Latest / The Curve / RTC10: What's better - investing in shares or the property market?

Transcript

RTC10: What's better - investing in shares or the property market? · The Curve

• 0:00
  Welcome to the Curve Podcast, a conversation for women who want to learn more about money,
• 0:06
  their money for the future they want to have. We're all busy and the pursuit for financial
• 0:12
  confidence and increasing your wealth should be a simple one. That's why the curve was created.
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  This podcast is for women to learn about investing in a non-scary or intimidating way.
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  With short episodes you'll have time to learn, digest and understand everything to do with the
• 0:28
  world of investing. Don't expect to be an expert on day one. No question is a silly question.
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  If you're asking it, so is everyone else. So thank you for being here and for listening,
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  because together we really can raise the curve. Thank God I'm more alive than last time.
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  That's good. I'm sorry, it looked like it. Don't I, brood?
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  Now today we're talking about property versus shares, which is an interesting one, isn't it,
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  because I feel like most people, when they think of investing, the only one anyone knows
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  anything about is investing in property. And especially in New Zealand, we have this
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  weird fascination with property and everyone talks about property and they think they understand
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  property and they should be on the property ladder and all those things. If I had someone talk
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  about the ladder one more time, you're right though, it's that thing where everyone gets to a
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  certain age, they save up all their pennies and they don't even consider looking at stocks.
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  Especially when you get to 30s and it's almost, if you're not looking at buying a house, it's
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  almost like, what's wrong with you? Which, which, where's your golden retriever and your five
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  children and your house deposits? Exactly, which is which is weird, because it's all about
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  where you can get the best return in my opinion and sometimes it might be in property and sometimes
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  it might be in shares, but that's up to you and your personal preference. We're going to go
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  through the team property and team shares and I love this. Have we got a pros and cons for both?
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  Yeah, and just kind of what you should be looking for when investing in both and the risks
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  you should be aware of, because even though we've been in a bull market, which means that property
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  prices have just gone up and up and up. Did you say bull like BULL? Yeah. Okay. Yeah, the lingo.
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  Yeah, so there's a bull market and there's a beer market. So a bull market is when things are going
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  up in a beer market, it's when things are going down. Like, oh God, you're being chased by a beer.
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  And do you know why? Why? I just found that, well, I know I actually have a few years ago.
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  You haven't looked more excited in a while. But I've always just heard these and spoken
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  these terms of bull markets and beer, and then I actually sat back and was like, why are they
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  called that? And it's because when each animal attacks a bull goes under and then up, like it'll
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  attack from going upwards and then a beer will rise up and come down. So the motion of a beer is
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  down and the motion of a bull is up. That is so cool. Yeah. I love that. Yeah. Okay, we can
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  finish this podcast now. We're doing it. And that is it. Okay. I mean, I guess for me, the first
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  thing that comes to mind is I don't have enough deposit to buy a house. So it's not even something
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  that I'm considering right now, but I must say that has been what I've been saving for is
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  oh, I'll have one day. I'll have enough to buy a house. Exactly. And that's kind of one of the
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  let's take a step back. And if we just kind of look over the last 20 years and look at New Zealand,
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  and if we compare the share market and the property market, so Auckland house prices have
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  returned about 8% per annum, so that means per year for the last 20 years. So the average house
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  price in Auckland now unfortunately is a million is over a million dollars. But if you'd invested 20
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  years ago, you would have got 8% return per year on your house, considering that type of investment.
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  And when we when we previously talked about different asset classes, you know, that's a pretty
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  that's a pretty decent return, especially over such a long term. If you're compounding 8% per annum,
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  yeah, if we look at the the share market, so the NZX50, which is the top 50 companies in New
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  Zealand, that's delivered 11% per year over the same 20 year period. So there's not a lot in it
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  to be honest. You've got a couple of percent. That's amazing though. So for someone who doesn't have
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  enough to buy a house deposit, doesn't mean you can't get the same return as someone who's
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  invested in property for the amount you've got. Exactly. And the disclosure, I invested in property
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  and I've invested in the share market. And I have had friends where I've asked them, why have you
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  not invested in property? And they've said to me, well, I get a bit of return investing investing
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  in other things like the share market. And that's that's totally fine. But when you sit down and
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  you actually compare the house price return and the NZX50 return, more people should be investing
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  in the share market. You're getting a bit of return over the same period. Yes, everyone, particularly
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  in New Zealand, has this first nature with only property. And I think that comes down to
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  a combination of factors and a few of them being... I can lack of education or even knowledge,
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  or where to start with the stock market, surely would be a big one, wouldn't that.
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  Yeah. And then there's also just globally, we have high ownership because we have the space.
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  We can afford to have a house that's not an apartment that is actually a house, for example.
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  We can have a property and another thing is we have... I've got a good one. I think I have one.
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  Is it because it's tangible? Yes. Because you can see and hold and touch a house. Probably not
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  hold a whole house. But you know, people like things. Exactly. Yeah. People rather than some random
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  stock that's floating around on the internet. And you find that even with stocks, people like to
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  invest in things they can use, products they use, or services they use, or... It feels close at
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  a heart. But yeah, they understand it better. And so that... That plays right into the hands of
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  property. You're literally touching... You can touch your house. Yeah. And you can see what you've
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  purchased. And that's the difference with property and shares. It's very online, transactional,
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  you type in an order and what you want to buy. And it shows up on a screen and it changes daily.
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  It's not tangible. So there's an element of it's not real, but it is. It's so funny because if you
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  think about buying online, it's so much easier to just be like, oh, I'm just accidentally spent
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  500 dollars on Amazon or whatever. Click, click, click. And it's done. But when it comes to investing
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  large amounts of money, I think people want to have their hand held. Like, oh, well done.
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  Here's this giant check. You're signing a house and here's your... Do you know what I mean? It feels
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  way more legit. Rather than I'm going to drop 20 grand on the internet boom gone. Yes. Yeah.
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  It comes back to research as well. People often say that the share market is like gambling.
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  And I disagree with that. I think there should be an element of research. No doubt in my mind,
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  there should be research done before you make an investment in the shares. You should know what
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  you're buying. And it's exactly the same when it comes to a house. We go to open homes. We research.
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  We talk to people. We compare and contrast different four bedroom homes for example in different
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  suburbs and what prices they go for. We do a lot of research because it's a big ticket item.
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  And I think that we need to bring that mentality into shares as well and make sure that we are doing
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  the same element of research and not just buying a car without taking for a test drive for example.
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  Looking at the brochure. Honestly, the amount of property brochures that I've seen on people's
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  tables. But you never see that for shares or stocks or companies, do you? No. No exactly.
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  So what are the other main differences or would you say pros and cons for each?
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  Well, I guess in New Zealand, we're a safe place to live. We're politically safe.
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  People want to come live here. So there's a lot of demand and on the flip side, there's not a lot
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  of supply because we just can't really build enough houses. Exactly. And the scarcity if that comes
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  down to getting a builder or getting regulation to actually build the house. There's limited
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  supply and there's heaps of demand. So we've spoken about this before. That leads to more buyers
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  than sellers and you get higher prices. And so that's what's been driving the housing market in New
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  Zealand. And that's why when people say, oh, house prices never go down. They're not going to.
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  Are they? Well, please can they go down? I mean, I'll be stoked. You look at me like maybe.
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  Never say never. I always think it's always dangerous saying that something's never going to happen.
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  But as long as those supply and demand dynamics are in play, then there's always going to be
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  upward pressure or increasing prices on houses. So then I guess with property, the reason it's
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  probably quite appealing is because that demand has gone up for so long and it's not looking
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  to slow. I mean, I probably shouldn't say that because I don't know. But it's the idea that there's
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  still so much demand and therefore people have a reasonably certain or what they think certain idea
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  that the house that they buy will go up and value it. Right. You do need to make the investment in
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  property with the understanding that prices can go down. You need to always, it's an investment.
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  And we've spoken about this time and time again that markets fluctuate. The property market is a
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  market. Very quickly that demand can dry up and very quickly that supply can come on. So you just
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  need to make sure you have your wits about you and you're you're not blinded by the fact that,
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  hey, just because of my lifetime, property prices have only ever gone up. Doesn't mean they're always
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  going to have that sense. So it's basically looking at it as you have said in previous episodes around
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  the risk and being very clear that it's not certain that the housing market is going to continue to
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  climb. No, no, past performance doesn't indicate future returns. There's always the caveat that we
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  say. I guess another thing is that with property, you can't take your money out like that.
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  It's not a liquid market. If you have invested in property and then you're like, oh my god,
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  I need my money out. You're going to have to go through the rigmarole of getting a real estate
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  agent, marketing the property, finding a buyer, which can take a month to three months, six months,
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  who knows? Some might not even want to buy it. Exactly. Whereas if you've made a mistake with
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  shares or you need the money really quickly, she has a price daily. There's always liquidity.
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  There's always a buyer. You might have to lower your price. You can always get rid of those shares
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  because they're priced daily. And I personally think there's one of the key differences
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  the property in shares is the liquidity, I speak. Because I guess you can also take out half
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  of your shares, a quarter of your shares, an eighth of your shares. You can't do that with the house.
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  You can't let it just chop the door off in the front room. I can't just keep it in the room.
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  But then the other positive thing is you can rent out those rooms. You can get additional income
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  with property. Just like with shares, you can get dividends. Some companies that you invest in
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  will pay a dividend as well as can you explain that? So they'll pay out some of their earnings.
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  So when you're buying a share, you're buying part of that business. So you will get the gain in
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  that share price is your return, for example. But as well as that return, you could also some companies
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  will will pay out a dividend. So they'll pay out a portion of their earnings. Because they've got
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  the stability they can see, they have quite good visibility of their earnings, they're confident
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  in the outlook of their business. So they can then pay out some of that. Whereas a tech company
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  or a technology company would, they'd reinvest those dividends into the business so they can really
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  grow and accelerate that growth and not pay them out to you. So it's just a different model,
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  a different model of different companies. With that dividends that they pay out, does that take
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  any value off or how much ownership that person has in that share? No, no. So it's like an additional
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  return. And is that agreed to before you invest? Yes, it is. Sometimes companies will say they'll pay
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  a dividend and then something changes and they won't. So then you just get the change in the share
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  price and other times you invest in a company and then they announce they're going to pay dividends
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  and so it's an added bonus. So why would they do that though if they don't have to? Why would they
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  randomly be like, well, who everyone gets free money? I don't get that. Because if they don't see
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  any opportunities in their business to invest that money into, then it's better to give it back to
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  the shareholders. It's just an additional return. But it's so cool. But it depends. It depends
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  because usually, usually I say, and that's the companies that pay dividends are the lower growth
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  companies. A technology company, for example, their share price might go from $1 to $2. You've made
• 12:55
  100% return. A electricity company, for example, their share price might go from $1 to $10. You've
• 13:01
  made 10%. But they'll do a 10% dividend. You've made 20%. You're still worse off. So it just
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  depends what your preferences really. Some older investors like to get a dividend because
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  that's what they live off. Yeah, it's like their pension. We've got a bit of track. How can we
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  get back on that? I was talking about rental income. That's right. And rental income, that's
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  an additional benefit with investing in property. You not only get the share price gain or sorry,
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  you not only get the property price gain, the change in the price from when you bought it to
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  when you sell it, you also get, you can rent out your house or your property and get rental income.
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  But the thing with rental income is that, again, it's pretty fickle. You could have tenants in
• 13:52
  there that only last six months and then leave. It's a much more of a management and a very
• 13:59
  hands-on approach to investment. Yeah. And some people like that and some people don't. If you also
• 14:06
  live in your property, then you're not getting that rental income. So you're only getting the gain
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  or the loss. Unless you get flatmates. Yes, then you are. Like you and I.
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  I mean, there's wear and tear if you live in it as well. I must say, houses are built to be used.
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  The other day I was running a bath and water started coming through the wall. I was like,
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  how does this even happen in this house, not just collapse? You know, like they obviously built to
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  last. What other comms would you say there are two investing in the property market? One would be
• 14:38
  just the large sum of money that you need to make the initial investment. So Auckland Hot House
• 14:44
  prices are at over a million dollars on average right now, which is ridiculous. And therefore,
• 14:51
  you need a $200,000 deposit to even buy a million dollar house. I thought you could do 10% now.
• 14:58
  Depends on your situation, but on average, you need 200,000. On average, you need a 20% deposit
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  in most markets. And that's that's $200,000, which not many people have in the bank. And then to be
• 15:11
  able to live your life after that and actually fund paying for the mortgage and everything,
• 15:15
  it's crazy. And to put all of that into one asset class and one investment, that's a huge decision.
• 15:24
  You're going to be spending a long time saving for that deposit. And what a lot of people do is actually
• 15:29
  invest in the share market to build their deposit for a house so that they kind of do both.
• 15:35
  Did you see my eyes line up? This is me here I come. It's really nice, I think. That's the massive
• 15:42
  positive at the stock market. It doesn't discriminate against someone who doesn't have tens of hundreds
• 15:47
  of that. You can you could literally have $50. Exactly. Or five. Yeah, I mean, she has ease and
• 15:52
  hatch and all those platforms. You can you can start with $50 even even less on some of them and
• 15:57
  start investing. So it's really investing for the masses, whereas property is very much very much
• 16:03
  for the wealthy. And it's yeah, you've got parents that are helping out their children to get into
• 16:08
  property. And yeah, it's it's it's it's not accessible for everybody. That's for sure.
• 16:13
  I take my absolute hat off to anybody that can save their own house deposit from scratch. That is
• 16:20
  incredible, isn't it? It's so amazing. And there's and I met some the other day who did it. And I
• 16:25
  just thought in nowadays, I mean, it's it's not as though it's a given that everyone's going to be
• 16:29
  able to get help from their parents, but the fact that so many people are still trying to do that
• 16:34
  given the ginormous hill that you've got a climb over to actually get there. It's pretty amazing.
• 16:39
  So one thing I want to talk about is leverage. So say you have a house for $1,000. You've bought
• 16:46
  a house for $1,000. That would be that would be very nice. Imagine. You actually can buy tents
• 16:51
  that are $1,000. Let's go there. You buy a tent for $1,000. And that tent is now worth
• 16:59
  $1,100. It's growing 10% after the first year. So it's growing by 10%. So you've made $100
• 17:07
  because you haven't used leverage and you've you've just put all that $1,000 in those are your savings
• 17:13
  and that $1,000 of value of your tent. Get them straight back into your pocket.
• 17:20
  Has has has grown to $1,100. And you've taken all that. So you've made $100 in that in that example
• 17:26
  without leverage. So you've just used all your savings, no debt, no mortgage. Now if we move
• 17:31
  on to an example with leverage, we have the same tent, which is a $1,000 tent, but we don't actually
• 17:39
  have that full of it full $1,000. We've only got $200. So we can't afford it. But hey, we can go
• 17:46
  here. Like after pay. If only you could after pay your house there would be amazing.
• 17:51
  We go to the bank and we ask for $800 of debt or of leverage. They go, yeah, sure, no worries.
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  So we've got $800 of debt and $200 of savings or what we call equity. That's our contribution.
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  So you've got your $1,000 now. Same scenario as last time that grows by 10% to $1,100. You're
• 18:13
  going to sell that tent and you're going. So you're going to get $1,100 for it. And you're the
• 18:18
  bank's going to be like, hey, we want our $800 back. You're going to go, sure, here, no worries.
• 18:22
  There's $800. So $1,100 minus $800. You've made $300. Okay. Instead of $200 in the previous
• 18:32
  example, because you get to keep the entire gain as well as obviously you get back the savings
• 18:39
  that you put in. The bank doesn't want any of the gain. Today just want their flat $800 back.
• 18:46
  So you've made 50% now on your savings. That's how leverage works because you've made just
• 18:54
  drop. Yeah. So because that amount, the total is more, even though you didn't own all of the money
• 18:59
  in the first place, we actually make more money. Exactly. Which is how. So now you put that on a
• 19:05
  million dollars and you can easily see why people use that. No wonder people get into so much debt.
• 19:10
  Yeah. Well, it's so appealing. Exactly. But the caveat is that work that can work in the reverse.
• 19:19
  And this is what nobody talks about. No. Is that we've got exactly the same scenario now.
• 19:26
  You had your $200 savings, your $800 debt from the bank for your $1,000 purchase. Your
• 19:32
  tint is now, it's actually dropped in value. It's worth $900. So you've lost $100. Now the bank
• 19:40
  wants to, once it's $800 back when you sell that. And so you're left holding $100 instead of the $200
• 19:47
  you began, you began with. And so this is the profit. So you lost 50%. So this is what scares me when
• 19:54
  people say the property market only goes up. It's like, yes, historically, it has done fantastically
• 20:01
  well. But when it turns, there's going to be a lot of people with debt to their eyeballs.
• 20:09
  And they're going to be hit with the reverse benefits of leverage. That's just one thing to be aware
• 20:15
  of. Leverage can be great when things are great. But terrible when things are terrible.
• 20:22
  What happens if someone that even, do you, you know, is that when people start taking like,
• 20:26
  you care your dog, you know, your tiny room table. Because what if someone can't pay it back?
• 20:33
  And that's why the banks don't lend you the full amount of the property price.
• 20:39
  Because they know if something happens, you can't pay any of the back. Exactly. And they know that
• 20:44
  the property market doesn't go up forever and they want to protect themselves just as much as you
• 20:48
  should. So because mortgage rates are so low, does that mean the debt you're talking about is
• 20:55
  cheaper or less? And would that have something to do with the demand?
• 20:59
  Yes. So you're right. And that's, that's an element that I should have mentioned that's also
• 21:03
  playing into the demand and causing these crazy house prices right now. And that's that
• 21:10
  interest rates are so low and therefore mortgage rates are so low. So that's given a whole
• 21:16
  additional pool of people access to debt that previously wouldn't have been able to have
• 21:22
  access to that debt because they couldn't afford to to to fund it. So it's opened up the property
• 21:28
  market. So even more people, so even more demand. Well, on one side, the house price has gone up,
• 21:32
  so that your deposit amount has gone up. So it's it's cut out a few people there. But what's
• 21:38
  even more than offset that is the fact that interest rates are so low, therefore mortgage rates are
• 21:44
  low and that low mortgage rates always fuels a property market. And so where they are now like
• 21:51
  2% for some mortgage rates is is unheard of and and back kind of 0708, they were they were up around
• 21:59
  878%. So does that mean that the amount you pay back is less? It means the interest on the
• 22:08
  amount you borrow is less. So technically, you're paying less for it. A long one. Yeah, it's
• 22:15
  the percentage that you have to pay back. The percentage you're paying the bank to effectively
• 22:20
  borrow that money is is much lower, which means for example, I can I can borrow a lot more and therefore
• 22:29
  I might be able to borrow by two houses instead of instead of or a more expensive house for a
• 22:34
  less interest or borrow more that I previously wouldn't have been able to borrow and therefore I
• 22:40
  can get on the property, get on the property ladder earlier. It creates more demand. That can also
• 22:48
  be a risk is that if you flip that round and interest rates start to increase from where they are,
• 22:55
  then that's going to take the wind out of the sales in terms of the property market, which means
• 23:01
  the house price increases might slow or they might go backwards. As in the value of your asset could
• 23:08
  depreciate. Yes, because there will be less people that are able to borrow that money because
• 23:14
  the percentage rate they have to pay back has gone up. And therefore the demand has gone down.
• 23:19
  Exactly. Therefore house prices will fall or not rise as much. If I could afford a house right now
• 23:26
  with interest rates being so low, it would be so silly not to though. And I know that obviously
• 23:32
  the housing rates could drop and blah, blah, blah, but you're not going to buy a house and then
• 23:37
  want to sell it in two years anyway. So surely you have enough time to wait out like the long game
• 23:43
  that you've been really hammering home. And that's for the long term. I'm glad you picked up
• 23:49
  something stuff. I'm paying attention, I promise. Yes, but the thing is that interest rates change
• 23:55
  and therefore mortgage rates follow what interest rates do. And interest rates increase,
• 24:01
  mortgage rates will increase. And even though you're holding for the long term, they change every six
• 24:07
  months, 12 months, 24 months. But don't you agree to a certain mortgage and interest when you buy it?
• 24:12
  And that's what it stays for the whole time. No. Oh, yeah. So this is the difference between
• 24:18
  fixed and fixed mortgage rates and floating mortgage rates. Okay. So you can have both?
• 24:24
  Yes. And it's probably a discussion for another day. But it just means floating is that you get the
• 24:33
  fluctuations of going up and down. Exactly. Yeah. And right now, I mean, if you'd had a floating,
• 24:40
  the most time period that you can get for a fixed rate anyway is like, it's maximum,
• 24:43
  I think about two or three years. Oh, that's another. Yeah. So the banks protect themselves.
• 24:48
  They're not stupid. Yeah, that's why I was thinking you'd be in a brain. And they're on
• 24:52
  to present. You've got 20 years of interest rates are falling. You probably used to take a
• 24:58
  floating rate, at least for some of it, so that you can get the benefit when the rates fall.
• 25:02
  But then, yeah, if rates are going up, then you want to kind of fix it for a long period of time.
• 25:08
  But the banks know this. They've done this for years. They're all over it.
• 25:11
  I just wish there was a quick fix. I wish you could just be like, here you go. Sove,
• 25:15
  here's the info. It just feels like every time I have a light bulb moment, there's a,
• 25:19
  but hold on. Wait, there's more. There's more. There's more. It's a silo, a hundred.
• 25:25
  I feel like this is enough for today, Vic, my brain's starting to hurt. Yeah, no, that was.
• 25:30
  Do you want to go over the top points for both? Or is there anything else that you wanted to add about
• 25:34
  stocks first property? Yeah, I guess what to be aware of and the key differences between both
• 25:39
  would be the leverage that you can use in property would be the liquidity that you need to be aware of
• 25:45
  with property and how liquidity can be such a benefit in shares and also the large investment
• 25:50
  amount that you need for property and you don't for shares. Those would be the three key points.
• 25:55
  Okay, great. I do love the word liquidity. Yeah, it's such a cool word, isn't it?
• 26:00
  Yeah, liquidity, liquidity. Okay, thanks, Vic. What are we going to go over next time?
• 26:06
  Next time we're going to talk about IPOs and private equity and listed companies and go through
• 26:11
  the life cycle of a company, which would be quite interesting, I think. Did you say that float
• 26:16
  right over my head? IPO, what are you doing? You find out next episode. This podcast is delivered
• 26:23
  to you by The Curve, an investing platform for women. We take somewhat complicated information
• 26:29
  and turn it into digestible content to educate and inspire women. If you're interested in learning
• 26:34
  more about what we do, hit to our website, thecurve.co.nz.