Property vs Shares

Introduction

The 'Property vs Shares' calculator prepares a comparison of predicted rates of return for investments in property and shares. It is based on typical conditions (taxes, costs, etc) in Australia. There is no reason why it couldn't be used for other jurisdictions though.

The basic assumption is that an investor takes out a loan in the form of a mortgage and invests it in a property and shares. Any income earnt goes into paying off the mortgage. If the mortgage is repaid then the income goes into an interest bearing account at the same rate as the mortgage. Capital gains are paid on the sale of the assest. The final account adds the mortgage and post tax sale price. The real value gives the gain in today's dollars. A calculation is made every year to show you how things change over time.

Warning: This is for testing purposes only. There may very well be errors in the calculations. Use at your own risk. No liability is accepted for any losses arises from the use of the calculator.

You may also be interested in the 'Property Price' calculator.

Method of Calculation

1. Income is calculated on price at start of year.
2. Mortgage is calculated on value at start of year.
3. Other costs are calculated also.
4. Profit is then calculated and adjusted for income tax and negative gearing.
5. Sale Price is the calculated and takes into account capital gains. CGT is halved if sold after first year
6. Final Position is then calculated as Sale Price and Mortgage combined.
7. Final Real is the final position in today's dollars.
8. Row is outputted.
9. Rent is then calculated fresh for next year.
10. Mortgage is then calculated fresh for next year.
11. Capital value is calculated fresh for next year.

Technical Points of Interest

1. Mortgage is greater than borrowed amount due to buy transaction costs. There is the initial loan and then there are extra associated costs which are also included.
2. Transaction costs tend to be greater for property. Property is harder to manage than shares and the costs are much higher. THE REI estimates that 25% of rent is lost in annual rental expenses.
3. Property prices need to fall significantly before property can compete with shares.
4. Once mortgage has been paid off left over income goes into a 'negative' mortgage which is equivalent to a high interest savings account.
5. The share market vehicle doesn't exist in reality as investments in shares would generally result in churning and incursion of capital gains along the way. The presumption here is that a wide range of shares is purchased and held for the entire period. Capital gains on shares held for less than 1 year is not included in the calculations.
6. The respective rates of return for property vs shares is contentious. It is less significant as the purchase price for the property though. Until recently long term returns for shares were better than property. The recent boom in property has meant that property just pips shares. It is reasonable to assume that shares will win out again. However, the default values of the calculator is generous to property and gives it 1% over shares. Even so, with a good buy property it still takes property 30 years to catch up and overtake the final position of shares!
7. 50 years is a long time and there will no doubt be major legislative changes as well as changes in the respective rates of return. This is all based on averages.

Observational Points of Interest

1. A bad property purchase will take 25 years to payoff the mortgage. A very good buy in today's market will still take 20 years.
2. Assuming that the market grows at a steady rate investors are ahead after a couple of years and have made as much profit as they borrowed 20 years later. This holds true for large and small borrowings for property and sharemarket. In terms of retirement you will have what you are prepared to risk. Very interesting.
3. There comes a point around the 40 year mark where inflation combines with the capital gains to erode the real gains made. This holds true for large and small borrowings for both property an dthe sharemarket. Maybe it would be time to sell up at 40 years! ie. at the time property is passed in a will it has reached its maximum real value. Very interesting.
4. Over the long term the share market clearly outperforms property mainly because it is cheaper to run. Add this to the advantages of it being more liquid and divisible and there are clear advantages to shares over property. Of course, it does depend when you buy an asset and there are chances to make good capital gains in property - just not at the moment.

Distill it down

1. Bad investments can haunt you until you retire.
2. For retirement you get what you risk assuming you bought wisely.
3. The kids shouldn't complain about capital gains as they are getting an investment at its peak.

Feedback

If you have any feedback please feel free to send it to me. This is just a personal project of mine done in my spare time. I may have made some obvious or not so obvious errors or oversights, in which case I'd be interested to hear you views. Hopefully the calculator was helpful to you. Please get in touch with me, Murray, at this email address: mwoodman-at-hotmail-dot-com. Cheers.

Disclaimer

The 'Property vs Shares' calculator is intended for illustrative purposes only. It should not be relied on for investment advice of any kind. The site's owner, Murray Woodman, will not be held liable for any loss resulting from the use of the calculator.