News | Features
27 Jun 2022 2:28
NZCity News
NZCity CalculatorReturn to NZCity

  • Start Page
  • Personalise
  • Sport
  • Weather
  • Finance
  • Shopping
  • Jobs
  • Horoscopes
  • Lotto Results
  • Photo Gallery
  • Site Gallery
  • TVNow
  • Dating
  • SearchNZ
  • NZSearch
  • Crime.co.nz
  • RugbyLeague
  • Make Home
  • About NZCity
  • Contact NZCity
  • Your Privacy
  • Advertising
  • Login
  • Join for Free

  •   Home > News > Business > Features

    The Investor: Property beats shares – or does it?

    At first it looked as if a recent article in the Reserve Bank Bulletin might help with the perennial question: Is it better to invest in property or shares? But no such luck!


    The article, by Reserve Bank economist Elizabeth Watson, looked at returns on a wide range of assets from 1989 to 2011, and also at their riskiness - how much their values fluctuate.

    We'll concentrate on residential rental property and New Zealand, Australian and international shares - with the Aussie and international shares hedged or unhedged. If an investment is hedged, it's protected from the changing value of the NZ dollar.

    The returns include dividends on shares and rent minus expenses on property.

    Here are the average annual returns, in order: rental property an impressive 9.5 per cent; hedged Australian shares 9.1 per cent; hedged international shares 8.7 per cent; unhedged Aussie shares 8.5 per cent; New Zealand shares 6.8 per cent; and unhedged international shares 4.4 per cent.

    And if we take risk into account, property looks even better. Over the period, shares were quite a lot more volatile than property.

    But there are a few "howevers".

    For one thing, Watson warns that 22 years "is a much shorter time period than would typically be used for investment research", but she couldn't get good longer-term data.

    And the last 22 years have been particularly rough for shares, with the bursting tech stock bubble followed by the global financial crisis. Some say that suggests shares are relatively cheap now, and have more "upside potential" than property.

    Similarly, assets that have done well may have more "downside potential". Watson probably had property in mind when she wrote, "Rather than suggesting that an asset's returns are reliably strong, high historical returns can sometimes indicate excessive valuation, with low or negative returns following as a consequence."

    Another major issue is that, "Not all of the gross asset returns reported here are equally achievable by investors."

    The average New Zealander can gain exposure to a share market via an index fund, which invests in all the shares in a market index. Index funds charge fees, but they're relatively low. "On the other hand, there is no cost-effective mechanism by which investors can gain exposure to the residential property or farmland markets as a whole," says Watson.

    Most people can buy only one or a few properties, often in the same region, giving limited diversification. And the volatility of Wellington property prices, for instance, is considerably higher than for the nation as a whole.

    Furthermore, rental property investors have to meet the considerable costs of buying and selling.

    There's limited flexibility, too. What if, for example, you wanted to hold 15 per cent of your $500,000 portfolio in property? Good luck with buying a $75,000 house! And Watson warns that property can be hard to sell in downturns.

    Tax further complicates the picture. For one thing, recent tax changes "will have reduced the relative attractiveness of property relative to other assets to some extent."

    Also, she says, watch out for personal risk. An example: if you work for the one big employer in a small town where you own a home and rental property, you could lose heaps if the company fails and property values slump.

    Over all, "Actual property investments... appear to be considerably more risky than headline risk metrics would suggest."

    What can we conclude? "It is not safe to assume that assets' risk and return characteristics in a particular relatively short period will be replicated in the future," says Watson. To keep risk down, diversify across different types of assets and beyond just New Zealand.

    © 2022 Mary Holm, NZCity

     Other Features News
     10 Sep: Spring clean your finances
     13 Aug: Plan ahead to give yourself a debt-free Christmas!
     10 Jul: Wise up to clear credit card debt
     07 May: Ways to prepare for the unexpected
     30 Mar: Time for a financial progress check
     10 Feb: Studying up on NZ Super
     10 Jan: Managing the back-to-school bills
     Top Stories

    RUGBY RUGBY
    The undefeated Black Ferns Ma won the women's Oceania rugby sevens title with a 26-5 win over Australia in Pukekohe More...


    BUSINESS BUSINESS
    Conrad Charlton was the first voice on ABC radio 90 years ago and his sons Michael and Tony were TV broadcasting pioneers More...



     Today's News

    Accident and Emergency:
    A serious crash is causing major traffic delays on State Highway 29A near Mount Maunganui 21:49

    Health & Safety:
    12 people are in hospital because of powdered fentanyl, which has been found for the first time in New Zealand 21:19

    International:
    Josh Green's incredible rise from Sydney's suburbs to the Dallas Mavericks shows no signs of slowing down 19:29

    Law and Order:
    Christchurch Police are promising a wide investigation after the shock murder of a woman walking home from work 18:59

    Rugby:
    The undefeated Black Ferns Ma won the women's Oceania rugby sevens title with a 26-5 win over Australia in Pukekohe 18:49

    Rugby League:
    Perth-based rugby league fans are set to get a rare taste of State of Origin tonight in game two 18:39

    Accident and Emergency:
    Police say the search for a swimmer missing at the South Island's Maruia falls will continue next week 18:09

    International:
    Disaster relief fund helps veterans access mental health support 17:59

    Cricket:
    The duel continues for New Zealand and England in their three-test cricket series with two days to play in the final dead-rubber match at Headingley 17:29

    Boxing:
    Kiwi light heavyweight Carlos Ulberg has claimed a statement victory at UFC Vegas 57 17:29


     News Search






    Power Search


    © 2022 New Zealand City Ltd