I was asked by a friend whether he would ever be able to buy a house to live in.
He is in his mid 20s and can't see any way out of the problem that is the expensive
Australian housing market.
Please keep in mind that this is in no way financial advice. I am not a financial planner.
These are just my ideas and opinions.
I suggested starting to build a deposit using shares or an ETF index fund and the conversation quickly turned to shares vs houses as an investment.
On face value, property seems the obvious method to build real long term wealth.
The percentages seem enormous and a house is tangible in a way that no list of numbers on a website can ever be.
But these comparisons are often not comparing apples with apples.
The raw price data just shows what a buyer paid for a property and what he sold it for on a particular day.
It often doesn't take into account taxes, rates, maintenance, inflation or transaction costs.
Most likely, the house originally purchased 30 years ago isn't the same house sold.
Most houses have a lifespan of 30 - 40 years. They need replacing or upgrading at least once in that period. Floors need fixing. Kitchens need updates. Plumbing, electrical, roofing needs will occur.
The average house costs 1million to build today & it's probably likely that one will spend the same amount just to maintain its value over a 30 year period.
Consider the example of a house purchased in 1996.
In 1996, the median house price in Sydney was approximately $200,000.
Over the next 30 years, if nothing was spent on it, by 2026 it's probably run-down
and needs to be rebuilt.
Say the owner spends 1million to rebuild and sells it for 2 Million.
On paper, the records will show that the property was purchased for 200K in 1996 and sold for 2M in 2026.
To calculate the compound annual growth rate (CAGR) — the average percentage return per year over 30 years.
The formula is:
Now plug in your numbers:
- Initial value = 200,000
- Final value = 2,000,000
- Time = 30 years
So:
That works out to approximately:
≈ 7.97% per year
This looks good on paper, but the underlying costs are what raw house price data charts miss.
They never appear in the growth data that real estate agents use to argue that property beats shares.
Shares work very differently.
If you look at the returns for indices like the S&P 500, the Nasdaq or the ASX 200 those returns already include all the ongoing costs to run a business and keep it growing. They include the research & development, investments, building renovations, corporate fees, insurance and land tax , etc etc.
Dividends are only paid you you after the company has covered all it's costs.
These dividends can receive a further boost with franking credits (in Australia only).
So my quick answer to his question is:
If you are a self motivated & disciplined saver, equities are the answer (by a country mile).
But, If you need to be forced to save, getting a mortgage is probably the best way to go since
the bank will force you to make the 3K-4K deposits per month (which is standard these days).
For example,
A $500,000 mortgage typically results in monthly repayments between $2,850 and $3,400+ at current Australian interest rates (approx. 5.5%–7%) over 30 years. Lower rates near 4% bring payments down to roughly $2,387, while higher rates significantly increase them.
Typical $500k Monthly Repayments (30 Years, Principal & Interest):
5.5% Interest Rate: Approx. $2,839 per month.
6.0% Interest Rate: Approx. $2,998 per month.
6.5% Interest Rate: Approx. $3,160 per month.
7.0% Interest Rate: Approx. $3,327 per month
=====================================================
To further investigate this question we asked Chat GPT this question:
"compare a 500k deposit + 500K mortgage on a Australian home (monthly repayments between $2,850 and $3,400+ at current Australian interest rates (approx. 5.5%–7%) over 30 years) vs the same in Australian shares (500K initial investment + 3000 per month top up over 30 years)"
This was it's response:
- Property: $500k deposit + $500k mortgage
- Shares: $500k upfront + $3,000/month
- Time horizon: 30 years
I’ll walk through this cleanly and then give you the real-world conclusion.
📊 Key assumptions (based on real Australian data)
- Australian shares: ~9–10% p.a. long-term
-
Property:
- ~5–6% capital growth
- ~7–9% total return incl. rent (before costs)
🏠 Scenario A — Property
Inputs
- $1M property
- $500k loan
- ~$3,000/month repayments
- 30 years
💰 Total cash invested
- Deposit: $500k
-
Mortgage payments: ~$1.1M
👉 Total out-of-pocket ≈ $1.6M
📈 Property value after 30 years
- 5% growth → $4.3M
- 6% growth → $5.7M
- 7% growth → $7.6M
🧾 Net wealth
Mortgage is fully paid off:
👉 Final wealth ≈ $4.3M – $7.6M
⚠️ Reality check
Property returns are not clean:
- Stamp duty (~$40–50k)
- Maintenance (~1–2%/yr)
- Insurance, rates
- Selling costs
👉 These can reduce returns by 1–2% per year, which is massive over 30 years
📈 Scenario B — Shares
Inputs
- $500k upfront
- $3,000/month for 30 years
- Total invested = $1.58M (almost identical to property)
💰 Future value
At different return levels:
- 7% → $5.9M
- 8% → $7.5M
- 9% → $9.6M
- 10% → $12.4M
- --------------------------------------------------------------------------------------------
| Scenario | Property | Shares |
|---|---|---|
| Total invested | ~$1.6M | ~$1.58M |
| Leverage | Yes | No |
| Expected return | ~6–8% net | ~8–10% |
| Final wealth | $4.3M–$7.6M | $5.9M–$12.4M |
| Risk | Concentrated | Diversified |
| Liquidity | Low | High |
......
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Now lets add dividends vs rent to the equation.
This is the missing piece that makes the comparison more realistic.
Now we’ll include:
- 🏠 Rental income (property)
- 📈 Dividends (shares)
And compare total return.
🏠 Scenario A — Property (with rent)
Assumptions (typical Australia)
- Property value: $1M
- Rental yield: 3–4%
- Growth: 5–6% p.a.
- Costs: ~1.5–2% p.a. (maintenance, rates, insurance, vacancy)
💰 Rental income
- Gross rent: $30k–$40k/year
- Costs: ~$15k–$20k/year
👉 Net rent: ~$10k–$20k/year initially
Important:
- Rent grows over time (inflation + demand)
- By year 30 → could be ~$40k–$80k/year net
📈 Total return breakdown
Property total return ≈
- Capital growth: 5–6%
- Net rental yield: ~1–2% after costs
👉 Total ≈ 6–8% p.a.
💰 Final outcome (30 years)
- Property value: $4.3M – $5.7M (5–6%)
- Plus rental income accumulated (if reinvested): adds ~$0.5M–$1.5M
👉 Total effective wealth: ~$5M – $7M
📈 Scenario B — Shares (with dividends)
Assumptions (Australian market)
Using something like the S&P/ASX 200 Index:
- Dividend yield: ~4%
- Growth: ~5–6%
- Total return: ~9–10% p.a.
💰 Dividends
Year 1:
- $500k × 4% = $20k/year
Over time:
- Dividends grow with market (~5–6%)
By year 30:
- Annual dividends ≈ $150k–$300k/year
🔁 Reinvestment effect (this is huge)
If dividends are reinvested:
👉 They drive ~50%+ of total returns
💰 Final outcome (30 years)
With:
- $500k upfront
- $3k/month
- 9–10% return
👉 Portfolio value:
- $9M – $12M
Breakdown:
- Capital: ~$6M–$8M
- Dividends compounding: ~$3M–$4M
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Negative Gearing vs Franking Credits.
I’ll compare:
- 🏠 Property with negative gearing → later positive gearing
- 📈 Shares with dividends + franking credits
Using realistic Australian assumptions.
Australia is rare in the world as it rewards share owners with franking credits.
Franking credits are tax offsets attached to dividends from Australian companies that have already paid tax on their profits, preventing double taxation. They allow shareholders to receive a credit for tax paid by the company, which can offset personal tax liabilities or result in a cash refund if the credits exceed the tax owed.
Key tax concepts
Shares → Franking credits
Using something like the S&P/ASX 200 Index:
- Dividends are often fully franked
- Company already paid 30% tax
- You get a tax credit for that
- Result: higher effective income, especially if your tax rate <30%
Property → Negative gearing
- Early years: losses (interest > rent)
- Loss reduces your taxable income → tax refund
- Later: becomes positively geared → taxable income
Negative gearing is an investment strategy, common in Australia, where the costs of owning an asset (such as mortgage interest, maintenance, and rates) exceed the income it generates (like rent). This creates a net loss, which investors can deduct from their other income—such as salary—to pay less income tax. It is often used with the goal of capital growth.
🏠 PROPERTY — After-tax reality
Early years (negative gearing phase)
Typical:
- Rent: ~$30k
-
Costs + interest: ~$40k–$45k
👉 Loss: ~$10k–$15k
If you're on a 37% tax rate:
👉 Tax refund: $3.7k–$5.5k/year
✔️ Helps cash flow
❌ But you're still losing money overall
Later years (positive gearing)
Once rent rises and loan shrinks:
- Rent: ~$60k–$80k
-
Costs: ~$20k
👉 Profit: ~$40k–$60k
Tax:
- At 37% → $15k–$22k tax/year
Capital gains tax (CGT)
If investment property:
- 50% CGT discount after 12 months
Example:
- Gain: $4M
- Taxable: $2M
- Tax ≈ $740k (at 37%)
🧾 Property after-tax summary
- Tax benefits early: moderate
- Tax drag later: significant
- Big CGT bill at the end
👉 Net effect:
Tax reduces returns by ~1–2% per year over long term
📈 SHARES — After-tax reality
Dividends + franking
Example:
- Dividend yield: 4%
- Fully franked
On $500k:
- Cash dividend: $20k
- Franking credit: ~$8.6k
- Grossed-up income: ~$28.6k
Tax impact
If tax rate = 37%:
- Tax on $28.6k = ~$10.6k
- Minus franking credit ($8.6k)
👉 Tax payable: ~$2k only
If tax rate <30%:
👉 You actually get a refund
Capital gains (shares)
- Same 50% CGT discount
-
BUT:
- You control when to sell
- Can spread gains across years
👉 Much more tax flexibility than property
🧾 Shares after-tax summary
- Dividends: tax-efficient
- Franking credits: huge advantage
- CGT: controllable
👉 Net effect:
Tax drag closer to 0.5–1% per year
⚖️ AFTER-TAX COMPARISON
| Factor | Property | Shares |
|---|---|---|
| Early tax benefit | ✅ Negative gearing | ❌ None needed |
| Ongoing tax | ❌ High (rent taxed) | ✅ Reduced via franking |
| CGT flexibility | ❌ Low (sell all at once) | ✅ High (sell gradually) |
| Tax efficiency | ❌ Moderate | ✅ High |
| Net return after tax | ~5–6% | ~7–9% |
🧠 The big insight
👉 Negative gearing is often overrated
It:
- Reduces losses
- But doesn’t create profit
You’re still:
Spending $1 to get ~$0.37 back
👉 Franking credits are underrated
They:
- Boost income significantly
- Reduce or eliminate tax
- Compound over time
🏁 Final conclusion
Shares are significantly more tax-efficient and typically deliver higher net returns than a leveraged investment property (esp when adding in franking credits).
⚠️ One exception (very important)
If the property is the home you live in
- ❌ No negative gearing
- ✅ No capital gains tax EVER
👉 That is a massive advantage
In that case:
Property can outperform shares purely due to CGT exemption
And you can't place a price on the stability to one's life when you know you can't be kicked out if the landlord doesn't like you.
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Final Take Home Thoughts:
If you go the shares path you have the option to save at any rate you like . You can enjoy your life a bit more that those with a mortgage, so your final figure will probably be less (if you are saving less per month than someone who has the bank breathing down their neck)....
But then life is meant to be enjoyed , esp when you are young.
The lack of leverage is a blessing and a curse. It reduces the upside & also the downside.
I don't like debt so I think of it more as a plus.
But,
If you are the sort of person who likes to go shopping every time you get a pay rise then get a mortgage.
The bank will be your savings enforcer.
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