Stocks over property for the long term investor

Australians love property.

The great Australian dream as we’ve all been sold, making home ownership embedded in our culture.  There’s the stories of an older generation that bought a house for X and sold it for a fortune 20 to 30 years later. Sounds easy enough, why wouldn’t we want to participate in that?

Since property is a tangible asset we can relate to it more easily. Anyone can value you a house simply by looking at it and seeing what other houses are selling for in the area.

Of course, real estate isn’t the only asset to help you grow your wealth. There’s the stock market too, but unfortunately that usually gets portrayed as an arena where you could lose all your hard-earned money with ease.

Stock over property for me though, here is why.

Starting with property.

Buy and Hold

I’m aware that some investors are more active and will buy property on the sell offs. Or, they’ll buy cheap properties and renovate them to flick them off for a tidy gain. There’s also buying for the rental yields and cash flow.

Then we have the investors who simply buy and hold, they buy property with the thought process of holding onto it for 10-30 years. Trying to accumulate the large gains like the older generation did. It’s this buy and hold strategy that I’m comparing stocks against.

The goal is to show you there’s another option besides property.

And with property prices still rising the barrier to entry is getting more and more difficult.

So how about those long-term gains?

The Average yearly returns

The table below is some data I put together.

I used the average house prices from 8 of Australia’s major capital cities from 1992 to 2019. (I had to use 1992, as it was the best year of data, I could source for the stock market)

My goal was to see what type of returns were house prices really getting from year to year when talking about those big gains that property investors were lucky enough to make.

The table is saying, for Sydney house prices to grow from $183k to $1.14 million, it grew at rate of 7% a year. And on you go down the list.

You can see Melbourne had the best growth but still fairly average considering the returns of the stock market.

Imagine house prices just continue on their growth rate as they have in the past, how much will they cost in 27 years from 2019?

Do you think we’ll see house prices at this level in 2046? Maybe if we get high inflation and high wage growth.

Remember, I’m only comparing this to a buy and hold investor. The active investors (or should we call them speculators) who buy cheap properties to renovate, or hunt for bargains will perform better than the average.

The folks who leverage the equity in their home to buy more properties are probably telling me I have no idea what I’m talking about. But these numbers don’t lie, and maybe they have a different strategy than buy and hold.

Large numbers

In my opinion most of us see the large numbers and think it’s amazing, I know I use to be this way.

To buy for $183k and sell for $1.14 million would be a cinch. Those numbers are getting large and it’s a sure-fire way to easy riches.

All I had to do was buy and hold for 27 years, I mean how easy is that?

Don’t be tricked by the large numbers, if you put that same $183k in stocks and received a 7% return you’d end up with the same amount.

One of the differences here is, your house would be sitting there with it’s value producing nothing. While your stock portfolio, if its yielding around 4% would be giving you an extra $45k in your pocket each year.

What would you prefer?

You know what they say? You can’t go wrong with bricks and mortar.

I’m sure we’ve all heard the saying property always goes up. Giving you the illusion your money is more safe being tied up in property.

Why do I call it an illusion? Because property can decline just as much as the share market.

Don’t believe me?

Look what happened in Las Vegas from 2007 to 2011.

The average house price peaked at $309,000 in 2007. The market sold off for 4 years reaching a bottom for an average price of $119,000. Losing around 60% of it’s value. Prices have come back now; at the start of 2020 they were around $318,000. From the sell off to the bottom, then back to it’s peak took just over 12 years.

Source: https://www.milliefine.com/overview/

Some people are fearful of the sock market because it could sell off, but whats the difference between a stock market sell off and this house price sell off? Both asset classes can sell off and then return to their pre-crash levels.

There’s two takeaways from this information. Property can decline just as much as stocks and, If this happened in one location what’s to stop it from happening in another.

I’m not being pessimistic, it’s just property isn’t some risk-less investment like it’s sometimes made out to be.

Then again, we have multiple other factors in Australia that help to prop up property prices i.e. negative gearing and first home owners grants.

And, similar to stock market speculators that bid stocks higher, we have property speculators that push house prices higher too.

Up keep

Then we also have up keep on a property, roof needs repairing? Fork out some cash. Hot water system is broken? Fork out some cash. You can see how it’s easy to start spending cash quickly if you own a few properties, you’d most likely need a separate funds account just for property maintenance.

I guess this is where the term equity rich but cash-flow poor comes from?

And a couple more hidden costs, when buying you could have stamp duty. While you own the property, you’ll have council rates to pay. When selling, you’ll have long-term capital gains tax to pay. Add up all those factors and your returns are now shrinking.

All that being said…

Buying property is obviously a profitable venture for some investors, otherwise why would people do it?

I just believe people with average incomes or someone who doesn’t want to focus on their investments would probably be better off sticking their money into a low-cost index fund or Listed Investment Company and keep adding to it over time.

Some other facts to consider

There are multiple hidden costs, the barrier to entry is high, the long-term house price returns are average.

You can become cash-flow poor and house prices can decline just as much as the stock market.

I’ll be honest I’m probably being ignorant and biased, but I can’t see the value from investing in property. At least not yet, but I’m happy to be stood corrected.

However, I can see the benefit of buying property outright without being financed or using leverage. Putting a tenant in there to increase cash-flow, having no interest repayments, or buying when prices are cheap. I can see how that makes sense.

But for us small investors I don’t think it’s wise to leverage up to the hills buying property after property. What if you lose your job? What if you can’t put a tenant in the house then you have two mortgages to pay? Sounds stressful to me.

The Stock Markets Average yearly returns

When I’m talking about shares, I’m meaning low cost index funds or LIC’s. Since they’re the asset that allows you to receive the returns the market produces.

Our Australian stock market indexes have gone through a few changes over history, each time tying to work out a better way to try and measure our markets returns. It can be hard to get consistent data in Australia, but there’re some websites that do a mighty fine job none the less.

Anyhow, here is the table going back to 1992 for the ASX200 accumulation index. This is the value of the index, and it factors in dividends reinvested and the price of the index.  (It receives the name accumulation index, since the dividends are being accumulated within the price)

A much nicer result with an average return of 9.8% a year. (Looks better than the paltry house price returns)

Most indexes aren’t just measured in price returns like houses are, they use total returns. Total returns are how much the price moved plus dividends. The dividends are what add about an extra 4% onto this yearly return.

One more piece of data going back to 1900, with stocks giving an annual return of 11.8%. https://www.marketindex.com.au/sites/default/files/statistics/historical-returns-infographic-2019-updated.pdf

Participating in productive enterprise

A major reason stocks have higher returns, is because we live in a capitalistic society.

Human beings go into business to make money, or they create a new widget or technology in the hopes of changing the world or their niche. But still, with the expectation they’ll be rewarded for their efforts down the track.

Most workers in companies are trying to make the business better and create growth, attracting more customers to impact that growth directly to their bottom line. The workers want a raise and the company wants to raise their profits. Also known as the optimizing individual.

If it’s a public company, then as their earnings grow, the stock price will follow. And, if the company has a dividend policy the dividends will also increase. Creating that pleasant total return that looks so nice.

When you buy stocks you’re indirectly participating in the growth of the economy. Some stocks grow faster than the economy which creates the overall out performance.

Barrier to entry is easy

With as little as $500 you can buy your first stock; you’ll have to pay a commission to get into the investment and a commission to get out. Which can be around $10 both ways, some brokers are cheaper though.

I personally think we’re not far off from free trades and zero commissions, it’s already happening in some countries.

No up keep

Unlike property which comes with hidden costs, stamp duty and council rates every quarter (just to name a few) Stocks have no up keep, and no hidden costs.

You buy the shares, pay the commission and you’re done.

Once you own the shares they’ll be stored electronically, all free of fees. So, if your broker was to ever fold you still own and can retrieve the shares.

It’s easy to keep adding to overtime.

If you want to buy a property or another property to add to your portfolio, you’ll need to save for sometime and build up enough cash for the bank to think you’re worthy enough to be lent the loot.

With shares, once you spend your first $500 then it’s just an extra $100 each time you want to buy more.

And, if you’re investing for cash flow, then each time you add you’ll increase your dividend payouts. Eventually getting it to a point where the dividends cover your expenses. Absolute bliss.

Conclusion

In this blog post, i’m only comparing a buy and hold property investor to a buy and hold stock market investor.

Both asset classes have multiple variables to consider. If an investor buys some property at a fire sale price they’ll probably receive returns out side the norm. Just as stock market investor who buys distressed companies can receive out sized returns.

Returns can also be misleading with shares and property, there is no guarantee we will see future performance similar to the past. This is something we need to remember.

However, shares are just simpler to own, execute and reap the rewards from. It’s unfortunate that most investors have the wrong perception on stocks. From no fault of our own, we’ve had friends or family members lose money in shares. And, the media tells us when the markets are doing poorly, making it seem like it’s a risky place.

Once you start to learn about shares, you begin to realize it’s not that risky of a place.

What do you think, am I way off the mark and property is just the bee’s knees? Let me know in the comments below

 

 

2 thoughts on “Stocks over property for the long term investor

  1. Very good read. Opened my eyes big time to investing in Property vs Stock Market which I’m only just starting to learn about. Cheers for the content.

    1. The mindset of property is a big one in Australia, I can see why considering an older generation made fortunes off buying and holding property over the long-term. I think with most of those property gains already priced into housing, millennials like us might be better off looking at another asset class to place our money.

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