The age old question – What provides better results, property or shares? A detailed comparison can offer insights into which investment route could potentially yield better returns. This article offers a case study, comparing a hypothetical ten-year investment in the share market against the property market in New Zealand, with a focus on Auckland’s property market.
To begin, let’s consider a couple with $160,000 to invest. They are saving $500 per week and continue to rent. For the sake of comparison, we exclude inflation from this equation. If they were to invest in shares, we assume they invest in index funds, such as the S&P 500. Historically, these have yielded an average return of 10% per year. After ten years, they would have accumulated $601,442.25.
However, this figure represents a gross return. In reality, an investor also needs to consider associated costs: fees at 0.5% and tax at 3.14%. After these deductions, the net return stands at 6.37%.
Property investment in New Zealand involves several factors that make it more complex than share investments. Let’s take the same couple with their $160,000, which they use to purchase an $800,000 townhouse in Ellerslie, Auckland. This property – a new-build, two-bedroom, two-bathroom townhouse with a single car park – is rented out for $700 per week, delivering a 4.5% gross yield.
The couple takes a $640,000 mortgage on a long-term interest rate of 6%, and interest is deductible due to the property being a new build investment property. The couple continues saving $500 per week, which is used to pay the mortgage.
However, there are additional costs associated with owning a property: rates ($3,500 per year), insurance ($2,000 per year), maintenance ($500 per year), and accounting ($1,250 per year), totaling $7,250 in annual costs, excluding the mortgage.
Factoring in Auckland’s average historical house price increase of 6% per year, at the end of ten years, the townhouse is worth $1,351,583.17, and the mortgage stands at $447,520.46. If sold, they would net $904,062.71, making them $302,620 better off than if they had invested in shares.
Goal Setting and Investment Stages:
While this comparison paints a favorable picture for property investment, it’s important to remember that investment strategies should align with your financial goals and life stage. Shares may offer more liquidity and are less labor-intensive than property investments, whereas property investments may offer higher potential returns through leverage and rental income.
Leverage and Diversification:
This case study also shows the power of leverage. With property investment, this couple could potentially use the equity from their home to buy another investment property worth around $800,000 by the seventh year. This diversification can potentially provide additional streams of income and capital gains, although it also increases exposure to property market risks.
Finally, it’s important to mention that both shares and properties come with their unique sets of risks. The share market can be volatile and impacted by global economic events, whereas the property market may be influenced by interest rates, regulatory changes, and market oversupply.
The property vs. share debate is ongoing and depends on numerous factors. However, this case study, based on historical averages and certain assumptions, suggests that property investment in Auckland, New Zealand, could potentially yield better returns over a ten-year period. As with all investments, both property and share market investments should align with individual financial goals, risk tolerance, and investment time horizons.
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