Property vs Shares: Which Is the Better Investment?

Property has played a major role in building wealth for many Australians. Over recent decades, some investors have benefited from substantial capital growth, particularly in Melbourne, Sydney and other high-demand markets.

This raises an important question: if property has delivered such strong results, why might an investor prefer shares?

The answer is not that property is always a poor investment. Both property and shares can contribute to long-term wealth. However, comparing them properly requires looking beyond past performance and considering debt, diversification, liquidity, cash flow and risk.

Property’s strong historical performance

There is no denying that residential property has performed exceptionally well for many Australians. Some properties have doubled in value over periods of seven to ten years, creating life-changing wealth for their owners.

However, property is not one single market. Performance can vary significantly depending on the location, property type, purchase price and timing. While some houses have produced impressive gains, other properties, particularly certain apartments or homes in areas with limited demand, have delivered weaker results.

The same applies to shares. Individual companies can perform very differently from the broader market. Comparing one successful property with an entire sharemarket index or one exceptional company with the overall property market does not provide a balanced picture.

A more meaningful comparison considers the long-term performance of each broad asset class.

The importance of comparing like with like

One of the biggest challenges when comparing property and shares is the use of debt.

For example, an investor may contribute $100,000 and borrow another $500,000 to purchase a $600,000 property. If the property increases in value, the return on the investor’s initial contribution can appear very strong because they received growth on the entire property value.

This is the effect of leverage.

By contrast, comparisons often assume that the same investor places only their original $100,000 into shares without borrowing. That is not an apples-for-apples comparison.

Borrowing can also be used to invest in shares, although doing so introduces additional risks. To compare the underlying investments fairly, we need to consider their performance using similar levels of debt, or no debt at all.

Leverage can magnify gains, but it can also magnify losses. Regardless of whether it is described as leverage, it is still debt, and debt increases financial risk.

Is property really less volatile?

Property is often seen as less volatile than shares because its value does not appear to change every day.

Listed shares are traded continuously while markets are open. Prices respond quickly to economic data, company announcements and investor sentiment. This means the market value of a share portfolio is visible at almost any moment.

Property is different. A home is not independently valued and offered for sale thousands of times each day. Its price is usually tested only when the property is valued, refinanced or sold.

This does not necessarily mean its underlying value is stable. It means price movements are less visible.

The liquidity of shares can create short-term volatility, but it can also be an advantage. An investor can generally sell part of a diversified portfolio relatively quickly. With property, selling a small portion is not usually possible. The entire property must generally be sold, which may involve considerable time and transaction costs.

Diversification matters

A single investment property can require a significant financial commitment. For many investors, it represents most of their investment wealth and is concentrated in one location and one type of asset.

Its performance can be affected by local employment conditions, population changes, planning decisions, natural disasters, oversupply and changes in tenant demand.

With shares, the same amount of capital can be spread across many businesses, sectors and countries. An exchange-traded fund, for example, may provide exposure to hundreds or even thousands of companies through one investment.

Diversification does not eliminate risk, but it reduces the consequences of one individual investment performing poorly.

The risks associated with higher debt

Residential property prices have been supported by several important changes over previous decades, including falling interest rates, greater access to credit and the transition from predominantly single-income households to more dual-income households.

The question for today’s investors is whether those forces can provide the same support in the future.

Households cannot continually add more incomes, interest rates cannot repeatedly fall from historical highs to emergency lows, and borrowing capacity cannot increase without limit. When an asset has already experienced substantial growth, investors should not automatically assume that its previous rate of return will continue.

The higher the debt attached to a property, the greater the pressure on household cash flow. A change in employment, illness, higher interest rates, unexpected repairs or a period without rental income can make repayments difficult.

Even income protection insurance will generally replace only part of a person’s lost income and is subject to policy terms and conditions. A highly leveraged investor may therefore be forced to sell at an unfavourable time if their circumstances change.

Past performance cannot simply be projected forward

It can be tempting to assume that property will continue doubling every seven to ten years because some properties have done so in the past. However, no investment can grow at the same exceptional rate indefinitely.

The same principle applies to successful companies. Microsoft has produced extraordinary returns since it became publicly listed, but it would be unrealistic to assume that its historical growth rate will be repeated forever. A company that is already one of the largest in the world cannot grow from the same small starting point again.

Past performance can provide useful context, but it should not be treated as a promise of future results.

Investors should instead consider current valuations, expected income, future growth prospects and the risks they are accepting.

What about the family home?

A family home is different from an investment property.

Owning a suitable home can provide security, stability and greater control over living arrangements. Those personal benefits may be more important than achieving the highest possible investment return.

Buying a home is therefore not always a purely financial decision. It can be entirely reasonable to choose a home based on lifestyle, family and emotional considerations, provided it remains affordable.

An investment property, however, should be assessed more objectively. Its expected return, income, expenses, debt and risks should all be carefully examined.

Business ownership and long-term wealth

Many of Australia’s wealthiest individuals built their wealth by owning and growing businesses, even when those businesses operated in the property sector.

Property developers, for example, create value by acquiring land, managing projects, constructing buildings and selling or managing the completed properties. That is an operating business rather than simply purchasing an existing home and waiting for its price to rise.

Buying shares provides investors with partial ownership of businesses. Those businesses may generate revenue, reinvest profits, develop new products, expand into new markets and pay dividends to shareholders.

This ability to participate in business growth is one of the main reasons some investors prefer shares over residential property.

There is no universal answer

The right investment will depend on an individual’s circumstances, including their:

Financial goals
Time frame
Income and cash flow
Existing assets and debts
Capacity to accept risk
Need for liquidity
Tax position
Knowledge and experience

Property has produced excellent results for many investors and may continue to form part of a well-considered strategy. Shares also involve risk and can experience significant short-term falls.

The key is to compare the choices fairly and avoid relying solely on success stories, tax benefits or assumptions that previous growth will continue.

Before investing, consider the complete picture: expected return, income, costs, diversification, liquidity and the amount of debt required. A strong investment strategy should be based on evidence and personal circumstances, not simply on which asset has performed best in the recent past.

The information provided in this article is general in nature only and does not constitute personal financial advice. 