Comparing gold to Australian residential property
Gold is the talk of markets, moving significantly higher over the past two years. As governments continue to print more money, investors are looking for opportunities to move their money into hard assets.
While hard assets are seen as an inflation hedge, so are real assets.
I’ve always preferred residential real estate to gold for two key reasons. The first is property gives me income, gold doesn’t. In fact, gold has negative income because you need to spend money to store it (security). Residential property gives me monthly rent and that rent is providing a tenant a home to live in, which has a productive use for the economy.
The second reason I like residential property over gold is because of leverage. Gold has risen around 270% in Australian dollar terms over the past 10 years. The average Australian house has risen by only 75%. But most investors don’t buy houses with 100% cash, they use gearing, usually 80%.
Gearing is accepted because property provides income, which can service the debt.
If we assume a $100,000 investment in gold 10 years ago and $100,000 into an average Australian house (average across all cities) with 80% gearing, the capital gain on gold would be worth around $270,000 while the equity on property is worth around $375,000. Mostly because of gearing.
This is a simplistic calculation, for example if you invested in high quality Sydney real estate in affluent locations, you would have done much better and if you invested in regional areas, you would have done worse.
But the point is that investing is about income growth, capital growth, leverage, and drawdowns. Sure, gold can be leveraged, but that leverage comes with strict drawdown limitations which can be subject to liquidation on market falls.
Leverage on gold also has interest costs, which can’t be offset by rent.
With residential property, it’s usually a set and forget strategy, as long as vacancy rates stay strong and capex is reasonable.
It’s also not an either/or. You can do both, but it’s important to understand that not all that glitters is gold. Sometimes other assets glitter, like property. What matters is why gold is rising and given those reasons, what else is likely to do well also.
Pick your lane, focus on the fundamentals and ride out the short term.