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The great debate: Property or Shares

It's the big question - a contest, in fact the perennial contest between the two most common asset classes and investment choices for Australians. Should you invest in property or shares? In this edition of our newsletter we will explore the cases for both asset classes, hopefully demystifying the decision.

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The case for shares

One of the most balanced and accurate reports with respect to asset class performance has in the past, been provided by the Australian Stock Exchange (ASX). These long term investing reports have detailed the performance of the various investment classes on a consistent net basis (i.e. after all the costs and taxation) over ten and twenty year periods.

The ASX long term investing report for the period  to the end of December 2008 has not been published this year. The reasons for not producing or releasing the long term investing report are not known to us but given the state that the stock market has been in, we can hazard a guess. It would be disappointing if the recent instability in the stock market were to be the cause for not producing that report as the market has already clawed back a good proportion of its losses. The performance levels of shares in the investment report would have looked a little unhealthy for a couple of years but of course will recover over time.

To begin the debate and for your interest I have produced a table of results from the past ASX reports that show the historical returns  of Australian residential investment property and shares up until the end of 2007. Later, using the All Ordinaries Index and Median House Prices I will draw some conclusions for the current period to the end of 2008.

Table 1 clearly shows that both shares and residential investment property have performed exceptionally well over the last 27 years with shares outperforming residential investment property more often than not. However the figures for the 10 and 20 year periods 1989 - 2008 are going to look very different due to the dramatic fall in the value of shares and the fact that the value of residential property in Australia has remained stable through the Global Financial Crisis.

The case for property

For a greater understanding of the state of the contest at the moment, read Table 2 in conjunction with Table 1. The figures used in Table 2 are the median house prices for the five mainland capital cities and Canberra as at December each year from 1989 to 2008 and the All Ordinaries Index of the ASX as at the last day of December from 1989.

This table shows the raw data that has been used in the past reports and would also be required for future calculations. The figures do not include rental income or depreciation from properties or dividends and franking credits from shares. Notwithstanding that, this is some of the actual data that is required by analysts to determine how the various asset classes are performing. The figures are quite conclusive and may explain why the 2008 long term investing report has not been published.

When you examine these figures it's easy to see how much more volatile the stock market is compared to residential property and you will see when you look at the interpretation of the figures below why residential property has always been the favourite investment category for many Australians. This is not the whole argument however, as there are always strong performers in both asset classes. The decision to purchase shares or property is dependent on the motive and requirements of the individual investor.

The maths

Now let's look at the comparative results for shares and property for the 10 and 20 year periods up to the end of 2008.

Over the 10 year period to the end of 1998 and based on raw numbers, the All Ordinaries Index outperformed residential investment property by 70.6% to 47%. During the following 10 year period however to the end of 2008 residential investment property outperformed the All Ordinaries Index by 93% to 16.1%. Even more conclusively, over the entire 20 year period to the end of 2008, whilst both shares and property performed well, residential property trumped the All Ordinaries Index by 218% to 121.9% - a 6% compounding growth rate for residential investment property in comparison to a 4% compounding growth rate for the All Ordinaries Index over the entire 20 year period to the end of 2008.

The result

In conclusion there is no doubt that both shares and residential property will both produce good returns in the future. The returns provided by residential property have continued over an extended period of time during which we have been continually told that we were building too much property and that a market collapse was just around the corner. Finally, the truth is revealed by the Governor of the Reserve Bank Glenn Stevens, Treasury Secretary Ken Henry and even the Federal Treasurer Wayne Swan all commenting that we have not been building enough property to house our rapidly growing population and we are already experiencing a substantial undersupply. If the forecasts for population growth are accurate (in fact, we believe they are understated), there is no alternative but for property to increase in value.

So what is the answer to the big question of property versus shares? In our opinion both shares and property will perform well in the future. If you're unsure of what to invest in, research is the key. There is no such thing as too much information. Speak with professionals who are experts in their fields and remember that balance in an investment portfolio is important. Residential property has performed exceptionally well over a long period of time, making it a vital part of any investment strategy.

DISCLAIMER: Whilst the publisher and author believe that the information contained in the publication is based on reliable and researched information, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. Anyone who intends to use the information as the basis for making financial or business decisions should first obtain advice from a qualified professional person. This article is published on the understanding that neither the publisher nor the author - is responsible for the results of any action taken on the basis of the information published; and is not engaged in rendering legal, accounting, professional or other advice or services. The publisher and author expressly disclaim all liability and responsibility to any reader of this publication as a consequence of anything done, or not done, by a reader relying upon any part of this publication. (C) This article may not be reproduced in full or in part without the specific written consent od Which Property? and the Author.

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