According to John Edwards, there is room for both. Stocks can give you superior gains if you cap your leverage at 50% and hold it for less than 2 years. This is because transaction costs are low. But if you hold beyond two years, volatility often causes margin calls and returns disappear.
Property usually have large transaction costs (agent fees of 1%, stamp duties of 3%, legal fees etc of 1%). But you can leverage at 80% safely with little margin call risks as long as you service your mortgages faithfully. If you hold it beyond 5 years, property will beat stocks.
Moral of the story: My stock returns are around 10% per year. With leverage, I'd probably achieve 18.5% max per year. For property, my returns are close to 30% per year. In fact my returns are around 40% IRR over last 8 years and that even beats Quantedge, a top 20 hedge fund in the world!
Founder of Residex Pty Ltd and Consultant to Onthehouse.com.au.
There is an age old question that never seems to get answered in an honest way:
What is the best investment; Houses or Shares?
This newsletter is aimed at giving you an honest, unbiased answer. The question is complex, so I will provide a simple answer here, and then a detailed analysis in the next quarterly State Market Report. Let’s first look at housing market performance in the last month.
In Table 1 – July Market Performance, the outcome for all capital cities and country state data is provided. The market is essentially behaving as we expected, and there is a general slowing or plateau in most markets.
However, the Sydney market is beginning to defy logic; there is again evidence of a resurgence of stronger growth. I say ‘defy logic’, because the median value of a house is now worth a considerable $839,500. Further, the percentage of the median household’s income (after tax) that is being used to service that debt, is 53 per cent. This high level of commitment has caused the market to correct.
Table 1
The consequence of this high level of un-affordability is a surge of growth in the unit market, as units are more affordable. The growth in the house and land market for the year is a high 18 per cent, while the unit market only recorded 14 per cent. However, in recent months, the unit market has started to outperform the growth in the house and land market. In Graph 1 – Sydney Trends, we provide the trend growth rates for these two markets.
Graph 1
The data is a rolling quarterly trend data set. Consequently, it somewhat hides the very recent, stronger growth in the house and land market. In May and June, growth was sub 0.5 per cent, but in July the growth rate was 1.7 per cent. Growth in the unit market was even stronger at 2.35 per cent.
This market does need to slow a little, to avoid potential problems in the future. With luck, the strong growth in July will not be repeated in August.
While I know we are all pleased to see our asset values increase, continuation of growth at this pace may result in some future adjustments. Steady, moderate growth is best for everyone but the trader – but a housing asset is not the asset class to trade in.
This brings us to our topic: Is housing a better investment than shares?
First some obvious points:
I have read many reports that indicate the share market is the better performer. However, this is only true some of the time. Reports achieve this notion by considering particular time frames which happen to favour the share market. Equally, these reports do not take account of the higher level of risks in the shares.
Quality analysis involves examining, over the long term, a large number of different investment periods being made at all possible times. Then the median outcome, with respect to each time period, should be drawn from this.
Analysis should also take into account all potential income streams of the assets, and allow for leveraging and taxation.
Graph 2 – Shares vs Property, provides the outcome of such analysis. Again, the assumptions and details of the analysis will be provided in the next State Market Report.
Graph 2
To understand graph 2, explanation follows:
We have taken share and house price data for Sydney for a period going back to 1978. This gives us about 36 years of data. Then, on a quarterly basis, we have made all the possible time based individual investments we can, in both assets, at every quarter during the 36 years. That is, at each quarter we have made a number of different investments for the shortest to the longest time period we can, provided the longest period does not exceed 20 years.
This means that there are a very large number of investment periods for each time period which covers both good and bad time frames for both houses and shares. We then found the median total rate of return the investment achieved at each time period, at each quarter, which ranges from one quarter through to eighty quarters.
Looking at the graph, the investment time period is on the x axis. This means, for example, when you look at number 20 on the x axis, you are looking at the median outcome of all investments made at each possible time period for 20 periods over 36 years.
The plotted returns on the y axis are real, total rates of return. That is, in the case of property, rent plus capital growth and tax benefits less inflation. In the case of shares, dividends are assumed to be fully franked plus capital growth plus any other tax benefits resulting from leverage.
What does the graph tell us?
So there you have it. If you are looking for more analysis and detail, then it will be available with the next edition of the State Market Report.
Until next time, happy investing and searching for that spectacular investment property.
John Edwards.
Founder of Residex and Consultant to Onthehouse.com.au.
Property usually have large transaction costs (agent fees of 1%, stamp duties of 3%, legal fees etc of 1%). But you can leverage at 80% safely with little margin call risks as long as you service your mortgages faithfully. If you hold it beyond 5 years, property will beat stocks.
Moral of the story: My stock returns are around 10% per year. With leverage, I'd probably achieve 18.5% max per year. For property, my returns are close to 30% per year. In fact my returns are around 40% IRR over last 8 years and that even beats Quantedge, a top 20 hedge fund in the world!
What is the best investment?
by John EdwardsFounder of Residex Pty Ltd and Consultant to Onthehouse.com.au.
There is an age old question that never seems to get answered in an honest way:
What is the best investment; Houses or Shares?
This newsletter is aimed at giving you an honest, unbiased answer. The question is complex, so I will provide a simple answer here, and then a detailed analysis in the next quarterly State Market Report. Let’s first look at housing market performance in the last month.
In Table 1 – July Market Performance, the outcome for all capital cities and country state data is provided. The market is essentially behaving as we expected, and there is a general slowing or plateau in most markets.
However, the Sydney market is beginning to defy logic; there is again evidence of a resurgence of stronger growth. I say ‘defy logic’, because the median value of a house is now worth a considerable $839,500. Further, the percentage of the median household’s income (after tax) that is being used to service that debt, is 53 per cent. This high level of commitment has caused the market to correct.
Table 1
The consequence of this high level of un-affordability is a surge of growth in the unit market, as units are more affordable. The growth in the house and land market for the year is a high 18 per cent, while the unit market only recorded 14 per cent. However, in recent months, the unit market has started to outperform the growth in the house and land market. In Graph 1 – Sydney Trends, we provide the trend growth rates for these two markets.
Graph 1
The data is a rolling quarterly trend data set. Consequently, it somewhat hides the very recent, stronger growth in the house and land market. In May and June, growth was sub 0.5 per cent, but in July the growth rate was 1.7 per cent. Growth in the unit market was even stronger at 2.35 per cent.
This market does need to slow a little, to avoid potential problems in the future. With luck, the strong growth in July will not be repeated in August.
While I know we are all pleased to see our asset values increase, continuation of growth at this pace may result in some future adjustments. Steady, moderate growth is best for everyone but the trader – but a housing asset is not the asset class to trade in.
This brings us to our topic: Is housing a better investment than shares?
First some obvious points:
- Assets which are ‘must have’ assets usually have higher levels of growth due to constant demand. Housing is a ‘must have’ asset;
- It is unique in that we are all users of housing of some form;
- It is generally thought to be understood by most. Most think it is a very safe asset to own;
- Housing has a slightly negative correlation with other asset sectors. That is, there is a slight tendency for housing to rise in value when other asset sectors fall in value;
- There can be few lies about a property. It can be personally audited by inspection and other professionally employed people. This is in contrast to a share purchase where you are dependant on the company directors telling the truth, and behaving in terms of law and corporate regulations;
- Housing is rarely worth nothing. Shares however, can leave an investor with no value;
- Bankers typically lend more against the housing asset, and at a lower interest rate;
- The housing market by value is very substantial. It is estimated that the total value of all residential property in Australia is approximately $5 trillion, while the stock market is estimated to be around $1.5 trillion; and
- Today the housing market is an asset class in which there is significant information about its performance and characteristics.
- Housing Investment is relatively illiquid. That is, you can’t decide on a particular day that you need to dispose of a property. It can take many months to sell;
- It is not easy to identify its market value;
- Any investment in housing is a large investment. Today it will be in the hundreds of thousands; and
- It is difficult to diversify and spread your risk across many markets simply because of the cost of each housing investment.
I have read many reports that indicate the share market is the better performer. However, this is only true some of the time. Reports achieve this notion by considering particular time frames which happen to favour the share market. Equally, these reports do not take account of the higher level of risks in the shares.
Quality analysis involves examining, over the long term, a large number of different investment periods being made at all possible times. Then the median outcome, with respect to each time period, should be drawn from this.
Analysis should also take into account all potential income streams of the assets, and allow for leveraging and taxation.
Graph 2 – Shares vs Property, provides the outcome of such analysis. Again, the assumptions and details of the analysis will be provided in the next State Market Report.
Graph 2
To understand graph 2, explanation follows:
We have taken share and house price data for Sydney for a period going back to 1978. This gives us about 36 years of data. Then, on a quarterly basis, we have made all the possible time based individual investments we can, in both assets, at every quarter during the 36 years. That is, at each quarter we have made a number of different investments for the shortest to the longest time period we can, provided the longest period does not exceed 20 years.
This means that there are a very large number of investment periods for each time period which covers both good and bad time frames for both houses and shares. We then found the median total rate of return the investment achieved at each time period, at each quarter, which ranges from one quarter through to eighty quarters.
Looking at the graph, the investment time period is on the x axis. This means, for example, when you look at number 20 on the x axis, you are looking at the median outcome of all investments made at each possible time period for 20 periods over 36 years.
The plotted returns on the y axis are real, total rates of return. That is, in the case of property, rent plus capital growth and tax benefits less inflation. In the case of shares, dividends are assumed to be fully franked plus capital growth plus any other tax benefits resulting from leverage.
What does the graph tell us?
- Once we get past making an investment for about 24 periods at any point in time over the last 36 years, the most likely outcome is that a housing investment in Sydney would have outperformed the share market (ASX top 200 index). The leverage allowed was 50 per cent for shares, and 80 per cent for houses, as this is basically the leverage that the market, or banks, would allow;
- Short term investments in shares are far better than short term investments in houses. The reason is simple; State Governments have their hand out, and take unfairly from purchases of houses (Conveyancing Duty);
- A housing investment should probably never be made for a period of less than six years;
- Shares are assets which are best traded. If traded well, the returns may be very high. However, this trading should be left to the professional as the risk can be very high.
So there you have it. If you are looking for more analysis and detail, then it will be available with the next edition of the State Market Report.
Until next time, happy investing and searching for that spectacular investment property.
John Edwards.
Founder of Residex and Consultant to Onthehouse.com.au.
