Recent short-term pain in the share market pales in comparison to long-term gain, but do stocks really trump property over the same time scale?
Weakness in the share market in the past month has sparked concerns among the millions of Australians with exposure to stocks.
Australia’s share market has come close to recording a correction – the technical term for a decline of more than 10%.
It follows a larger downturn in the US triggered by investor worries about the impact of tariffs on the economy and increased recession risk amid an environment of stretched valuations, with the change in sentiment spreading to the local market.
A share market correction typically wouldn’t be immediately concerning those who haven’t invested in stocks, but it’s caught the attention of everyday Australians, given how invested the nation’s big superannuation funds are in both local and global shares.
Most working Australians have exposure to both local and overseas shares markets through their superannuation, and many have seen their balances decline in recent weeks due to the recent correction.
While a 10% fall in the share market may seem alarming, it pays to put recent falls into perspective.
Five years ago, the ASX 200 recorded its largest one-day decline in more than 30 years, falling 9.7% on March 16, 2020 amid concerns over the economic impact of the pandemic, which had only just begun.
The market kept falling and hit a low on March 23, the day nationwide lockdowns began, with the index crashing by about 30% from its previous all-time high.
But what followed that tumultuous period was a huge bull run which took the local market to its highest point ever in February this year. From trough to peak, the ASX 200 rose 88.2%.
Even after recent weakness, the ASX 200 is still up 71.4% compared to the low point five years ago.
Let’s compare that performance with the property market. At the national level, property prices are up 46.7% since the March 2020, according to the latest PropTrack Home Price Index, but performance varies considerably around the country.
Adelaide has been the top-performing capital in that time, with the 81.7% growth in property prices putting the South Australian capital slightly ahead of Perth (81.2%) and Brisbane (80.9%). Prices in regional South Australia, Western Australia and Queensland performed similarly over that period.
Interstate migration, changes in lifestyle preferences and an imbalance of supply and demand in these markets have driven that huge growth, as has relative affordability – as interest rates rose, buyers with diminished borrowing capacities sought out less expensive homes.
Prices are up 38.6% in Sydney, 35.4% in Canberra, 37.1% in Hobart and 30.4% in Darwin.
Melbourne remains the outlier among the capitals, recording property price growth of 15% since the pandemic.
That underperformance is attributed to a range of factors including tougher lockdowns during the pandemic, migration flows to other states, higher levels of home construction relative to population growth, a weaker economy and tax changes.
At face value, it’s apparent that the share market has outperformed the property market at the national level and in the largest capitals in the past five years, even after the weakness of recent weeks.
Had it not been for the recent correction, the ASX 200 would have also outperformed even the strongest capitals of Adelaide, Perth and Brisbane.
However, that conclusion overlooks several key factors.
It should firstly be noted that achieving that 71.4% return from the share market would require an investor to buy at the very bottom of the market in March 2020 – exceptional timing and something that would have taken a great deal of conviction at a time of extreme volatility when many investors were fearfully selling off stocks.
An investor who had bought in about a month earlier — when the market had just hit an all-time high — and held on through the crash and subsequent recovery would be looking at a return of just 8.6%.
Further, most property buyers use leverage — that is, people borrow money from a lender to buy a home or investment, typically 80% of the value of the property value — which can amplify gains.
For example, if an investor bought a $500,000 property using a $100,000 deposit and a $400,000 loan and that property rose in value by 46.7% (the same rate that the national median value grew), they would be sitting on a $233,500 gain, excluding any interest, expenses or rental income.
On the other hand, leverage in the share market, also known as margin lending, is less common and the risks are greater, considering the fact that even small declines in the market can lead to large losses.
An investor using margin lending is required to maintain a certain amount of equity in their account to cover potential losses. If the account balance falls below the required margin, investors will be required to deposit additional funds to meet the margin requirement, or will be forced to liquidate their position.
The same isn’t true in the property market. If the value of a home falls below the loan balance, known as negative equity, lenders don’t require homeowners to contribute additional funds or sell their home. According to the RBA, very few loans are in negative equity.
A factor that skews the comparison is dividends – the portion of a company’s profit that it pays to shareholders. The dividend yield of the ASX 200 currently sits at about 3.5%, which is down from a long-term average of a little more than 4%.
Similarly, property investors who rent out their property accrue rental income. The gross rental yield at the national level is 4.4%, according to the latest REA Group Rental Report, with a higher yield for units (4.9%) than for houses (4%).
Gross rental yield does not take into account expenses, such as interest, strata payments and maintenance, which will be based on an investor’s personal situation and the property itself.
Another way that shares and property differ is liquidity – the ease with which an asset can be converted to cash. Shares can be bought or sold online at the click of a button, whereas trading property typically takes weeks or months, has higher transaction costs and requires the service of professionals, such as real estate agents and conveyancers.
Properties typically cost hundreds of thousands, or millions of dollars, while shares can be traded in parcels as small as $500. A property ties up a lot of capital and concentrates risk in a single asset, with no guarantee performance would precisely track its broader market. On the other hand, the same amount of money could be invested a portfolio of multiple different shares or index funds that track the market, spreading risk across multiple assets.
A key piece of the puzzle is the tax advantage of owning a property compared to shares. Share traders will need to pay capital gains tax on profits, and the same is true for property investors. But for an owner-occupier, profit derived from selling one’s main residence is typically tax-free.
While data from the past five years may suggest that stocks trump property, simply comparing performance ignores the fact that most people borrow to buy a home, whereas most retail investors don’t use leverage to buy shares.
It also overlooks the varied costs associated with owning a property, as well as the income generated from both shares and property.
The comparison also highlights the potential volatility in the share market, with maximum returns requiring investors to enter and exit the market at very specific times, and on the flip side, the concentration of risk that comes with buying a property.
Returns aside, one of the biggest advantages property has over shares is its utility. At its core, a property provides shelter, but it's also a tangible asset that can also be personalised, renovated, or even knocked down and rebuilt entirely.
The reality is that for most Australians, a property is much more than just an investment. It’s a home that provides safety and security – something that’s become increasingly valuable in uncertain times.
