Investment: - Home Vs Shares

The stock market first started trading in Australia back to the middle of the 19th century so any time since then it has always been an option to invest the money that you would have invested in a house into the stock market.

One of the problems I have observed in a number of of articles that have addressed the issue of property versus shares has been that the information provided is far too general and not really helpful.

For argument sake on graphs used to provided analysis they will show you the average median house price over say the last 50 years and compare that to the gain in the Australian All Ordinaries Index (AOX) on the share market over the same period. Until very recently it was impossible for you to buy shares in the AOX you were required to actually buy shares in the company listed on Exchange that made up the AOX and the fate of such companies are as diverse as the fate suffered by any particular individual within a group.

Further you may have seen in the consideration on buying versus renting page that there are a wide spread of locations for houses throughout Australia and similarly there is wide range of companies you can invest in, so I have found these comparisons not very useful.

Commonwealth Bank listed on the exchange in 1991 at a price in the vicinity of seven dollars a share currently 23 years later the price of that share is listed at about $82.That represents a capital growth rate of just under 12% a year over the 23 years. A similar sort of annual capital growth is applicable to BHP for the last 33 years. It would be an easy matter for you to locate in your area a particular property in which you had an interest and find out the value of that property in 1991 and the value of the property now and calculate the average annual growth and compare it to these company performance. I doubt if you'll find any property in Australia that has performed that well over such a period.

Further both these companies provided income by the way of annual dividends and somewhere usually in the range of 3 or 4% of face value of the share and it would be unusual if those payments were not franked with a tax dividend of $.30 in the dollar which for people on lower to middle incomes would provide a tax-free income as well.

Talk with any investment consultant about a house rental property for investment and these are the types of pre-tax annual incomes you would expect from such properties

We are often reminded that companies can and do go broke in which case you lose all your investment whereas we are told that house prices in Australia are extremely unlikely to ever go to zero (Though you could buy land for two shillings and six pence an acre in far North Queensland when the Japanese invaded Papua New Guinea in 1942). But people who provide this advice neglect to point out that while house prices may not go to zero if a person has a mortgage and is unable to maintain the mortgage payments and the property market is in decline and they are forced to sell then it can and does occur that such people may lose all the money they've invested in their house. The same outcome as investing in a company that goes bankrupt.

The next poignant point to consider about investing in shares rather than a house is the flexibility shares offer in extreme situations of emergency when liquidity is an issue. You can't take the back veranda and a garage from your house and liquidate them in order to raise urgently funds (Say $30,000 required for a medical emergency) but $500,000 invested in shares allows you the option of doing so within 24 hours if needed . A flexibility that investment in home ownership can never offer.

Borrowing Funds

You may remember if you've read the page on owning versus renting that raising funds for an investment in home ownership (house of personal residence) is granted a privileged position. Borrowing funds to purchase shares will not only require a much higher deposit from you, somewhere in the vicinity of 20 to 30% of the capital cost of the purchase but also an extremely high rate of interest at least 1.5 that of a loan to purchase your house.

Taxation

Here again home ownership benefits from an extremely gracious privilege granted by the government to exempt profits made from the sale of your house from being part of your taxable income. The example above of raising funds for a medical emergency would have unavoidably exposed you to a tax liability for capital gains. Not so when you come to realise capital gain on your house of residence.

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