The real estate and stock markets are both powerhouses of potential to deliver big returns, but it's important to understand the differences and weigh the pros and cons.

One mistake new investors often make is rushing into purchases. We’re here to answer your burning questions, and give you the inside scoop on investing in property versus shares in Australia this year. We’re talking about the good, the bad, and the ugly to help you make an informed decision.

Let’s go!

While we’d love to put a definitive answer to this question, it boils down to personal choice. It will also depend heavily on your financial goals and risk tolerance. 

Some investors choose property, despite certain risks, because it suits their investment style. Others choose stocks because they have different financial or personal considerations.

Investing in real estate certainly has its appeal. With a physical property that you can touch, see, and even improve, many feel they have a lot more control over this kind of investment. 

Real estate can provide a steady and reliable stream of income, as well as capital growth over the long term. Renting out your property and using it to pay off your mortgage can allow you to build equity and even expand your property portfolio.

Investing in real estate also comes with a variety of challenges and considerations. Real estate markets are often cyclical and can experience significant price fluctuations, which may impact the return on your investment. 

Purchasing a property typically requires a large upfront investment, which can be difficult to come by for some investors. Owning a property also means you'll need to take care of its maintenance and upkeep, which can be time-consuming and costly. 

Becoming a shareholder and buying a piece of a company means having the potential to profit from the company's growth and success. Many people prefer investing in these intangible assets because it's quicker and requires less upfront money than real estate. It also avoids the responsibilities of property maintenance. 

However, the stock market is inherently volatile and can be unpredictable, which can impact the value of your shares. Since stocks are more speculative than bonds or real estate, there is also a greater risk involved.

Before investing in stocks, it's important to thoroughly research the company you're interested in, understand the risks involved, and diversify your portfolio to minimise potential losses.

If you’re debating whether or not to invest in shares or property, here are some things to consider:

Let's talk about returns on investment (ROI) between property and shares in Australia. Real estate and stocks are two of the most popular investment options, but they both offer different returns.

The average ROI for real estate can vary depending on a number of factors, including the location of the property, the state of the real estate market, and an investor's strategy.

According to an Australian Securities Exchange (ASX) report in partnership with Russell Investments, the average real estate return on investment in Australia has been at 6.8% over the past 100 years.

This means that if you buy a property worth $1,601,467, it could increase in value by $108,899. The average rental yield in Australia is around 8%, with 1% accounting for ongoing costs like dues, strata and insurance fees.

In other words, for a property worth $1,601,467 you would expect an annual rental income of $128,117 and ongoing fees of $16,000, leaving you a profit of $112,117.

It's hard to predict exactly how much you'll make on your investment. The average ROI for stocks can also vary, depending on the stock market conditions, the specific stocks invested in, and the length of time the investment is held. 

To get an idea of the overall market, look at the All Ordinaries Index. This index is made up of the stock prices for 500 of the largest companies listed on the ASX and measures their combined performance.

Research by Canstar shows that the All Ords rose from 1,582 in March 1992, to 7,323 in February 2022, with a 362% increase in market value of shares. Per year, the average total return of stocks is 9.3%, based on data by the S&P/ASX 200 Index.

The stock market can be more volatile than real estate, with bigger potential for both gains and losses in the short term.

Risk is inherent to investing. The higher the risk, the greater the rate of return an investor can expect.

Whether you prefer the stability of real estate or the potential for higher returns in stocks, it's important to be aware of the underlying risks along with the benefits. The markets may change at any minute - and it’s not set in stone how the future of these investments may go. 

Let’s take a look at some of the most common risks of investing in property vs shares in Australia:

Market Volatility

• Shares prices can fluctuate greatly in short periods of time based on market conditions, news and other external events.
• Stock market changes can affect the overall value of a portfolio, which can lead to significant gains or losses.
• At any given time, if there is too much supply of shares and not enough demand, their value and price will decline.
  
  

Company-specific Risks

• Management changes, legal issues, competition, and other factors can affect a company's financial performance.
• Company-specific risks can lead to a decline in a company's stock price and impact the overall return on investment.
• In the case of a company that issues more debt and equity than its assets are worth, earnings will be reduced, the share value will decrease, and the dividends paid will be lower.
  
  

Industry-wide Risks

• An industry-wide risk refers to risks that are inherent to a particular industry and can affect all companies operating within that industry.
• Examples of industry-wide risks include changes in technology, new competitors entering the market, changes in government regulation, and more.
• Industry-wide trends can also affect the demand for products and services within an industry. For example, the popularity of electric vehicles has impacted the demand for gasoline, leading to a decrease in the profits of oil companies.
  
  

Economic & Political Risks

• Economic changes, such as recessions, inflation, or changes in consumer spending patterns, can have a significant impact on a company's financial performance and stock prices.
• Political risks, such as changes in tax laws or trade policies, can also affect a company's financial performance. New regulations or laws may increase the cost of doing business, leading to lower profit margins for companies. This can result in a decline in stock prices.
• Geopolitical tensions and trade agreements can impact global companies. Tariffs or sanctions imposed by one country can harm the export of goods, reducing revenue for trade-involved companies.

Economic Fluctuations

•  Changes in interest rates, inflation, and unemployment can affect real estate prices and rental income.
• When interest rates are low, people are more likely to borrow money to buy a house, which drives up prices.
•  When inflation is high, the cost of living increases and people may not have the money to buy a house, so prices drop.
•  When unemployment is high, people may not have the money to afford rent, which could lead to a decrease in rental income.
  
  

Overbuilding & Oversupply

• Too much new construction in a given area can lead to an overabundance of available properties and drive down prices.
• Overcapitalization is a risk when property cost exceeds the potential value or rental income. For example, building too many apartments in an area with low demand can result in prices too low to cover costs, leading to financial loss for the owner.
  
  

Inflation Risk

• Inflation can affect real estate investments by decreasing the value of rental income over time.
• Inflation may also trigger rising mortgage rates along with development and maintenance costs
• In the current market, landlords may need to increase rental prices to account for higher mortgage rates and supplies, which may lead to tenants being unable to afford the rental rate, leaving the property vacant.
  
  

 Specific Risk

• This refers to the risk associated with specific properties or markets.
• Specific risk factors such as location, zoning laws, the condition of the property or declining local economies can negatively impact real estate values.
•  A property can lose its value even if it is a good investment overall. Due to the associated risks, a property located in a high crime area or declining economy, for example, might become a less desirable investment.

Property investment has been a historically popular option for securing financial stability in Australia. Data shows that nearly 2.6 million individuals (or 10% of the population) were landlords as of 2019. 

Real estate is known to appreciate in value over time, with an average annual growth rate of 3% over the past decade. Additionally, property investment can provide significant tax benefits, with deductions available on expenses related to property ownership, such as maintenance, repairs, and interest payments on loans. 

On the other hand, investing in property also comes with risks such as illiquidity, ongoing maintenance costs, and exposure to market fluctuations, as property values can change significantly over time. Property investment also requires significant capital, which may not be feasible for some investors.

Let's look at more of the pros and cons of property investment:

The pandemic triggered a wave of people looking at investment options to sustain their future. In fact, the ASX saw a major upsurge in activity, with 435,000 individuals making their first-ever investment in stocks, and a new record of 1.25 million active investors by the end of 2020. 

Stocks were particularly appealing, thanks in part to the rise of online brokers. Investors could easily tap into an entire market brimming with wealth potential from the comfort of their homes.

While it can seem like a sure shot, there are also risks associated with investing in stocks. Stock prices are known for their volatility and can fluctuate rapidly, resulting in less experienced investors losing a lot of money very quickly. 

The stock market can also be influenced by many factors, such as economic conditions, company performance, and political events, making it difficult to predict and navigate.

Let’s take a look at some of the pros and cons of investing in stocks:

Traditional investment practices in Australia have changed.

For the real estate market, pandemic-triggered low interest rates resulted in higher overall property demand over the last 2 years. 

Property values are now 20-30% higher than at the beginning of this cycle when wage growth was mostly minimal to moderate. This means that more people may not be able to afford property. 

The pent-up demand for buying a property seems to be waning. Many have had to delay their plans of moving for so long due to the pandemic, that they are now less eager to jump into action and actually purchase a house. 

More people have shown an interest in moving out of cities and into detached houses. There may be higher property demand in regional areas and investors looking for a more pandemic-friendly home.

The share market, on the other hand, tells a different story.

The entry of Omicron in 2022 has disrupted the market's recovery, casting uncertainty on how much companies may be able to recoup. With staff shortages, supply chain breakdowns, and higher inflation, it seems like the already risky tower is becoming even riskier. 

Sell-offs are becoming more common as companies find it harder to justify their valuation with the spike in interest rates. High dividends may still be paid out, but not to the record level that was reported in August 2021. 

Market analysts predict that the market will keep rising, but at a slower pace than 2021. The low interest rates are expected to bring back a surge in stock investment.

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