Property vs. Shares - Navigating Investment in an Uncertain Market

While both asset classes have historically delivered strong returns, recent developments in Australia’s housing market and global economic shifts have altered the risk-reward equation. A projected housing shortfall and potential stock market volatility in 2025 are reshaping investment strategies, making it more important than ever to understand the nuances of both options.

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Leverage: The Power of Property Financing

One of property’s biggest strengths is its ability to leverage. Unlike shares, which typically require an investor to use their own capital, property allows buyers to borrow 80-90% of an asset’s value, amplifying potential returns. A $100K deposit on a $500K home gives an investor exposure to the entire $500K asset, whereas a $100K investment in shares is limited to the amount directly invested. While this leverage can significantly enhance gains, it also introduces debt risk, making interest rate fluctuations and borrowing conditions key factors in property investment success.

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Performance Over Time: Property vs. Shares

Property:

• Over the past 30 years, Australian real estate has grown by an average of 6.8% annually.
• Major cities like Sydney and Melbourne have seen consistent price appreciation.
• Rental income provides passive cash flow in addition to capital growth.

Shares:

• The ASX 200 has returned an average of 9.3% annually, including dividends.
• Stocks offer greater liquidity, allowing investors to buy and sell with ease.
• However, the stock market is more volatile, reacting daily to global economic and political events.

While shares have historically outperformed property on a percentage basis, their volatility and sensitivity to macroeconomic factors make them less predictable than real estate.

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2025 Market Outlook: Housing Supply Crisis and Economic Headwinds

Australia’s housing market is on the brink of a significant supply shortfall, which is expected to have lasting effects on property values. According to the Property Council of Australia, the nation is projected to fall 462,000 homes short of the government’s target of 1.2 million new homes by 2029. This deficit is expected to drive prices higher while exacerbating rental affordability issues.

For property investors, this presents a potential acceleration in capital growth as demand outstrips supply. However, affordability concerns may prompt government intervention, such as increased investor taxes or lending restrictions, to prioritize owner-occupiers and first-home buyers.

Meanwhile, in the stock market, Macquarie has warned of a potential bear market in 2025, citing aggressive economic policies, tariffs, and government spending cuts as factors that could lead to a 20% decline in share prices. Investors with exposure to equities may need to adjust their portfolios to account for heightened volatility and shifting global economic conditions.

Read more: Herald Sun Report on Housing Shortfall

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Risk Considerations: Property vs. Shares

Property Risks:

• Upfront costs: Stamp duty, legal fees, and deposit requirements.
• Lower liquidity: Selling a property takes time compared to selling shares.
• Market cycles: Interest rate changes and policy shifts can impact property values.

Stock Market Risks:

• Short-term volatility: Daily price swings based on economic news and corporate earnings.
• Exposure to external factors: Global events, trade tensions, and political decisions can impact performance.
• Psychological impact: Market downturns can lead to panic selling, affecting long-term returns.

While property is generally less volatile, it is also less flexible than shares. The stock market offers quick liquidity, but investors must be prepared for market swings and potential downturns.

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Tax Advantages: Property vs. Shares

Property Tax Benefits:

• Negative gearing: Offsetting property-related losses against taxable income.
• Capital Gains Tax (CGT) discounts: A 50% CGT discount applies to properties held for over 12 months.
• Depreciation deductions: Claimable on building structures and fixtures, reducing taxable income.

Shares Tax Benefits:

• Franking credits: Reduce tax liabilities on dividend income.
• Strategic selling: Investors can time share sales to optimize tax outcomes.
• Lower capital requirements: No stamp duty or ongoing property-related taxes.

From a tax perspective, property offers significant long-term benefits, particularly for leveraged investors, while shares provide greater flexibility in managing capital gains and losses

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Investment Strategy: Which Asset Class Is Right for You?

The decision between property and shares depends on an investor’s risk tolerance, financial goals, and time horizon.

Property is ideal for those seeking:

• Long-term capital growth with rental income.
• A hedge against inflation in a supply-constrained market.
• Tax advantages through negative gearing and depreciation.

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As housing supply tightens and economic uncertainty looms, property appears to offer more predictable growth, while shares may require careful selection and risk management in the face of potential market downturns.

Looking to invest in property? Contact us for insights on the best opportunities in 2025.

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References:

The Australian - Housing crisis 'time bomb' alarm sounded

Courier Mail - Grim amount now needed to afford the average Aussie rental

Herald Sun - Why renters are set to miss out on $2600 of yearly savings

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