Shares or property: what's the smartest investment in Australia today?

With the end of the 2023-24 financial year, you may have seen news stories looking at the performance of Australian residential property over the past 12 months versus the performance of Australian shares.

By some of the most popular measures, overall returns were similar, with property just ahead.

However, residential property makes larger investment returns available to a bigger cohort of Australians, because it provides more attractive security to lenders than shares.

Performance comparisons

On July the 1st, the ABC’s respected Finance commentator Alan Kohler presented the following chart in his nightly segment on the 7 pm television news bulletin:

It shows the performance of the All Ordinaries Index, which charts the progress of the 500 largest companies on the Australian Stock Exchange over the 2023-24 financial year.

The index put on 4.4% during the 12 months to June 30th.

When you add dividends paid out by those 500 companies, the total median return to investors was 11.9%.

Alan Kohler has compared this to the median house price growth in Australia over the past year (as calculated by CoreLogic) of 8%.

When you add rents, the total return to investors is 12.2%.

“So bricks and mortar wins on both counts,” Mr Kohler declared.

Websites that promote share investment tend to use different measurements of stock performance when making a comparison with property.

Unsurprisingly, these usually cast stocks in a better light.

Some will use the performance of the narrower ASX 200 (the top 200 companies listed on the exchange).

During 2023-24, the ASX200 Index rose by 7.83%, and if you add dividends on top, the total return to investors was a median of 12.1% - almost identical to the median return from property.

Comparing grapes with watermelons

Others will use bizarre comparisons - like pitting individual stocks on the ASX against Australia’s national annual median home price growth.

A well-known stock market newsletter gleefully pointed out on the 10th of July that shares in a company called Pro Medicus Limited had gained 118.3% in value on the ASX during 2023-24, contrasting this with Australian residential property’s overall median growth of 8%.

What they did not point out was that Pro Medicus’ share price jumped after the firm won a prestigious industry award for a new innovative diagnostic health computer system.

They also did not point out that more than 50% of the business is held by 3 shareholders who are all company insiders.

If they all decide to dump their stock, the company’s share price will plummet.

If you wanted to make a fairer comparison, I’d suggest contrasting Pro Medicus with capital growth in one of the 15,353 towns and suburbs in Australia.

How about the remote WA town of Mount Magnet (population 576), where house prices have grown 137% over the past year?

Property wins again on that score.

The comparison that really matters

For the ordinary investor, these kinds of “mine is bigger than yours” arguments are largely meaningless.

There is a very real reason the amount of money Australians have tied up in residential property is three and a half times the amount they have invested in the stock market (excluding shares held by super funds on behalf of working Aussies).

It’s called leverage.

Leverage, in financial terms, is the use of borrowed capital to fund an investment.

For the investor, it works like this:

The safer an asset, the more money a bank or a financial institution will lend you to invest in it.

Generally, banks will lend most buyers and investors the 80% balance to buy a residential property if they come up with a 20% deposit and have the means to pay back the loan.

In some cases, banks will lend you up to 95% of the cost of a home if you take out mortgage lenders insurance.

Under some government-backed loan guarantee schemes, it’s now even possible to get banks to lend you up to 98% of the cost of a home.

You only have to put down a 2% deposit to get your foot on the property ladder.

So what about shares?

If you borrow money to invest in a share portfolio, most banks will loan you an absolute maximum of 70% loan-to-value ratio in the form of a “margin loan”.

In other words, you have to put up at least a 30% deposit.

So, you are already at a disadvantage against many property owners, as you have had to save-up for longer to fund a similar-sized investment.

Shares can also be quite volatile and there can be consequences if the value of the shares in your portfolio drops.

“If the value of your security drops in relation to the loan amount, you may exceed the maximum LVR (Loan-to-Value Ratio),” Australia’s largest bank, CBA, explains.

“This will trigger a ‘margin call’ and you’ll be required to either reduce your loan amount, contribute additional security or sell part of your investment until your LVR is below the maximum.”

While this happens quite often with share portfolios, it is very rare that Australian residential mortgage customers get an effective “margin call” from the bank if the current value of their property drops below the bank’s maximum LVR.

Banks risk-averse appetite for risk

Another point worth noting is that of the 2,200 stocks and securities traded on the Australian stock exchange, banks will only consider lending you money against a fraction of these.

In the Commonwealth Bank’s case, it’s just under 500.

You can check out their latest list here:
Accepted Securities List - Listed Securities for Margin Loans as of 15 July 2024

What’s interesting is that for about 14% of the companies on their list they’ll only accept 40% LVR for an investment in that stock within a wider, diversified portfolio of shares.

So you will have to come up with a 60% deposit for that stock.

In those cases - where you are carrying a larger risk than the bank - it’s essentially leveraging your money, rather than the other way around.

And banks often won’t accept a standalone investment in those low LVR stocks.

On the other hand, if you have a 20% deposit and evidence of means to service a mortgage, banks will pretty much give you a home loan anywhere in Australia’s 15,353 suburbs.

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Interest rates

Finally, here’s another clear example of the value banks put on shares versus the value they put on bricks and mortar:

The Commonwealth Bank’s securities division CommSec will currently (as of 15th July 2024) lend you money to purchase shares at 9.65% variable or 8.54% fixed for one year.

Given that margin loans are interest only loans (no principal repayments) the latest interest-only Commonwealth Bank home loan rates are around 7.18% variable or 6.59% fixed for one year for owner-occupiers and 6.96% variable or 6.64% fixed for one year for investors.

If you take advantage of special bank offers or are a first home buyer, you can get rates much lower than this.

In short, the price of money is more expensive for share investment lending because the bank perceives there is much more risk for this asset class than Australian residential property.

The take-out

Despite changing opinions, property and shares are still top investment choices in Australia, but choosing between them requires considering several key factors.

Fans of share-trading will often point out that it’s far easier to buy and sell shares than buying and selling property.

But these are usually people who have a relatively modest share portfolio built from savings - not a much larger portfolio sourced from borrowings.

The only real way to achieve financial freedom is to make use of leveraging, essentially using the bank’s money to build your own wealth.

The simple truth is that for most Australians who aren’t already very wealthy, it’s much harder to harness the power of leveraging with shares than with property.