Property beat shares over the last decade: Or did it really?

Credit: Diliff

Residential property was the best performing asset class over the last decade according to recent research, including beating shares.

According to a May 2016 research report by Russell Investments for the ASX, for the 10 years from December 2005 to December 2015, property recorded an annual return of 8%, compared to just 5.5% for Australian shares, including dividend income.

Global shares were also beaten by property, gaining 6.2% annually.

Has the tide turned?

But recent large pullbacks in cities like Perth and Darwin has seen home values rise 7.1% for the 12 months to end of September, according to CoreLogic RP Data. However, the S&P/ASX 300 (Index: ^AXKO) (ASX: XKO) recorded a gain of 8.6% – before dividends.

Had investors invested in the S&P/ASX 200 A-REIT (Index: ^AXPJ) (ASX: XPJ) in September last year, they would have received nearly 16% capital gains, plus dividends on top of that.

Had they bought shares in Commonwealth Bank of Australia (ASX: CBA), they would’ve received a skinny 1.3% capital gain. But had they bought shares in lithium miner Galaxy Resources Ltd (ASX: GXY) in September 2015, a whopping 693% return was on offer.

Comparing apples with oranges

The real problem with comparing returns from different asset classes is that they are different. Tax treatment, different tax rates and the ability to borrow at low rates for property compared to say a margin loan for shares means the returns are also different for different types of investors.

Property investors can use negative gearing to claim expenses against their taxable income, while share investors get to claim franking credits against it.

First home owner’s grants anyone? Something similar for shares – forget it.

It’s also hard to estimate the amount of maintenance and money spent on capital improvements for property over the past decade. Shares don’t really have that problem and capital raisings are factored into the share price.

There’s also second and third order factors to consider. As one person I know noted, ‘how much did taxes and council rates improve infrastructure, making it more desirable to live in?’

There’s also the problem that investors can’t buy every home in Australia, or every share on the stock market, so each individual investor’s returns will be different to the overall market as well as each other. Try comparing a property investor who bought a house in Perth or one of the mining towns during the peak of the mining boom to one who bought an inner-city home in Sydney or Melbourne at the same time.

Foolish takeaway

It’s best to take any comparison between different asset classes with a grain of salt. There are plenty of assumptions made – not all of which fit everyone in those markets. Perhaps the best measure to use is ultra-long term results – which happen to show (PDF) that over 30 years, Australian shares have returned 9.6% annually (on average) to beat every other asset class.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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