Last week I copped a bit of criticism following my Safe As Houses post. Here’s the first:
2 major flaws in your chart, which would suggest your post is indeed ‘enticing narrative’; – If you factored in the income from each of these assets, including the fully franked dividend from the CBA, you would find the CBA has delivered somewhere around 200% of the income return of property – What is the impact if you took said income and reinvested it? Massive… I’d love to see your chart then. Capital Growth is only one component of your return and in the case of the CBA, represents around half your return.
This reader raises a valid point – dividends and the impact and power of compounding returns. I decided to ‘tidy up’ my analysis. So I included CBA’s dividend, reinvested it (although not everyone reinvests dividends), and compared the return to Melbourne and Sydney house prices in nominal terms. I chose Melbourne and Sydney given the share of CBA’s loan book these two cities.
And voilà, here’s what we have. Although I didn’t have time to incorporate rental income from the two cities, the outcome is no different. I also note the chart is not a common base chart, i.e. all investments start at the same point, which means Melbourne’s end price would be higher given the lower start price.
You can see the correlation and behaviour is very similar. Another reader writes:
With two sides of the story being capital growth and income received I don’t think you have provided great understanding of the correlations and drivers of both property & shares and underrepresented both.
My original article was providing evidence of the correlation between residential property and CBA’s share price, and was being done so not based on the two being mutually exclusive.
The reader continues…
Families need to understand whether they want to have a part time job, maintaining a property portfolio, chasing rent, keeping tenants, fixing broken water pipes, paying real estate agents, paying lawyers. Or whether they would like a set and forget strategy of investing in the great companies of this world, where they pay a financial adviser, a platform and investment fee and they can enjoy what’s most important to them.
Although the reader seems to have misunderstood the intent of my original article, they raise a valid point. Investing in direct property can be both time consuming and costly. For this reason, most investors hire a real estate agent. They take care of the maintenance of the property, they both find and keep tenants, they arrange for the broker water pipes to be fixed, and yes, we pay them a fee. Just like our clients pay us for the services we provide. I would have also thought that property can be a ‘set and forget’ investment too, can it not?
The alternative the reader provides us with is to hire a financial adviser, pay them, hire a platform, and pay them, then pay the investment fees, and forget all about it.
I admit, my comments are tongue in cheek, but what these comments proved to me, yet again, is that those with vested interest will continue to peddle the narrative that best suits them. Walk into a Holden dealership, you won’t be sold a Toyota.
Investors deserve the truth. Investors deserve to be educated. Investors deserve the right to know what we as advisers can help them with and cannot help them with, not what we will and will not help them with – there is a difference.
My original article was not to spark debate between property or shares. Both asset classes not only behave very differently, they both serve different objectives. History tells us that both Australian shares and Australian residential property have performed broadly in line with each other over the long-term. Australian shares have provided a slightly higher rate of return, however Australian residential property has provided investors with a smoother ride along the way.
I kindly remind you, as investors, look beneath the investment and ask yourself the following questions:
- Where am I allocating my money?
- What is the underlying investment?
- What is the investment influenced by?
- What am I really investing in?
Most importantly, ask yourself this question:
What is the objective/purpose of my investment?
Here’s the blueprint for how to think about investing in it’s simplest form – a snippet from our Intergenerational Wealth Transfer forum in 2018.