Australian Property vs Shares

Australian Property vs Shares

For Australian investors, the decision between investing in property or shares represents one of the most significant financial choices they'll make. Both asset classes have passionate advocates, and both have created substantial wealth over time. But what does the historical data actually tell us about their comparative performance?

This analysis examines a century of returns across Australian residential property, domestic shares, and international equities to provide evidence-based insights for today's investors.

Key Findings at a Glance

• Australian residential property has delivered average annual returns of approximately 6.3% (after inflation) over the past century

• Australian shares have produced average annual returns of around 6.7% (after inflation) since the 1920s

• International shares have yielded approximately 5.9% (after inflation) annually for Australian investors over the same period

• Volatility has been significantly higher in shares compared to residential property

• Tax advantages and leverage have enhanced property returns for many investors

• Diversification benefits exist across all three asset classes

The Historical Performance of Australian Residential Property

Australian residential property has demonstrated remarkable stability and growth over the past century. According to data from the Reserve Bank of Australia (RBA) and various economic studies:

• From 1920 to 2024, Australian housing prices increased at an average annual rate of approximately 6.3% when adjusted for inflation

• Major capital cities, particularly Sydney and Melbourne, have outperformed regional areas

• Property has exhibited lower volatility than shares, with fewer dramatic downturns

• Notable boom periods occurred in the post-World War II era, the 1980s, early 2000s, and 2012-2017

• Significant corrections occurred in the early 1990s (following interest rate spikes) and during the 2008 Global Financial Crisis

The most comprehensive long-term housing data comes from Nigel Stapledon's work at UNSW, which constructed housing indices dating back to 1880, showing that while there have been periodic corrections, Australian property has never experienced the catastrophic crashes seen in some international markets.

Australian Shares: A Century of Performance

The Australian share market has delivered strong long-term returns despite periods of significant volatility:

• The ASX (and its predecessors) has delivered average annual real returns of approximately 6.7% since the 1920s

• Including dividend reinvestment, total returns have averaged closer to 11.5% nominally

• Major corrections occurred during the Great Depression (1929-1932), the 1970s oil crisis, the 1987 crash, the early 2000s tech bubble burst, and the 2008 Global Financial Crisis

• The Australian market has benefited from strong banking and resource sectors

• Compared to property, shares have displayed approximately twice the volatility

Data from the ASX Russell Long-term Investing Report and research by Credit Suisse (through their Global Investment Returns Yearbook) confirm these figures, with Australian shares performing above global averages over most long-term periods.

International Shares: Global Opportunities and Risks

For Australian investors, international shares have presented both opportunities and challenges:

• International shares have delivered average real returns of approximately 5.9% annually to Australian investors over the past century

• Currency fluctuations have significantly impacted returns for Australian investors

• US markets have outperformed most global indices over the long term, delivering around 6.5% real returns

• European and Japanese markets have seen periods of both extraordinary growth and prolonged stagnation

• Emerging markets have offered higher potential returns but with substantially greater risk

• International diversification has provided protection during periods of Australian economic weakness

The Credit Suisse Global Investment Returns Yearbook and MSCI indices provide the most reliable long-term data for international equity performance.

Comparing Risk Profiles

A crucial difference between property and shares lies in their risk profiles:

• Standard deviation of returns:

  • Australian property: approximately 5-7% annually

  • Australian shares: approximately 12-18% annually

  • International shares: approximately 14-20% annually

• Maximum drawdowns:

  • Australian property: largest decline approximately 20% (early 1990s)

  • Australian shares: largest decline approximately 55% (Great Depression)

  • International shares: largest decline approximately 60% (Great Depression and GFC)

• Recovery periods:

  • Property downturns have typically recovered within 2-5 years

  • Share market crashes have taken between 3-10 years for full recovery, depending on severity

The Hidden Factors: Leverage, Taxes, and Costs

The true performance comparison must account for several crucial factors:

Leverage

Most property investors use substantial leverage (mortgage financing), which can significantly enhance returns in rising markets but amplify losses during downturns. A typical property investor might use 70-80% leverage, while share investors typically use less or none.

Tax Advantages

Australian tax policy has generally favored property investment through:

• Negative gearing benefits

• Capital gains tax discounts (50% discount for assets held over 12 months)

• Primary residence exemption from capital gains tax

• Depreciation benefits for investment properties

Ongoing Costs

Property investment incurs substantial costs that reduce effective returns:

• Maintenance (approximately 1% of property value annually)

• Insurance

• Property management fees

• Council rates and strata fees

• Stamp duty on purchase (typically 3-5%)

Share investments also incur costs, though generally lower:

• Brokerage fees (though substantially reduced in recent decades)

• Management fees for managed funds or ETFs

• Tax on dividends (partially offset by franking credits for Australian shares)

The Diversification Perspective

Modern portfolio theory suggests that optimal portfolios contain a mix of asset classes. The correlation between Australian property, domestic shares, and international equities has varied over time:

• Property and domestic shares: correlation coefficient of approximately 0.3-0.4

• Domestic and international shares: correlation coefficient of approximately 0.6-0.7

• Property and international shares: correlation coefficient of approximately 0.2-0.3

These moderate correlations suggest significant diversification benefits from holding multiple asset classes.

The Future Outlook

While historical performance provides valuable context, several factors may influence future returns:

For Property:

• Population growth trends (historically a key driver)

• Interest rate environment

• Housing supply constraints in major cities

• Changes to tax policies and incentives

• Remote work trends affecting location preferences

For Shares:

• Technological disruption across industries

• Changing global economic power balance

• Climate change and the transition to renewable energy

• Evolving monetary policy in a post-pandemic world

• Geopolitical shifts and trade relationships

Conclusion: Finding the Right Balance

The century-long data reveals that both property and shares have created substantial wealth for Australian investors, with surprisingly similar long-term returns despite very different risk characteristics.

The most successful investors typically:

• Diversify across multiple asset classes

• Take advantage of the unique tax benefits each offers

• Maintain a long-term perspective through market cycles

• Match their investment mix to their personal circumstances

• Regularly reassess their strategy as markets and life situations evolve

Rather than viewing the property vs. shares debate as an either/or proposition, the evidence suggests that a thoughtful combination often produces the most robust results over a lifetime of investing.

Whether you're a property enthusiast, a share market devotee, or simply looking to build wealth sensibly over time, understanding the historical performance patterns of these major asset classes provides an essential foundation for making informed investment decisions in the Australian context.