Property V stocks: which has performed better?
Stephen Koukoulas is one of Australia's leading economic visionaries, past Chief Economist of Citibank, heading global research in London for TD and Senior Economic Advisor to the Prime Minister. Stephen has a look at property v stocks performance since the GFC.
Think back to about the middle of 2007 and a scenario where an individual had $500,000 to invest. The options were either buying a house or putting the money into the stock market. It was a tough choice because the housing market was, in the eyes of some, looking expensive. Some high profile forecasters were even calling for a housing crash where prices would fall 40 per cent.
At that time, the stock market was on a strong growth path and seemingly had some more upside, or at least that is what most stockbroker advisors were saying.
Fast forward to today and if you bucked the doomsayer predictions and chose residential property in Australia, your $500,000 would have done exceptionally well to the point where you would be sitting on a asset worth about $875,000. That is a terrific 75 per cent capital gain in under a decade.
If you chose shares and invested in the broad ASX200 index, the value of that share portfolio would be around $475,000, which represents a capital loss of around five per cent. Ouch! Of course all these numbers exclude rental and dividend returns which are an important part to investment preferences.
The Australian public are not mugs when it comes to investing. These simple facts are well known and generally understood.
They explain why there is an overwhelming bias in investment plans towards residential property and away from shares. Quite simply, it has paid to have your investment money in dwellings.
This investor bias shows up very clearly in the outstanding debt on investment loans for housing and for stocks, the latter being the so-called margin lending where investors negative gear shares.
The latest Reserve Bank of Australia data shows that there is $548 billion in loans outstanding for residential investment property, which is up from around $275 billion in mid-2007.
Margin loans outstanding for negatively geared investment in the stock market are just $12 billion, which is down quite precipitously from $40 billion in the middle of 2007.
In other words, in 2007 the value of loans for investment in property was about seven times the value of loans for shares. Today, that ratio is almost 50 times.
It reflects the performance of both assets classes, no doubt and may also reflect the very conservative, risk averse attitude of the general population.
The $64 billion question is whether there is any scope for borrowing for property to cool off and for shares to rise. One thing that is obvious is that the attractiveness of property versus stocks is rapidly changing. House prices growth is slowing and there is a risk prices may even fall a little. Rental yields are also tracking at multi-decade lows. At the same time, evidence that the local economy is growing at a decent pace, commodity prices are rising and corporate profits appear to be set to lift.
Whether this is enough to see the relative attractiveness of stocks improve versus property is tough to say, but markets (housing) do not rise forever and stocks do not remain weak forever. For me, my money would be on stock market outperforming property over the next few years and it would not be surprising to see margin loans start to pick up once investors realize this.