Before looking at the question of which asset class-property or shares-offer the better returns over time we need to look at a few important differences between property and shares.
Firstly, you can easily borrow to purchase residential property whereas borrowing to purchase shares is likely to be met with a refusal by your friendly bank manager. And this ability to borrow means the return on your money is multiplied or ratcheted up in a rising market because you can buy a residential property with only 10% down.
It’s a different story in a falling market, however, because you face the prospect of negative equity or at least a wiping out of any gains you may have seen in the value of your property.
You also have the problem of liquidity and not being able to easily sell the property and cut your losses in a hurry. Shares on the other hand allow you to be more nimble and to enter and exit the market quickly thereby releasing liquidity when you are most likely to be in need of scarce cash.
Secondly, you can live in your residential property and rear a family, maybe work from home, run a business, and so forth. You cannot do this with shares. Being able to enjoy your property and have a roof over your head regardless of how the stock or property markets are performing generally is a reassuring comfort that gives peace of mind.
Thirdly, you can easily invest in shares in foreign markets such as the UK, the United States, Europe. This is not a practical prospect if investing in property unless you invest in some type of property fund or REIT.
Fourthly, buying shares in Ireland by comparison with property offers lower transaction costs-for example the avoidance of legal fees which you will incur buying property. Stamp duty on residential property is only 1% in Ireland but it is 7.5% regarding commercial property.
Other variables that need to be considered include interest rates and taxation and how much of a write off you get against your tax bill when you invest in property as opposed to shares.
Having made these initial observations let’s see how these asset classes have performed over time.
When considering the best returns over time and trying to make a sound judgement as to which is the best asset class you need to consider one factor: timing of the investment.
If you buy into either property or shares at the top or bottom of a boom or bust cycle you may get a distorted view of the market and its performance over the long term.
You need to look at investing as being for the medium to long haul, and preferably the long haul-that is a term of 20 or 30 years.
But if we take a look at what has happened in Ireland over the last 30 years or so we can get some guidance.
Between 1990 and 2018 €10,000 invested in Irish residential property your investment would have been worth €39,000 in 2018. That is a return of 290%.
€10,000 in global shares would have returned €51,290, a return of 413%, while €10,000 in Irish shares would have ended up at €36,785, a return of 268%.
If you invested your €10,000 in 1995 your returns would have been as follows:
- Irish residential property: 347%
- Global shares: 315%
- Irish shares: 256%
If you invested your €10,000 in 2000 you would have these returns:
- Irish residential property 117%
- Global shares: 70%
- Irish shares: 51%
If you invested in 2005 you would have seen the following outcome:
- Irish residential property: -7.5%
- Global shares: 150%
- Irish shares: -10%
Over the long haul the best returns come from global shares. From 1990 to 2018 global shares gave a return of over 400%.
The difficulty in coming to a definitive conclusion as to the best asset class over time arises because of the difficulties in comparing them.
It is not unlike comparing apples and oranges because you need to decide over what period of time you will compare, what type of property (residential or commercial) is being compared, what type of shares, how big a basket of shares, the tax treatment of both investment types in different parts of the world, and so on.
Then, how do you factor in the power of being able to leverage property much more easily than shares and offset this with the illiquid nature of property investment as opposed to the more liquid share investment.
Another important consideration is your personality and your psychological make up. Investing in shares and seeing the daily fluctuations in share prices, corrections, and occasional crashes can be upsetting and distressing for the individual who has a young family and is not able to withstand the emotional rollercoaster that may be involved in shares investing.
This individual may be better off in property because at least he can live in it and enjoy it with his family and is not subject to a daily update on the value of his private residence.
Property investment, especially in residential property, is probably less likely to play with your nerves, notwithstanding our experience with the property crash from 2007 to 2010.
One thing we can safely conclude, however, regardless of which asset class: buy property or shares and hold them for 15 to 30 years and you will almost certainly see an excellent return on your investment.