Residential property vs shares since 1926

The residential property versus shares debate is popular and can be as fiery as political and religious debates. So I’m often asked about comparisons of the long term returns.

Following is some commentary I came across from Dr Shane Oliver, Chief Economist and Head of Investment Strategy at AMP Capital Investments. (Emphasis added by me.)

After allowing for costs, residential investment property and shares generate similar long-term returns. This can be seen in the next chart, which shows an estimate of the long-term return from housing, shares, bonds and cash.

Over the long term, the returns from housing and shares tend to cycle around each other at similar levels. In fact, both have returned an average of 11.5% p.a. over the last 80 years or so. While housing is less volatile than shares and seems safer for many, it offers a lower level of liquidity and diversifcation. The bottom line is, once the similar returns of housing and shares are allowed for, and these characteristics are traded off, there is a case for both in investors’ portfolios over the long term.


Source: Oliver’s Insights, Edition 37 – 25 November 2010, ‘Australian housing – is it a bubble? What’s the risk?’

7 thoughts on “Residential property vs shares since 1926

  1. Matt, I don’t think this is a fair comparison.

    Yes, somebody investing $100 in shares in 1926 would probably buy $100 worth of shares. But NOBODY would use their $100 to buy just $100 worth of property!

    They would take their $100 to a bank, and borrow $400 (even with a conservative bank, who insists on a 20% deposit), so they actually get $500 worth of property.

    That $500 property is growing at 11%, remember, so after 5 years it’s worth $842. Let’s say they pay 10% interest on their $400 loan each year, which is $40 per year. Over 5 years, that’s $200. So that reduces the $842 to $642.

    Now contrast that with the share investor, who puts in $100 in 1926, and makes 11% each year. After 5 years, that’s only $169. In fact, it takes 18 YEARS to reach the $642 that the property investor gets in 5 years.

    That’s a HUGE difference, and it only gets bigger each year.

    I’m not saying this alone means property is better than shares. But I *am* suggesting this is what happens in practice, whereas the comparison in the graph bears no relation at all to real life..

    1. Oh, and I also meant to add …

      So why don’t more financial planners recommend investing in property? I don’t know, but I suspect it’s because most of them only get a commission for recommending shares!

      That’s why I prefer to work with an adviser like you, Matt, who offers truly independent advice. Is it true the entire industry is being forced by the government to change to this practice? If so, it can’t happen soon enough!

      1. Thanks for your kind words, Gihan.

        Even many fee based advisers (like me) don’t initially recommend direct residential property investment to clients because often it is inappropriate when you consider other elements such as cash flow, competence and risk tolerance. As advisers we work towards getting those elements sorted so that direct property becomes suitable.

        (Historically investment-only commission-based advisers would naturally only recommend those investments that paid the bills. But financial planners like me take a bigger picture and therefore recommend what is appropriate. Planners have been the minority but are growing fast.)

        Yes, the Federal Labor Government are proposing to ban commissions from 1st July 2012 but it is only some commissions and it is not across the whole financial industry. Sadly mortgage brokers, property agents and property advisers are excluded from the ban. So investors in direct residential property still can’t expect advice uninfluenced by commissions and other vested interests.

        You may be interested to know that many property developers are now in fact targeting financial advisers with the promise of big commissions for referring clients to buy properties. The marketing I’ve received focuses on the attractiveness of the commission as the selling point. So the cynic could perhaps suggest that will actually result in more financial advisers recommending property. 🙂

    2. Thanks Gihan for sharing your thoughts.

      The article is not intended as a comprehensive comparison, so I think fair or unfair is debatable.

      However I do believe Dr Oliver’s graph is one interesting insight (of many) into a comparison of the asset class returns.

      Your example is useful as an illustration of the investor return. Investor return is a combination of the funding strategy, the asset class return, the ownership strategy (which impacts tax), transaction and holding costs. The huge difference in your example is more a result of the power of the funding strategy than the asset class.

      Theoretically you could apply the same funding strategy to a different asset class, such as shares, and some people do.

      The fact that to access the asset class return of residential property most people generally NEED to borrow money is one factor that makes such an investment inappropriate for probably a majority of the adult population (in my advisory experience).

      People can argue “best” until the cows come home and get nowhere because it all depends on the contextual definition of “best”. I much prefer focusing on what is appropriate to you based on your personal situation and goals.

      To assess what is appropriate requires an understanding and filtering of each element of the investor return. In that context understanding the nuances of each element is essential, plus combining it with the art of the intangibles such as “comfort”.

      Shameless plug follows: for a more comprehensive comparison of the asset classes that considers each element of investor return check out my DIY Wealth Creation for Busy People course at

      1. Thanks, Matt. What you’re writing makes sense (as usual).

        I’ll just point out that as you (correctly) say, theoretically people could borrow to buy shares just as they do with property, but in practice most people don’t. I wasn’t referring to anybody who is even vaguely an “investor”; my example was based on the “typical” person (if there is such a thing), who might be weighing up whether to buy blue-chip shares or the family home – i.e. the most boring and conservative uses of their money (apart from putting it in a bank).

        It’s also interesting that you say “a majority of the adult population” (in Australia, presumably) should NOT borrow to buy a house. I wouldn’t have guessed that, but you obviously have more expertise in this area than I do. If that’s correct, that’s a HUGE change from, say, even as little as a decade or so ago, where buying your own home was considered one of the most stable financial decisions you could make.

        1. Thanks again Gihan for contributing.

          I didn’t realise you were talking about the home they live in, rather than a residential property investment (one you don’t live in.)

          (For other readers’ benefit – in the finance world a residential property is a property someone lives in, though not necessarily the owner.)

          Understanding you meant an owner-occupied home yes people will borrow for that (though I wish they’d borrow less). But given statistics indicate around half of the population carry over a credit card balance each month they are in no position to borrow to invest (yet).

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