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Should you invest in ASX shares or buy a house?

Is it a better idea to invest in ASX shares or buy a house?

A lot of people are facing the difficult choice of either trying to save for a house or putting their money towards ASX shares.

Low interest rates makes the current financial environment very difficult. Asset prices are almost as high as they’ve ever been, in all markets, and wage growth isn’t going anywhere fast.

So, which one should you go for?

Invest in ASX shares

The advantages of investing in ASX shares are pretty clear. You get to build up your wealth at whatever pace suits you, you can invest as little as $500 at a time.

Shares have been the best performing asset over the long-term. We can say that shares have returned an average of 10% per annum throughout the decades – and that doesn’t include the bonus of franking credits. If you invest well you can get higher returns than that.

Another advantage of shares is that you don’t need to take on a huge loan. House prices can go down but the loan will need paying until it’s paid off.

Investing in shares means your wealth is far more diversified than putting all of your money in just one property.

Share investing also has much lower costs. You can buy shares for as little as $10 or $20 per trade. Whereas property costs thousands of dollars to buy in fees, plus (perhaps) stamp duty.

If you’re worried about missing out on the gains of property – good or bad – then you could invest in shares like REA Group Limited (ASX: REA), Domain Holdings Australia Ltd (ASX: DHG), Arena REIT No 1 (ASX: ARF) and National Storage REIT (ASX: NSR).

Buy a property

Buying a property to live in means you are no longer exposed to rent increases – it’s a protection against inflation. Rent rises may actually be quite low going forward due to how low inflation is, so that may not be such a good reason at the moment.

You can build up your net worth with property too. Paying down the mortgage increases your equity and the house value will hopefully go up over time too. Though as we’ve seen over the past two years, that won’t be the case every year.

But, any gains you make on the sale of your principal place of residence is likely capital gains free, whereas all the returns of shares are taxable.

Some people may like the flexibility of renting because they can move locations quite easily. However, families with young children may want to put their roots down somewhere.

You can’t renovate a rental property how you want it to be. But you can do it how you want with your own property. A new deck, knock down some walls or even just a bit of painting, you can probably do whatever you like.

Foolish takeaway

On a purely financial basis, it depends on individual factors to decide whether property or shares do better over the next few decades – although my bet is on good shares doing better.

But the best reasons to buy property are non-financial. So if you’re financially able to buy a property and you want to buy, then that could be the right choice for your family.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has recommended National Storage REIT and REA Group Limited. 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 Scott Phillips.