What is going to the best investment over the next five years? Shares, property, cash, gold, hedge funds, bonds, commodities or an alternative asset? This is a question with significant scope for error, however the drivers of supply and demand are a good place to start.
The Investing Times has helped readers assess the risk and return landscape of the share-market and many other opportunities for more than 45 years on the basis of supply and demand, however has never before released research on whether shares or property are likely to be the better investment – until now.
This research is intended to push forward our contribution to value-based investment research, and as such we have compiled a summary of the findings as well as inviting readers to download the full report at the end of this article.
History shows property has been the winner
Looking back through recent history, it should be little surprise that Australian bricks and mortar have outperformed shares. In fact, Australian residential property has outperformed shares in 73.8% of rolling 5 year periods over the past 15 years and in 55.0% of periods since our records commenced 30 years ago (capital returns). This is despite having 34.3% less risk over the past 15 years and 23.8% less risk over 30 years (standard deviation).
The fact Australian property hasn’t even experienced a negative 5-year return since 1986 has led numerous Australians to form a view that property is a safe bet. This view may or may not prove to be misleading over the next 30 years, however international perspective shows it isn’t always a one-way street.
In addition, even in Australia shares have outperformed property significantly at different times in the cycle. For example, we can see that the period from 1990 to 2000 and 2003 to 2007 was a prosperous time for shares, whereas the period from 2000 to today has been a generally golden period for property.
The big question is not whether one asset-class in permanently better than the other – we know for a fact they both have the ability to produce significant wealth gains and will produce different results depending on the stage of the cycle. The big question is whether it is possible to determine the times when one is better than the other using value metrics including supply and demand fundamental analysis.
What drives shares and/or property?
If we are any chance of identifying the winner in shares versus property going forward, it is not good enough to assume property will crash relative to shares merely because it has grown so much further in the past decade and a half (although this may be a partial indicator of a “buy low sell high” logic).
It requires logical analysis and the deconstruction of the key drivers of each asset – including but not limited to debt level analysis, rental and dividend yield comparisons, interest rate moves, employment growth (or lack thereof), population changes, building supply changes; and more.
For example, we know property tends to excel in times of economic prosperity (no recessions), when unemployment is stable, interest rates are falling and the population is booming. We also know that shares tend to produce the highest performance in times when the share-market is cheap (“buy low, sell high”), when dividend yields are high, when earnings are rising and when households are generally increasing their participation in the share-market.
Our research agenda allows us to explore these drivers in impeccable detail, and we monitor what we consider to be nine of the key drivers for each market. These drivers can be considered a part of the “science of investing” and are detailed with the intention of helping readers make assessments on the risk and return outlook for asset types.
Do the drivers work?
If done correctly, the analysis should hopefully speak for itself. As a hint of what to expect, it can be seen in the charts below that the 9 drivers are generally quite predictive of the future 5-year return – especially for shares but also for property. For example, in times when the less than 4 of the 9 share-market drivers are positive, the average forward 5-year annual return is 1.1%. In times when more than 6 of the 9 drivers are positive the average forward 5-year annual return is +17.5%. The same applies to property, with 4.1% versus 10.5% forward 5-year annual returns respectively.
If the future valuations of property and shares stay true to their underlying drivers, which is probable but not guaranteed, one should have a reasonable view of the relative value between the two assets (we say “if” because we must acknowledge the limitations of using any system as a basis for future returns).
It is a combination of logic/common-sense as well as historical perspective.
What do the drivers say today?
At present, the share-market has 6 of the 9 drivers positive, while the property-market has 3 of the 9 drivers positive. All things being equal over the next 5 years, this leads us to expect reasonable positive returns for shares versus an expectation for relatively subdued returns for property.
In fact, using 25 years of historical analysis, we can see the likelihood of shares beating property over the next 5 years is approximately 3:4 or 74% from the current backdrop. Obviously this means there is room for error. The backdrop is also likely to change over the course of the next 5 years and clearly the results will vary by sector and individual asset.
Regardless, keeping up with the trends in fundamental valuations of shares and property may prove to be useful asset allocation information at the highest level. This is especially true in the current world of excessive noise and fear-mongering.
We wish you safe and prosperous investing and note that if you wish to see the full report, including the full analysis of all 18 drivers, it can be downloaded via the link below at no cost. All you give is your email and name, which we use to share similarly insightful and valuable reports (no spamming) to advance our authority as an independent research house.