Should you invest in Shares or Property?

The debate as to whether shares or property are a better long term investment has been raging for years, and compelling data can be found supporting either side of the argument. In this blog we’ll look at the pros and cons of both shares and property as investments and try to clear the air.

A few groundrules…

In this blog we’ll be looking at shares and property purely from an investment standpoint. In particular we’ll only consider investment property?—?property purchased as an investment with an intention to rent?—?we won’t be looking at owning or buying a house to live in.

Why is buying a home to live in not considered an investment?

‘Buying a stock gives you a piece of an organization that generates revenue with the potential for growth that beats inflation. A home is a bundle of stuff, there is no reason to expect it’s value to significantly outpace inflation because in 20 years it’s still just a bundle of stuff.’

• Unless the property is rented, it is not a yielding asset as it does not produce income;
• Realising any returns on a home can be difficult unless you downsize or move to a different area that has not experienced the same growth.

If you are in the situation of considering buying a home, check out this link to help you decide if it is better to rent or buy.

Leverage

In addition we won’t consider borrowing to invest in property or shares in this article?—?this is a wide ranging topic which deserves its own blog. Suffice to say typically banks are far more willing to lend money for the purchase of a property (they have recourse to it), this comes with advantages and disadvantages.

Returns

Measuring long term returns is a difficult exercise?—?which shares do you choose? how do you measure property investment returns? what period of time do you consider?

We’ve reviewed a wide range of credible research and our conclusion is that on average long term returns from shares (the S&P 500 index) and global property (the Economist global property index) are similar?—?an average of around 8% to 10% a year over the last 25 years.

Notably however US house prices have risen only 4% over the same 25 year period, and UK house prices 76% (a little over 3% a year). Clearly geography is a critical consideration when measuring property returns.

Let’s turn to some other investment considerations.

Volatility

Volatility is a measure of the range and speed of movement in prices?—?how far and how fast prices move.

Reliable data is difficult to find, however the weight of evidence is that shares are substantially more volatile than property, and an individual share price can fall to zero, while property will always have at least a land value.

During the GFC for example world stockmarkets on average fell in value by 50% within 18 months, and many individual companies failed altogether. While property prices fell also, the falls were much more modest.

You should also remember that share prices are quoted on a continual basis, while property prices only become certain with a purchase or sale. The fact that you see share prices move continually can lead to emotional investment decisions.

So share investors should be prepared for a potentially “rougher” ride, and this volatility often leads to irrational investment decisions?—?selling out when prices are low and buying when prices are high.

Liquidity

Liquidity refers to the ability to enter and exit an investment. Shares (listed on a stock exchange) are very “liquid”?—?they can be readily bought and sold at virtually any time, and the cash is usually available in 2/3 days.

Property on the other hand is an “illiquid” investment?—?buying or selling a property can take a significant period of time, between 6 weeks up to 3 months.

For those investors looking for quick and simple turnaround in their investments, shares are the better option.

Diversification

Diversifying your investments is a well known and reliable way of reducing your overall investment risk.

Even with small amounts, it is easy to diversify your share investments across companies, sectors and even different stockmarkets around the world.

Property investments on the other hand are much more difficult to diversify?—?for most of us only a single or perhaps two property investments are feasible. This leads to a concentration of risk.

Investment amount

Excluding borrowing, the amount required to purchase a property is substantial?—?we estimate a minimum $100,000 excluding borrowing?—?as a first time investor the amount required is often prohibitive. There is no minimum required to invest in shares.

Up front and ongoing holding costs

A property purchase incurs substantial upfront costs?—?for example in many countries “Stamp Duty” of 1.5% to 2.5% of the purchase price is charged by the relevant government authority. In addition there are up front property inspection costs, legal costs, pest inspections etc to take into account.

An investment in shares will incur a brokerage commission, up to 1% of the trade value, but often substantially less.

An investment in property also involves significant ongoing costs?—?repairs and maintenance, insurance, council rates, taxes and utilities (like electricity, water and so on). As a rule of thumb ongoing costs are 5% of the initial purchase price.

There are no ongoing costs associated with holding shares.

The Bottom line

In terms of returns, property and shares on average have similar performance, although the UK and US property performance significantly lags shares.

Shares are a more volatile investment, but offer the advantages of flexibility, diversification, the ability to invest with lower amounts and no ongoing holding costs.

Property is less volatile, but inflexible, and requires significant upfront and ongoing costs to be met.

To help you make a decision we have created an infographic below, you can also see it here.

If you want to take the plunge into investing in shares, we built Simply Wall St just for you. Get started now.

(A copy of this article previously appeared on the Simply Wall St blog.)