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  • Property v Shares

    Interesting article here from the Motley Fool in the UK.

    shares v property

    Now, IMHO the situation in the UK is a lot different to NZ in terms of both shares and property.
    For one thing, the UK sharemarket is much larger, and less dependent on external factors than the NZ one.

    For another there is both stamp duty and capital gains tax on shares an property in the UK, and stamp duty on an average home would be thousands of pounds.

    Still, it would be interesting to do a similar comparison with NZ data



    Property Versus Shares
    By Cliff D'Arcy | 22 May 2007
    |

    Habitual readers of my Fool articles will know that I am something of an enthusiast when it comes to investing in the stock market. I've been buying shares for around 20 years and it is the source of much of my personal wealth.

    However, riding the stock-market rollercoaster has been a far from smooth ride. Early in my investing career, I witnessed Black Monday and the events of October 1987, when the UK and US stock markets plunged. The benchmark FTSE 100 index ended up plunging by more than a quarter (28%) in the final three months of 1987. On the other hand, many people forget that, despite this massive setback, the 'Footsie' actually finished up 2% on the year.

    Obviously, as with any other market, the UK stock market is subject to periodic surges and setbacks. Most recently, we ran into a three-year bear market between 2000 and March 2003, when the FTSE 100 more than halved from peak to rock bottom. However, as this graph reveals, despite its sporadic stumbles, the value of the UK's biggest business does tend to rise over time.

    On the other hand, I've also done quite nicely out of property, purely by buying a family home. I bought my first (and only) house in the dog days of late 1992, when no-one seemed to be interested in buying property, thanks to a housing crash which began in 1989.

    I went on to sell my house in April 2005 for more than 3½ times what I paid for it. This amounts to a return of 11% a year compounded, which is more than satisfactory. Of course, since I leapt off the property ladder two years ago, house prices have continued to surge -- but so have the shares which I purchased with the proceeds of my house sale.

    Thus, my big question today is: how well has the stock market performed against domestic property prices during my investing lifetime? Happily, this gives me an excuse to build a spreadsheet incorporating large sets of data in order to find out the answer. Accordingly, I downloaded and analysed quarterly data for the FTSE 100 going back to early 1984 and acquired matching house-price data from the UK's largest mortgage lender, Halifax.

    Here's what my number-crunching revealed:
    The long game: June 1984 to March 2007

    Here's how both markets performed over this period:
    Date
    FTSE 100
    Halifax
    house price (£)

    June 1984
    1039
    32,751

    March 2007
    6308
    192,314

    Increase (%)
    507
    487




    As you can see, since mid-1984, the Footsie has slightly beaten the Halifax house price index, rising by 7.4% a year compounded as compared to 7.2% a year. So, at the top level, there's not much in it between shares and houses.
    The yearly game: 1984 to 2006

    Now let's take a look at how annual returns have varied across both markets:
    Year
    FTSE 100
    Annual change (%)
    Halifax
    house price (£)
    Annual change (%)
    Winner

    1984
    1,231
    34,292

    1985
    1,413
    14.7
    37,259
    8.7
    Shares

    1986
    1,679
    18.9
    42,262
    13.4
    Shares

    1987
    1,713
    2.0
    48,825
    15.5
    Property

    1988
    1,793
    4.7
    65,442
    34.0
    Property

    1989
    2,423
    35.1
    68,754
    5.1
    Shares

    1990
    2,144
    -11.5
    68,895
    0.2
    Property

    1991
    2,493
    16.3
    67,250
    -2.4
    Shares

    1992
    2,847
    14.2
    61,643
    -8.3
    Shares

    1993
    3,418
    20.1
    62,867
    2.0
    Shares

    1994
    3,066
    -10.3
    62,383
    -0.8
    Property

    1995
    3,689
    20.3
    61,544
    -1.3
    Shares

    1996
    4,119
    11.6
    66,094
    7.4
    Shares

    1997
    5,136
    24.7
    69,657
    5.4
    Shares

    1998
    5,883
    14.5
    73,286
    5.2
    Shares

    1999
    6,930
    17.8
    81,595
    11.3
    Shares

    2000
    6,223
    -10.2
    86,095
    5.5
    Property

    2001
    5,217
    -16.2
    96,337
    11.9
    Property

    2002
    3,940
    -24.5
    121,137
    25.7
    Property

    2003
    4,477
    13.6
    140,687
    16.1
    Property

    2004
    4,814
    7.5
    161,742
    15.0
    Property

    2005
    5,619
    16.7
    170,043
    5.1
    Shares

    2006
    6,221
    10.7
    187,076
    10.0
    Shares




    Over the past 22 years, the Footsie has seen five down years (1990, 1994, and 2000/02), with the worst being 2002, when it fell by almost a quarter. The best year was back in the yuppie heyday of 1989, when the FTSE 100 rose by over a third (35%).

    Over the same period, the housing market has experienced four down years: 1991, 1992, 1994 and 1995. However, three of these setbacks were very modest (less than 2.5%) and the worst, 1992, was less severe than any of the Footsie drawbacks. Hence, at the top level at least, housing downturns have been less severe than stock-market declines.
    The quarterly game: June 1984 to March 2007

    Finally, I will slice and dice my data on a quarter-by-quarter basis. The table is too long to produce here, so I'll cut to the chase:

    In these 91 quarters, there were 28 occasions when the FTSE 100 fell over the course of a quarter. In other words, the index fell around three times in every ten quarters. As you'd expect, the worst fall was around Black Monday: in Q4 1987, the index lost 27.6%. The best quarter was Q1 1987, when the Footsie rose by almost a fifth (19%).

    Over the same period, the Halifax house-price index fell 19 times, or roughly one in five quarters. The best quarter was Q3 1988, during the previous housing boom, and the worst was Q4 1992, when house prices fell by 3.6%. Hence, Footsie falls happen more often than housing declines, which you'd expect, given the higher volatility of share prices.

    If I were to summarise these results, I would say that both asset classes have produced useful returns for investors since 1984, with shares winning by a nose. However, the FTSE 100 is considerably more volatile than house prices, so investors in shares need to be patient in order to ride out the fairly frequent setbacks which the stock market springs on us.

    In addition, it's important to note that the vast majority of private investors put their money directly into shares or funds with no gearing. In other words, they don't use extra borrowing or derivatives (such as contracts for difference, futures, options or spread bets) to 'gear' (magnify) their returns. Thus, there is no chance that these investors can suffer more than a 100% loss and end up owing more than they invested.

    On the other hand, most homebuyers buy a property with a mortgage. For example, they may hand over a deposit of a tenth (10%) of a purchase price of £100,000 and fund the remaining £90,000 with a home loan. When house prices are rising, this gearing produces terrific returns. In the above example, a 20% rise in property prices would triple the buyer's deposit from £10,000 to £30,000.

    However, gearing is a double-edged sword: if prices fell by 20%, the buyer's deposit would be wiped out but s/he would still owe £90,000. Given that his/her house is now worth £80,000, the buyer is £20,000 out of pocket, thanks to this 'negative equity'.

    Finally, I intend to continue to steer clear of property in favour of investing in shares to build wealth. As I see it, after eleven years of positive returns, the property market is heading for a nasty fall. On the other hand, the stock-market shakeout of 2000/02 brought share prices down to sensible levels, and rising company earnings make the FTSE 100 reasonably priced even today. Then again, it is very much horses for courses, so do your own research before investing in either asset class!

  • #2
    However, gearing is a double-edged sword: if prices fell by 20%, the buyer's deposit would be wiped out but s/he would still owe £90,000. Given that his/her house is now worth £80,000, the buyer is £20,000 out of pocket, thanks to this 'negative equity'.
    but, but, but

    Over the same period, the housing market has experienced four down years: 1991, 1992, 1994 and 1995. However, three of these setbacks were very modest (less than 2.5%) and the worst, 1992, was less severe than any of the Footsie drawbacks.
    and that year was -8.3%

    Also, what have the nett yields (rent -vs- dividends) been in that time.

    Flawed analysis, IMHO.
    DFTBA

    Comment


    • #3
      The other difference betw the two is that when the end is nigh, then with a property you are left with a real asset - even if you have to sell brick by brick, but with shares you get a little piece of paper....

      Comment


      • #4
        Both classes have their strengths and weaknesses. The richest man in the world, Bill Gates, made his money from business. The second (or possibly third) richest man made his money from shares (bits of businesses), so despite the abilty to do well out of property it would be a fool that dismissed other wealth building vehicles.
        Julian
        Gimme $20k. You will receive some well packaged generic advice that will put you on the road to riches beyond your wildest dreams ...yeah right!

        Comment


        • #5
          LEVERAGE, Sceptic, you can compare all the data you like but I'll give you just one example of the difference between property and shares.
          I Purchased a property in december 2001 for 200k and put 40k deposit in.
          December 2006 has RV of 590, so 390k from my 40k. Even compounding that 40k would be no where near it!

          Comment


          • #6
            Originally posted by muzza View Post
            LEVERAGE, Sceptic, you can compare all the data you like but I'll give you just one example of the difference between property and shares.
            I Purchased a property in december 2001 for 200k and put 40k deposit in.
            December 2006 has RV of 590, so 390k from my 40k. Even compounding that 40k would be no where near it!
            No you have missed my point muzza, I wasn't saying shares were better, I was saying it was interesting to see the comparable fluctuations between the 2 classes. Personally I like to invest in both.

            Actually certainly in the UK you can easily take advantage of leverage for share investing, with contracts for difference and options and the like (and you can buy on the margin in NZ - I would never do this personally). It's only a useful tool when the return is positive however, don't forget the compounding works to magnify your losses as well.

            Comment


            • #7
              For anyone interested you can get into CFD's on the New Zealand stock market here:

              http://www.cmcmarkets.co.nz

              so its really easy to use leverage with shares... (and maximise your losses if it goes the other way - but with CFD's you can use stop losses etc)

              (and you can play elsewhere in the world too....

              Comment


              • #8
                The scariest thing for me with shares is the volatility. Whilst huge gains in short periods can occur so can the reverse. Property values tend to move at a more gradual, predictable rate.

                However, just because we have had a long period of sustained growth in property shouldn't imply it will continue unabated forever. I bought a property in 1994 that I actually paid less for than the owner had paid seven years earlier. Admittedly it has since gone up, and would now be worth about six times what he sold it to me for - but my point was there can be periods when property prices can stagnate for quite a while, yet the costs march on mercilessly.

                During such a time negatively geared properties start getting dumped on the market, adding to the supply and keeping prices flat.

                If Muzza had bought his $200k property at the beginning of a long flat period in property prices then his appreciation for the sector might not be quite what it is. Fortunately he bought at the beginning of one of the longest growth spurts in recent times.

                Julian
                Gimme $20k. You will receive some well packaged generic advice that will put you on the road to riches beyond your wildest dreams ...yeah right!

                Comment


                • #9
                  The scariest thing for me with shares is the volatility. Whilst huge gains in short periods can occur so can the reverse. Property values tend to move at a more gradual, predictable rate.
                  This is true....but you are able to see how a share's value changes a number of times per day. This is not the case with property. Or would be very expensive if you got a valuation done everyday!!

                  I wonder how people would react if we had the same market price data available for property as we do for shares.

                  Are shares just more volatile because we have easier and more frequent access to their market value?
                  No Regrets

                  Comment


                  • #10
                    The key is:

                    Leverage
                    No price is too high to pay for the privilege of owning yourself. - Friedrich Nietzsche

                    Comment


                    • #11
                      I invest in both-Shares via the ASX and the NZ property market both have made me many $$$$$ lost $$$$$ and IMHO if you put the same time in studying & investing your time in both they can be equally great long term investment's(checkout the history of BHP,ANZ etc)
                      -if your looking for very short term profit-shares are far better IMHO unless the property market is booming unlike now.

                      -As for Shares not having leverage-In CFD 5% margin needed say on BHP -interest 2% higher than normal rates on 95% invested-(my CFD provider)
                      -Margin lending diff % on whats shares invested into.
                      -Or like what I'm doing atm In using my property Equity in my dept free Qutown section to loan at 9.05 fix 1yr to invest via my share trading cpy into the ASX buying Tax-loss selling bargin before the end of june( goal 50%+)

                      Comment


                      • #12
                        One advantage of shares is that you can go 'short' and make money when there is a major downtrend. That is a little harder to do in property!!!

                        John

                        Comment


                        • #13
                          I use equity from my property portfolio to trade on the US stock market, to create a great monthly income, which in turn helps me to further build my property portfolio......its the good old snow ball effect!

                          We all know that our income level, or lack of it, can be an issue when we attempt to raise mortgages, so I set about learning some other investment strategies to enable me to create a large monthly income without taking up a lot of my time (so that i still had time to put property deals together)

                          As has already been mentioned in this thread by others, property and shares are like chalk and cheese, however both have their +'s and -'s. But like anything once you learn about these things and understand it, you know how to control the risk.

                          Contrary to popular belief there are ways of getting a lot of leverage on the Stock market. The current strategy that i am using (in the current volatile US market) is what we call a "collar".
                          1. This is where i buy a parcel of stock (generally a fast growing stock like Google) I buy say US$150k of Google stock,
                          2. I then but put options to protect me from any potential downward movement in the stock, i then sell call options at about three strike prices above the current stock price (i receive a premium income for this in my account immediately) this helps offset the cost of the put options. And gives me an upside potential for profit of $30 dollars per share (Google can move at least $10 per day)
                          The best part about this strategy is that because of the new "Portfolio Margin" laws that came in early in the year, i don’t have to fork out the $150k for the stock, i don’t even have to put up 50% or even 10%. I only have to put up the total net risk amount which is the $ amount difference between what i had to pay for the put options and what i got paid for selling the call options, approx $2,500.

                          So to summarize, i can put on very large positions (say US$1m) with substantial profit potential (Tens of thousands of dollars in a month) with zero risk of loosing capital if the stock tanks (because of my put options) and i only have to put up a absolute fraction of the amount.

                          Have a look at the website (Wealth3Ways.com) on my profile page for further details.


                          Have a great day!

                          Clint
                          Last edited by Clint T; 03-12-2007, 02:23 PM.

                          Comment


                          • #14
                            Just as a follow on note from my post above: To qualify for Portfolio Margin you need to have a mimimum of US$100k in your trading account.

                            Best regards,

                            Clint

                            Comment


                            • #15
                              You should invest in Mutual Funds and Property. Having a mix is good, its called diversifying. However, when you invest in anything, risk always becomes a factor. A mix is always best because at its core "investing" is just another word for "gamboling". Investing excess capital is one thing, but when you rob Peter to pay Paul (as Clint, above, is doing) the most likely outcome will be failure.
                              Erewhon is still erehwon, I don’t see it changing anytime soon.

                              http://exnzpat.blogspot.com/

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