It is one of the perennial questions of investing - shares or property? Both asset classes have their positives and negatives, their supporters and detractors. Over the very long term, it seems likely that Australian shares have provided better returns than property.
I say "likely" because there is no one way of comparing the two. All sorts of assumptions have to be made.
Last May, Russell Investments and the Australian Securities Exchange produced a study of the major asset classes over the long term. It was one of the better comparisons because the report looked at "real" returns after accounting for taxes and costs.
Over the past 20 years, Australian shares produced better "real" returns than residential investment property.
The outperformance of shares held true for investors on the highest and lowest marginal tax rates and was also the case if the assets were held inside superannuation.
However, one of the drawbacks of property - that you cannot sell-down part of the investment - is probably also one of its strengths. Shares are very easy to buy and sell. They can be sold on the spur of the moment, with a couple of keystrokes on the computer through an online broker or with a call to a stockbroker. Maintaining discipline can be hard with shares the strategy can come unstuck in times of market downturns, with investors selling at the worst time. The very illiquidity of property means investors are more likely to stick with it through thick and thin.
Most people who invest in property tend to gear pretty much to the maximum while being comfortable with the repayments most people who own shares hold them without any gearing.
For many investors, the gearing levels of investment property are likely to be higher than 50 per cent - for each $1 invested, at least 50 cents is borrowed. Gearing magnifies the losses as well as the gains.
You would have to think it unlikely that property prices are going to do much over the next few years. Higher interest rates are dampening price growth and a high Australian dollar appears to have significantly reduced demand from foreign buyers for inner-city apartments.
In fact, for those with mortgages, one of the highest returning and dependable investments they can make is to put spare cash into the mortgage.
That's especially the case now, with mortgage rates at about the 7.5 per cent mark. There are no costs involved - no stamp duties, as when buying a property, and no fees to brokers to buy and sell shares - and nothing has to be entered into the annual tax return.
The rate of return on putting money into the mortgage is 7.5 per cent, with no tax to pay on the "earnings".
What other investment can provide a return of 7.5 per cent - tax free and cost free - which is likely to keep paying 7.5 per cent subject to changes in the cash rate?
Frequently Asked Questions about this Article…
Which has delivered better long-term returns in Australia: shares or property?
A study by Russell Investments and the Australian Securities Exchange found that over the past 20 years Australian shares produced better “real” returns than residential investment property after accounting for taxes and costs.
What does “real returns after taxes and costs” mean and why does it matter when comparing shares vs property?
“Real returns after taxes and costs” means returns adjusted for inflation and net of taxes and investing costs. It matters because it gives a more realistic comparison of what investors actually keep, not just headline price moves.
How does liquidity differ between shares and investment property and why should everyday investors care?
Shares are highly liquid — you can buy or sell quickly through an online broker — whereas property is illiquid and can be hard to sell partially or quickly. That illiquidity can help investors stick with property through downturns, while the easy tradability of shares can tempt some to sell at the worst time.
What is gearing and how does gearing differ between property and shares?
Gearing means borrowing to invest. Most property investors tend to gear heavily (the article suggests gearing levels often exceed 50%), while many shareholders hold shares un‑geared. Gearing magnifies both gains and losses, so higher property gearing increases risk.
Are property prices likely to rise strongly in the near term?
The article suggests it’s unlikely property prices will do much over the next few years because higher interest rates are damping price growth and a strong Australian dollar has reduced demand from foreign buyers for inner‑city apartments.
Is paying extra into a mortgage a good investment right now?
For mortgage holders the article argues that putting spare cash into the mortgage can be one of the highest returning and most dependable moves, especially with mortgage rates around the 7.5% mark — it’s described as tax‑free and cost‑free compared with buying property (stamp duty) or trading shares (broker fees).
Do shares outperform property for investors in different tax situations or inside superannuation?
Yes — the Russell Investments/ASX study found the outperformance of shares over residential property held true for investors at both the highest and lowest marginal tax rates and also when the assets were held inside superannuation.
What practical factors should everyday investors weigh when choosing between shares and property?
Consider long‑term after‑tax returns, liquidity (ease of buying/selling), gearing levels and the risks they bring, upfront and running costs (stamp duty, broker fees), behavioural discipline during downturns, and alternatives like paying down a mortgage, which can offer a predictable, tax‑free effective return.
Call 1300 880 160
Start a chat
Schedule a call
