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Friday, 4 August 2017

Property versus shares...again

Best case

A wryly amusing article from Team Montgomery this week, entitled "Which is a better investment, property or shares?".

Plodding my way through the painfully convoluted property investment example, I don't think I'm too wide of the market in hazarding that the author has never invested in property.

But anyway the thing that beguiled me was that this was a supposed "best case" for Australian property compared against the (US?) share market for the last 13 years (just 'cause...).

And, shock horror, in the supposed "best case" scenario the property investment showed...a worse return than shares.

Cue hollow laugh.

As a Sydneysider who has owned a property portfolio throughout the period in question I'd like to make a few short observations here.

Here's roughly how a Sydney investor would more likely have fared - big picture - over the past decade:

Assume you bought three modest $800k terraces in the eastern suburbs (2007), lower north (2008), and inner west (2009) using 10 per cent deposits (whisper it quietly, you could sometimes use 100% leverage before the crisis, but anyway, stay with it...).

Stamps to pay, of course, and although the investment properties would be positively geared today, there'd have been significant holding costs to absorb in the early years, even after the generous tax breaks. 

So, all in, an investment of about half a million bucks over ten years. 

If you only achieved the 'average' Sydney capital growth over that time, you'd be sitting on equity of well over $3 million today, even if you hadn't paid down a cent of principal.

The toughest choice facing such a property investor today is whether to retire to the Hunter or the Sunny Coast. Choices, choices. 

In reality many will still balk the prospect of paying tax on the capital gains, instead opting to redraw a moderate amount of equity to invest in other assets.

As far as I can tell, most are not opting to splurge their gains, hence the unexpectedly muted wealth effect through this cycle. 

The elephant in the room is that the Australian stock market has gone almost exactly nowhere over that same decade, while margin lending soared like an eagle and peaked beautifully in concert with the resources boom and stock price bubble, before the market promptly collapsed spectacularly in a heap.

I know you didn't do that, of course, you bought the dip and picked all the winners. Plus you reinvested the divs! No flies on you, but some investors lost their shirts and then some, the figures show.

Now yes, I know...of course, past returns as indicators, interest rate cycles, risk adjusted returns, and all of that stuff.

But if you're going to spend six or seven years endlessly propagating the property bubble argument, you can hardly simultaneously argue with a straight face that property investors have underperformed the share market, can you?! 

The stark truth is that Sydney and Melbourne property investors have easily enjoyed greater returns than most share market investors over the past decade, and in many cases outrageously so. 

Don't take my word for it, by the way, just look at how the ABS household balance sheet figures have played out over that time, as I have diligently plotted each quarter here on this blog. 

Moreover, if you want to understand the Aussie psyche and the (for now) apparently ingrained preference for property over shares then the answer lies in the above outcomes, and not in painstakingly concocted "best case" examples that don't reflect the reality of what has gone before.

Of course, if you torture the (US share market) figures more mercilessly than Guy Fawkes during the gunpowder plot you can make them say more or less anything.

Finally, one other thing - drawing analogies with the property crash of the 1890s...really?