The core advantage of property over shares is that the banks will more readily lend into the property market and investors will more readily borrow.
It's accepted that you leverage into property. The borrowing rates are lower and you can get a higher loan-to-value ratio than you can with shares. That's basically the difference.
In other words, the key advantage of property is that you can put up $100,000, borrow $900,000 and when the property market goes up 10 per cent you double your money.
But when the share market goes up 10 per cent and you are not geared, you make $10,000. The main advantage of the property market over shares is that it more acceptably, and at lower interest rates, enhances the power of leverage.
The other great advantages of property over shares include:
The fact that the Australian property market has gone up. It is a bit basic to say but it is undeniable that the property market has provided Australians with steady gains for decades and they have become used to that. To the joy of property developers, it has become an Australian assumption that “property always goes up” and if it doesn't, wait.
Stability. Hindsight suggests that the property market is more stable, with low volatility and only irregular, isolated – rather than systemic – disasters. It can, of course, change but it hasn't.
Safety. The property market is perceived as safer than shares and the experience of the global financial crisis confirms that. While shares fell 54.5 per cent, Australian property owners were basically, except for a few pockets, undisturbed. Property is perceived as a safer asset class than shares.
Adding value. People can add value to property. They find it very hard to add value to shares.
Collateral benefits. Property delivers enormous non-financial benefits if you live in it. You can't live in shares.
Forced saving. People are driven to be disciplined by the gearing. They are forced to budget and save and be financially responsible when in debt. They pay down the debt and so build equity more reliably. This is not the culture in shares.
Protected. The government and the banks do everything they can to ensure a stable property market, which is core to confidence, economic stability and growth and key to the investment risk. On the other hand, it is well accepted that there is little they can do to support the equity market; so when it falls, they simply let it go; it is not “government backed”. Property is. The whole nation's interests are deeply rooted in the stability and success of the property market.
Tax breaks. Negative gearing is a remarkable bonus that benefits the investor over the other taxpayers. You can get it in shares as well, of course, but only if you borrow. Your principal residence in Australia is also capital gains tax-free. This is a massive advantage for younger Australians relative to shares and anyone not taking advantage of that and buying shares or an investment property instead hasn't done the numbers.
Basically, leveraged property investment is a great investment if all the assumptions are right, if history continues to repeat itself, if property always goes up and if there is no “tsunami event” that reprices the whole property market and allows my daughter to buy even half a standard block near her parents, which, at their latest prices, she most certainly can't.
So what is the attraction of shares?
I'll tell you. Risk is in the culture; it is understood, expected and it is managed.
Most property investors are unprepared for risk; they have to assume it will never happen and God forbid if it ever does.
Shares also have liquidity, low entry costs, can be bought and sold in bits; you can take a big or small exposure and exit on a click. Their yields include franking.
They can also offer exposure to massive returns rarely available in property. They can be short duration or long duration, not just long duration. Execution is instant. They are suited to automatic exit systems. There is no stamp duty. There are thousands of products to choose from. International investment is easy. Tsunami events can be avoided.
You don't have to fix the toilet if it goes wrong. No one can burn your shares down. And if you're old enough, there's no capital gains tax.