Young Aussies are buying shares over property and coming out on top
Many Australians, especially younger generations, feel they have missed the property boom. Even with interest rates at rock bottom, there is much angst surrounding the affordability of owning your own home. But the trend towards share market investing as a wealth creation strategy is growing given the relative affordability and accessibility compared to residential property.
Statistically, Australians have never been wealthier, with recent data revealing the value of our bank accounts, homes and shares rose to record highs in 2020 despite the harsh economic impacts of COVID-19. Total household wealth jumped by 4.3% or $501.5 billion to a record $12.03 trillion in the December quarter, the highest quarterly growth rate since 2009, according to the Australian Bureau of Statistics.
Net Australian household worth, or 65%, was made up of $7.78 trillion of property assets, $3.34 trillion of superannuation and $1.12 trillion held in shares. Cash and term deposits holdings stood at a record $1.32 trillion, representing 21.6 % of financial assets held by households. Government stimulus programs and record low interest rates significantly have helped boost wealth.
But what that data also shows is that household portfolios are significantly overweight on property holdings and arguably underweight when it comes to shares. Shareholdings made up just 18.3% of all financial assets, well below the long-run average of 22.1%, and less than the amount held in cash and deposits. And that comes at a time when share prices have been rising!
Asked about their intentions for the next 12 months, 57% of investors say they plan to invest in Australian direct shares, including 83% of next-generation investors. The ASX Australian Investor Study 2020 also showed that a significant proportion of investors have been building their portfolios with more long-term goals in mind - indeed 17% of respondents have invested all their spare cash, including 34% of next generation investors (aged 18-24) and 18% of accumulators.
Similarly, 17% of investors increased their allocation to Australian direct shares, with just 3% selling down their shareholdings during 2020 despite the sharp sell-off in March. The strong rebound in share prices last year reflects that while volatile, the share market is full of potential, which can be captured through a well-diversified share portfolio in domestic and international shares, across sectors and geographies.
Over the longer term, capital gains on Australian shares are consistently higher than property. When looking at how the two compare over a 20-year period, residential investment property as measured by the CoreLogic House Value Index underperformed Australian shares, as measured by the S&P/ASX All Ordinaries Index, by 4% p.a. over the 20 years to March 2021.
In addition to the potential to creating wealth through a well-diversified portfolio, there are other factors which favour shares over property as more accessible investments. Shares do not attract a huge stamp duty slug or require a deposit. You can invest much smaller amounts of money unlike the property market which has a big price barrier to entry. Apart from interest, there are also other costs such as stamp duty and conveyancing on residential property purchases.
The ASX Study found that many younger investors would rather invest in shares than property. Asked about their intentions for the next 12 months, 57% of investors said they plan to invest in Australian direct shares, including 83% of next-generation investors, that is, those aged 18 to 24. That compared to just 24% of the next generation who wanted to buy a residential investment property.
Moreover, many next-generation investors are gravitating towards exchange traded funds (ETFs), which spread the risk across a diversified portfolio versus investing in one or two companies. ETFs are cost effective and can be easily bought online for low brokerage costs. They appeal to SMSFs as well as older and younger investors; the ASX Study found that 45% of next-gen investors said they are planning to invest in ETFs in the next 12 months.
That makes sense. Younger people are taking control of the finances online and they are favouring those investments that are transparent, cost effective and accessible, investments such as ETFs. Younger people are buying ETFs which support their views on how the world is shaping and those that are aligned to their values and beliefs. Investment strategies that focus on sustainability, clean energy and technology focused such as video gaming ETFs are the preferences. The investment approach of the next generation will shape the markets of the future and determine where capital will be employed.
Indeed, given the housing affordability issue will not abate in the near future, the next generation is looking towards the world of share markets which undeniably offers a more diverse universe of opportunities. With ETFs, markets and asset classes around the world are accessible. Digital platforms are offering a frictionless experience. And we can expect the appeal of share markets to grow even more as the price tag of property rises out of reach for many.