There’s little doubt that economic growth will be hit by the coronavirus outbreak. However, the extent of the damage is still largely unknown as central banks and governments rush to support the economy.
All of these economic movements provide an interesting backdrop to the classic shares versus property debate. The RBA slashed interest rates to an unprecedented 0.25% yesterday afternoon. Cheap credit often leads to more borrowing, with strong demand pushing property prices higher. However, these aren’t normal times.
So, with Australia staring at a recession and ASX shares under pressure, which investment is safer right now?
Why I prefer ASX shares to property right now
The nature of ASX shares means you can diversify quite easily. With just $1,000, you could purchase a diversified ETF like Vanguard Australian Shares Index ETF (ASX: VAS). Similarly, $5,000 might buy you a handful of individual ASX 200 shares like CSL Limited (ASX: CSL) and Woolworths Group Ltd (ASX: WOW).
If you invest in residential property, chances are you’re not getting those diversification benefits. You’re putting all of those financial eggs in one basket like a house or apartment. That carries extra risk, and it may not be compensated with extra return.
However, property investing can reap big rewards compared to investing in ASX shares too. The benefits of leverage can’t be underestimated, although I’m not sure being heavily in debt is the best approach if we do hit a recession. The other factor is that property prices may in fact fall later this year. If unemployment rises, more Australians may struggle to pay off their mortgages and be forced to sell.
This won’t be apparent for quite some time given property values will lag the share market. While I’m not against property investing, I think the easy access, diversification and liquidity of ASX shares make it a better place to be right now.
Investing in ASX shares is harder than it sounds, particularly if you’re an active investor. However, I think the market correction has presented some good value buys. There are lots of cheap ASX 200 shares on the market right now if you have the cash and risk tolerance to buy.
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Ken Hall owns shares of Vanguard Australian Shares Index. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. 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 Scott Phillips.