COMMENT
Property vs. Shares

By David Kuo (TMFDragon)
July 14, 2005

Given the housing boom of the last few years it's not surprising that some investors have turned their backs on shares and focussed instead on property. In fact, some Britons even consider the rising value of their homes as a good substitute to saving for their retirement.

But there is a danger to adopting such an approach to investing. In a recent survey, two investors in three reckoned property produced the best return of the four assets classes over the last two years when in fact it hasn't. Since June 2003, property prices have risen 27% compared to equities that have gone up some 35%.

Of course, no one can argue against a 27% return in two years. I would happily embrace a compound rate of return of half that, provided it was sustainable. But over the long term, investing in property has generated a lower return than this. Since 1973 property prices have risen roughly 9% a year. This compares with shares that have returned an average of 11% since 1918.

However, it's important to try and compare apples with apples, and this is where it can get a bit complicated. You also need to consider other factors such as income from property (as you save rent by owning a house) and maintenance costs of keeping it marketable.

So which is the better investment property or shares? Interestingly, there are arguments for both, and here are some of the main ones.

Perhaps the biggest plus to property investing is the fact that land is a finite resource. Therefore, property should gain in value over the long term as population rises and demand for new homes increases. What's more, it's much easier to borrow against the value of a property, so gains are amplified when house prices rise. However, losses are magnified if house prices fall.

Shares tend to rise over the long term too, but you need to be more discerning when choosing which companies to invest in. That said you can always invest in an index tracker, which mimics the performance of the stock market.

Another argument that is often put forward for investing in property is that it is a tangible asset. In other words, you can drive past it and know that it's still there. However, this is where property gets to be a headache also. It has to be maintained, which can take time and money.

Of course, a portfolio of shares needs to be maintained too, and for that you need to learn the basics of investing. Mind you, it's a lot easier to learn about shares than whipping out your tool box or calling out a handyman. Additionally, you can learn about shares in your spare time, unlike dealing with a burst pipe that has to be fixed immediately.

The cost of buying and selling properties are something to bear in mind too - such as legal fees, stamp duty and estate agency commission. So, it's not something you want to do too often. By comparison, dealing in shares is much cheaper. So, if you think you may have invested in the wrong share, you can sell them and buy something else instead through low-cost broker.

On this point, liquidity is something worth considering too. Just because you want to sell your house doesn't mean you can do so quickly. It can take months or sometimes years to sell a property. Selling shares, on the other hand, is far quicker. So if you decide to sell your shares today, the proceeds could be in your bank account in a matter of days. Additionally, you can sell just a portion of your share portfolio, but you can't sell a house brick by brick!

So, there you have some of the arguments for investing in property and shares. In my view, both are great assets to own. Moreover, they should both deliver good long-term returns. However, since I already own a house, which has gone up significantly in value, I'm happy to balance things out by investing in more shares.