Property vs. Shares: What's The Better Option?

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When it comes to making your money work for you, there are numerous options to consider. Two popular contenders that frequently capture our attention, particularly in the media, are real estate and the share markets. So, which one is better: investing in property or the share market?

Let's start with property, a well-established heavyweight in the investing world that has been favored by past generations of Kiwis. Thanks to the media's enthusiastic interest, it has become deeply embedded in our daily lives. On the other side, we have shares, which involve backing a company or a group of listed companies.

Why has property 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 cheaper compared to salaries. 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, are shares a better option? Or is property still superior to shares?

Property investment has faced several challenges in recent years, such as stricter regulations on property conditions, increased compliance requirements for landlords, tighter lending restrictions, and a highly competitive housing market. The balance between property and shares may be shifting.

What do 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.

Given these factors, it is no wonder that the number of Kiwis owning at least one rental property has decreased by 8% since 2015, according to MBIE data.

On the other hand, share market investing is gaining popularity.

There has been a shift in the way Kiwis invest, 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

Now, let's weigh the pros and cons of investing in shares versus property:

Returns on investment:
  • 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.
  • In contrast, house prices in New Zealand have grown by an average of 5.8% annually since 1990.
Cost of entry:
  • With share market investing, you can start with any amount that suits you, whether it's $100, $1,000, $10,000, or more.
  • On the other hand, a basic entry-level rental property in a major city can cost between $600,000 and $800,000, requiring a 40% deposit.
  • Shares typically require full upfront payment, unless you have a margin account, which comes with its own risks.
  • On the other hand, 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 your property to obtain funds for purchasing additional properties.
Convenience and liquidity:
  • Shares are easily bought and sold without the need for ongoing maintenance. They offer a "set and forget" approach to growing your money.
  • In contrast, selling a property can take months, transaction costs are high, and property ownership demands regular maintenance and attention.
  • Share markets can experience daily fluctuations, making short-term share investing riskier.
  • On the other hand, property investing is subject to bubbles and market 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 an average annual growth of 10%.

Ultimately, property investing may still make sense for certain individuals, and it's essential to diversify your investment portfolio across multiple assets. However, when it comes to investing in rental properties, significant upfront costs and uncertain returns should be taken into consideration. Share market investing, with its lower entry costs and absence of property maintenance, offers an alternative approach.

It's important to highlight the same investing principles apply to both property and share investments:
  • Plan for the long term, as holding shares in a company over time tends to yield better results than frequent trading.
  • Diversify your portfolio to mitigate risk. Consider investing in exchange-traded funds (ETFs) as a way to spread your investments across various assets.
  • Make regular investments, even if they are small amounts, similar to paying a mortgage on a rental property.
  • Continuously educate yourself about investing to navigate challenges along the way.
  • Explore the option of investing in the property industry through Real Estate Investment Trusts (REITs) listed on the share market.

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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