There’s a debate every Australian investor has eventually: property, or shares?
According to Motley Fool Chief Investment Officer Scott Phillips, speaking on 7NEWS’ latest episode of Money Talks, powered by Vanguard, it’s not really a debate. It’s an “unfair race”, and one side was always going to lose.
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Property vs shares
A property’s value can only grow as fast as buyers can afford to pay for it, and that’s capped by wage growth.
“You can only pay 100 per cent of your payout in real estate,” Phillips said on 7NEWS’ latest episode of Money Talks, powered by Vanguard.
Once households are already stretched to afford homes, prices can’t keep outrunning income.
Over time, that caps property growth at roughly wage growth: around three per cent a year.
Shares don’t have that ceiling.
Listed companies can grow profits faster than the economy, steal market share from competitors, and expand overseas.
Stack dividends on top, and the share market has returned close to nine per cent a year on average for more than a century.
“If wages go up at three, how can property go up at nine?” Phillips said.
“It can’t, because you can’t afford to at some point.”
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The question every property investor should be asking right now
With negative gearing wound back for new purchases, is buying an investment property still worth it?
Phillips says the framework hasn’t changed, just the numbers.
If the old tax deduction was worth $100 a week, ask yourself: would I still buy this property for $100 a week less in rent? Can I still cover the mortgage if it sits empty for a month? Is the capital growth still worth it?
“No investor ever, in any asset class, should be trying to minimise their tax,” Phillips said.
“You should be trying to maximise your after-tax return.
“Too many people the tail wag the dog by saying, ‘how can I possibly pay less tax?’ The accountants get that question all the time.
“The good accountant will say, ‘that’s the wrong question’.
“The right question is, ‘how can I make a lot of money after tax?’”
The loophole still standing
Negative gearing benefits remain for brand new dwellings, part of a government push to boost housing supply.
A knockdown-rebuild generally doesn’t count.
A genuinely new build on untouched land does.
Before betting six or seven figures on that distinction, Phillips says you should get advice. with the rules on what qualifies are still being finalised.
So is property dead?
No, Phillips said.
He isn’t arguing against property, he’s arguing the tax changes just removed one of the few things that helped it keep pace with shares on paper.
“I would love to buy an investment property,” he said.
“But as a group, the maths is stacked strongly, strongly in favour of shares.”
Take the Vanguard SmartRetire quiz at vanguard.com.au/smartretire to discover the building blocks of a more confident retirement.
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