Property’s growth story looks impressive on paper as soaring house prices seem to show stronger long term gains than shares, but that headline growth bundles in decades of invisible renovation spending and high running costs that can seriously drag on true returns.
Right now it is common to see charts showing Australian house prices climbing dramatically over the last 20 to 30 years and it is easy to assume property must therefore be the superior investment. The problem is that those charts only capture what each property sells for at different points in time. They ignore everything spent to keep that home standing, modern and attractive enough to fetch those prices. They also skip over the fact that most of the apparent “growth” is a mix of appreciating land plus large amounts of fresh capital poured into rebuilding or upgrading the dwelling.
Think about how a typical home ages. Tax guidance assumes a building has a useful life of about 25 to 40 years, which means major elements - kitchens, bathrooms, floors, roofs, wiring, plumbing and outdoor spaces - have to be replaced or heavily upgraded at least once in that period just to maintain liveability and appeal. With the average Australian home now worth just over $1 million, around $1,016,700, that implies owners need to reinvest close to the full value of the dwelling every few decades to stop it sliding into “knock down” territory. On paper a property that goes from roughly $245,000 in the mid 1990s to $2 million today looks like it has compounded strongly every year, but the data series rarely show the $1 million plus rebuild and landscaping required along the way.
Shares work on a very different model and that difference is where the comparison breaks down. Long term return figures for major share indices such as the ASX 300, the S&P 500 and the Nasdaq already include the money businesses continually spend on staff, technology, equipment and replacement of ageing assets. Companies absorb all that reinvestment inside the business and investors see the end result in the form of total returns that combine capital growth and dividends after those costs. On top of that, property investors face holding costs that share investors largely avoid. Gross rental yields around 3% often shrink once council rates, insurance, body corporate fees, maintenance, land tax and vacancy are accounted for. Central bank estimates suggest basic holding costs alone sit at roughly 2.6% a year, which means much of the rent flows straight back into keeping the property functioning rather than building true income.
There is also the friction of getting in and out. Buying a home usually means paying stamp duty, while selling involves agent commissions and marketing, which together can easily reach around 7% of the property’s value each time it changes hands. In contrast, trading shares can be done at a tiny fraction of that cost, which makes it much cheaper and easier to adjust or diversify a portfolio over time. When people compare raw house price charts with sharemarket indices they are really lining up a gross number for property that blends land appreciation with ongoing capital injections against a net number for shares that already includes the effect of reinvestment and includes dividends. Once these are put on equal footing, residential property still looks like a solid long term wealth builder but broad sharemarkets appear to deliver stronger returns with lower ongoing costs, less effort and less concentration in a single asset.
