When it comes to making your money work for you, there are numerous options to consider. Two popular contenders that frequently capture attention, particularly in the media, are real estate and the share markets. So, which one is superior: investing in property or the share market?
Let's start with property, a well-established heavyweight in the investing world that has been favoured by past generations of Kiwis. Thanks to the media's enthusiastic interest, it has become deeply embedded in our daily lives. On flipside, we have shares, which involve backing a company or a group of listed companies.
Why property has been such an aspirational investment
Some Kiwis have used property management to help build wealth. Back in the 1970s, when property investment started gaining momentum, house prices were relatively low when compared with the average income. People could borrow significant amounts, rent out properties in almost any condition, and enjoy tax-free capital gains when selling them. Property has also been considered a tangible asset. This means that investors could financially benefit from the physical work they put into house maintenance and upkeep. However, as the golden age of property appears to be fading, is a share porfolio a better option or is property still superior?
Property investment has faced several challenges in recent years, such as more regulations on property conditions, increased compliance requirements for landlords, tighter lending restrictions, and a highly competitive housing market.
What the recent property law changes actually mean
They aim to provide tenants with safer and more secure housing while imposing more responsibilities on landlords. Over the past couple of years, New Zealand has implemented changes to its laws that are likely to impact property investors. These include maintaining rental properties to meet the 2022 Healthy Homes standards, the removal of mortgage interest as a tax deductible expense, and changes to the bright-line test, which can result in higher capital gains taxes for certain property sales within a 10-year ownership period.
Property investors now have to adjust their expectations regarding rental profits, as it has become increasingly difficult to find properties that can cover all expenses solely through rental income. These expenses include mortgage repayments, insurance, repairs and maintenance, property management fees, cash reserves for missed rent or vacancies, rates, and body corporate fees (if applicable to multi-unit properties).
Being a landlord can also be time-consuming and stressful, involving tasks like monitoring rent payments, conducting property inspections, finding and vetting tenants, managing maintenance requests, filing tenancy contracts and bonds, and dealing with disputes and evictions (which have become more challenging due to recent tenancy law changes). Property owners can hire a property manager, but they must budget for up to 9% of rental income as a baseline fee. Additionally, recent lending restrictions require a 40% deposit for property purchases, which can be a significant financial burden for some.
Meanwhile, investing in shares is gaining popularity
There has been a shift in the way Kiwis want to build wealth, with the introduction of KiwiSaver in 2007 playing a significant role. Today, over three million New Zealanders are part of KiwiSaver. Despite the expected ups and downs and occasional volatility of the share market, KiwiSaver has demonstrated the potential for long-term returns and the accumulation of wealth.
Alongside KiwiSaver, New Zealanders, particularly younger individuals, are embracing the opportunity to invest in the companies they use and love, aiming to profit from their success. Thanks to a variery of online investment platforms, investing is more accessible than ever. New Zealanders are becoming increasingly exposed to investing in shares and gaining a better understanding of how the share markets function
Weighing up the pros and cons of investing in shares versus property:
Returns:
- Shares: the S&P 500, which tracks the top 500 companies on the US share markets, has historically grown by an average of 10% per year over the past 30 years.
- Property: in contrast, house prices in New Zealand have grown by an average of 5.8% annually since 1990.
Cost of entry:
- Shares: with share market investing, you can start with any amount that suits you, whether it's $100, $1,000, $10,000, or more.
- Property: a basic entry-level rental investment property in a major city can cost between $600,000 and $800,000, requiring a 35% deposit or more.
Leverage:
- Shares: typically require full upfront payment, unless you have a margin account, which comes with its own risks.
- Property: when you purchase a property with a mortgage, you borrow the bank's money to acquire an asset that is more expensive than what you could afford independently. You can also leverage equity in your current property to obtain funds for purchasing additional properties.
Convenience and liquidity:
- Shares: generally, these are easily bought and sold without the need for ongoing maintenance. They provide a set and forget approach.
- Property: selling can take months, transaction costs are high, and properties generally require regular maintenance and attention.
Volatility:
- Shares: markets can experience daily fluctuations, making short-term share investing riskier.
- Property: property is subject to market bubbles and corrections, but the volatility is generally lower over the short term.
Considering all these factors, it's understandable why property investing continues to be a popular choice. Its familiarity and the tangible nature of owning a house make it easier for people to comprehend. Many have witnessed fellow Kiwis make substantial profits when selling properties. In comparison, share markets can be volatile, experiencing periodic corrections and market downturns. However, over the long term, share markets have historically shown strong consistent returns.
If you're wanting to learn how to build wealth though property and shares or you just want to check to see how you're tracking financially, book a 60-minute obligation and fee-free session with Gareth here.
This article is for informational purposes only and should not be considered as financial advice. It is always recommended to consult with a qualified financial professional before making any financial decisions based on your individual circumstances.
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