Many, many people get hung up on whether houses are better than shares as long term investments and vice versa. Logic would dictate that over the long term, houses are a depreciating asset requiring substantial capital to buy or maintain with high transaction costs, and therefore are likely to underperform listed equity, which should overcome these hurdles. However, this ignores key characteristics of the property market as well as issues specific to Australia.
One issue is the availability of credit. Banks generally hold substantial residential property and so are loathe to revalue their entire portfolio down – even when market values fall. This provides an element of ‘buffer’ for borrowers and therefore additional stability for the asset class. The recent global banking crisis crimped lending in most developed countries but not in Australia. This has helped retain values. Unemployment has not suffered (proportionately) in Australia compared to the US, UK, and other developed countries. Interest rates falls have flowed directly to the average person who holds variable rate mortgages in Australia, leading to improved serviceability of existing loans and increased affordability for housing – even in the face of what are comparatively very high prices. Another issue is supply/demand, where Australian property prices reflect the distortion of a lack of available homes resulting in a difficulty in prices reaching a ‘fair market value’ – ie, a price that can be negotiated without stress by either the buyer or the seller. Supply shortages distort markets. Australia continues to enjoy historically high birthrates and sustained high levels of immigration, placing continuous pressure on the supply of housing.
Markets distort all of the time – whether in a free market or in a controlled economy – so why not just look at how the overall impact works? How about looking at an assumption of buying the “average” (remembering that averages don’t exist in residential housing) house as far back as reasonably public research will allow and assuming we take an equal amount of money and invest it into the Australian sharemarket (as reflected through the All Ordinaries Index – which has changed a bit over the years but is at least representative of the broader market).
The following chart is an attempt to do just that. Feel free to try this yourself at home. The data is available. It is made a bit more difficult by the ABS changing their measurement basis back in 2002 – but i have made a rough adjustment for that. In other words, don’t expect perfection here, folks. The idea is just to look at relativities and see if it tells us anything about these markets.