Shares vs. property: Beginner investors choosing Aussie shares, ASX ETFs and rentvesting

Young Australians just starting their investment journeys are making some similar decisions, data shows.

Shares vs. property is typically the first big decision any budding investor has to make.

Of course, there are other options like simple savings accounts and bonds, but most people think of shares and property first when contemplating long-term investment for retirement.

There are lots of factors to consider in the choice of shares vs. property, but the overarching one is quite simple. Can you get enough finance to buy what you want?

Interest rates on investment property loans are at about 6%. Then the banks add a 3% 'mortgage serviceability buffer', as directed by APRA, to assess your long-term ability to keep up with repayments.

Being assessed at 9% makes it very hard for younger Australians to get a loan big enough for a property purchase. After all, the Australian median home value is just over three-quarters of a million dollars.

So, the affordability of property itself coupled with the difficulties of getting enough finance are big issues for beginner investors preferring bricks and mortar to shares.

But as always, the free market finds ways to adapt when challenges arise.

Shares vs. property: The path to investment

Most beginner investors can buy ASX shares tomorrow. All they need is an online broking account and a minimum of $500 in savings to make that first trade through any of the big banks.

Property is harder.

Historically, the traditional path to property investment started later in life, after first home ownership.

Back in the 1970s and 80s, most Aussies aspired to own a family home on a quarter-acre block. That was the Great Australian Dream. Then later down the track, some of those homeowners would use the equity in their residences to fund a single property investment for their retirement. That was the 'ideal' realised.

But over the years, the Great Australian Dream became difficult to afford. As the population grew, home prices rose more rapidly in the desirable inner city suburbs closest to work in the CBD.

So young Gen X Australians began buying further away, which led to the dawn of the commuter lifestyle. Those young families reasoned that owning a home outweighed the inconvenience of long travel to work. But eventually, those properties on the outskirts also became hard to afford, as land values shot up.

So, young people went back to the inner city and bought apartments instead. The dream of a quarter acre was lost, but home ownership remained the priority, with investment to come later in life as it always had.

Then those inner city units became expensive.

So, the next generation — the millennials — came up with a new idea. They changed the Great Australian Dream from home ownership to property ownership, with investment coming first, ahead of ownership.

That spawned a new market trend: Rentvesting.

What is rentvesting?

Rentvesting is where a young person rents where they want to live — typically a trendy inner city lifestyle area where they can't afford to buy — and purchases an investment property wherever they can afford it.

The rent helps them pay the mortgage, and they hope for enough capital growth over time to fund a deposit on a home in a location where they actually want to live themselves, later down the track.

This choice is facilitated by it being easier to get an investment loan than a home loan. This is because the property's rental income counts as part of the bank's serviceability and income assessment of you.

Rentvesting has become such a significant trend that in 2019, the Australian Bureau of Statistics (ABS) began separately reporting the number of new loans going to first-time buyers purchasing for investment as opposed to owner-occupation.

Last year, 7,412 young Australians took out loans to rentvest, according to ABS lending finance data.

In 2022, it was 8,243. In 2021, it was 10,678.

That decline over recent years may be the result of interest rates rapidly increasing since May 2022.

Are more beginner investors choosing shares vs. property?

The rapid growth in property values over the past 20 years could be a factor in data that indicates more beginner investors may be choosing shares vs. property.

According to the 2023 ASX Australian Investor Study, 32% of 18 to 24-year-old investors own investment property vs. 43% who own ASX shares. Some may own both, but you see the difference.

Among 25 to 49-year-old investors, 42% own investment property vs. 52% who own ASX shares.

Which ASX shares do beginner investors like most?

ASX shares are the most popular category of stocks among both age groups.

The second-most popular category is exchange-traded funds (ETFs).

The data shows that 33% of 18 to 24-year-old investors and 29% of 25 to 49-year-olds own ETFs.

ETFs are a relatively new investment phenomenon. ETFs were introduced on the ASX in 2001. They are increasingly popular, with 2023 being a record year for growth for these investment products.

ASX ETF provider BetaShares says investors funnelled $15 billion net into ETFs last year. This, along with gains in asset values, led to the highest increase in annual funds under management (FUM) within the Australian ETF industry, ever.

In terms of specific shares favoured by younger investors, broker Selfwealth Ltd (ASX: SWF) released some data last year naming the most popular ASX shares among millennials.

They were as follows.

(Fun fact: Many of these ETFs below hit new 52-week high share prices yesterday.)