Should you invest in a home or in the stock market? From In the Black September 2005.
Remember the early noughties? It seemed every other TV program was about real estate: buying, renovating and investing in it.
Now these shows have all but disappeared.
It’s a sign, says ABN Amro economist Kieran Davies, that the property market is in decline and we should be thinking about diversifying into something else – local and international stock markets or bonds.
Fair enough, forget about investing in real estate for the time being. But should we sell the family home? It’s a logical question but not a simple financial equation to fathom. Inflation, interest rates and the rates of return of alternatives have to be calculated. Somehow the warm and fuzzy feeling of well-being associated with home ownership also has to be factored in.
This includes the irrational personal satisfaction often gained from the impromptu erection of sheds, curtains, and nailing and screwing things to walls.
As ever, canny investment is about the correct timing of moving money from one investment class into another.
On the (very simplistic) face of it the figures work for alternatives to property.
ABN Amro’s Davies points out housing now makes up 64 per cent of household wealth. This dramatic growth in real-estate-driven wealth has been on the back of a somewhat lumpy performance, including booms in the early 1970s, the late 1980s and the early noughties.
But over the long term, real estate investment has been little more than static. According to figures from Macquarie University, real estate prices in booming Sydney have increased by about 200 per cent since 1970.
Yet good old compound interest brings this return into perspective. That 200 per cent becomes compound growth rate of 2.6 per cent each year – not far off the current inflation rate. From 1990 to 2003, Sydney real estate prices increased by 70.3 per cent – less than 4.5 per cent a year compounded.
According to Treasury figures, over the 10 years to 2003, Australian house prices on average increased by about 67 per cent. The average in booming Sydney was 87 per cent and, of course, in boom suburbs the figure was much higher – 300 per cent or more.
Add into the pot that rents are low (property yields are about 3.5 per cent) compared with the cost of a mortgage (about 7.5 per cent). Then factor in stagnating, if not falling, property prices, and the argument for rental wins.
Meanwhile, the ASX 200 has increased in value by more than 200 per cent in the same time (compound growth of about 5.5 per cent), also offering dividends and the benefits of franking credits.
If we can strip out the emotional baggage it is a no-brainer. The stock market wins.
The problem is that many of us are irrational when considering investments.
‘Even though there is lots of talk of long-term investing, in practice we chase short-term gains a lot more nowadays,’ Davies says. ‘Over the long term, the stock market gives a superior return but people’s time horizons don’t match that.
‘They [investors] are too influenced by recent trends. That’s OK because often if you are in a boom it can often go for longer than people think. I guess the trouble is, do you really want to risk your money in something where you might be getting close to the peak, which many people did in the investment property market.’
For most of us, the reality is that now is not the best time to sell a home. On the other hand, potential home buyers are better to wait until the current stagnation in property prices bottoms out, which according to the pessimists, could be three years away.
But if investors are putting money into the market for the short term, they could lose out. Confused? For a sound night’s sleep, stick with the family home.