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Shares make better investments than property as Sydney’s house price falls continue

Brendon Lau

Shares have cemented their lead over property as the outlook for both asset classes widens following the release of the latest home-lending data today.

Investors may not quite feel the bullishness towards equities as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index falls 0.7% in late afternoon trade, but there’s little doubt in my mind that shares will generate a superior return over property for the next year or so.

Also read: Australian banks plunge to multi-year lows

Housing finance has dropped 1.4% in April to mark its fifth straight monthly drop and the longest losing streak since September 2008 at the height of the global financial crisis when Lehman Brothers collapsed, according to an article in Bloomberg.

Sydney is showing the most signs of stress with home prices in our largest city retreating 4.2% in May compared to the same time last year.

The pace of the decline is accelerating and that is prompting some to worry about a hard landing for the sector, although I am avoiding the use of the word “bubble”.

Sentiment isn’t helped by reports that some experts are tipping a 9% drop in Melbourne and Sydney house prices if Labor wins the next federal election and Bill Shorten curbs negative gearing.

Don’t count on the Reserve Bank of Australia (RBA) cushioning the blow by holding off lifting our record-low interest rates either. Mortgage rates are likely to rise independent of the cash rate (click here to see why).

Also read: 3 warning signs you're dealing with a property spruiker

As it is, tighter credit checks have been a big factor behind the drop in the housing lending figures. An increase in the standard variable rate in the not too distant future will suck further air from the market.

Even if wages growth were to rebound to the mean, this won’t be enough to reinflate the housing market as our record household debt will make consumers think twice (or three times!) about leveraging themselves any further.

In contrast, corporate earnings are still relatively strong and the global macro environment is supportive of further profit growth among our large cap stocks.

I am counting on miners like BHP Billiton Limited(ASX: BHP) and Rio Tinto Limited(ASX: RIO) to lead the charge forward in the second half of 2018, but several industrial stocks are also well placed to outperform.

These include investment bank Macquarie Group Ltd(ASX: MQG), global logistics group Brambles Limited(ASX: BXB) and seed and crop protection solutions company Nufarm Limited(ASX: NUF).

The best case scenario for stock or property investors is for an orderly retreat in the residential market as the last thing we want is a confidence recession.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Brambles Limited, Macquarie Group Limited, and Rio Tinto Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.