At some point in your working life you’ll be faced with the prospect of either buying property or looking at the stock market. I don’t know about you, but I was always pretty lousy at Monopoly, so I couldn’t see how I’d be any better in real life.
Were you the one to end up with Mayfair and Park Lane every time? Lets take a look at your options now.
Real estate, residential and commercial, attracts a lot of investors and everyone seems to know someone who has doubled their money with real estate investment. On the other hand, there are lot of people who are fans of the stock exchange and believe that nothing could help their money grow better than acting out their “Gordon Gekko” fantasies.
In the pre-GFC era, investors were pretty easy with taking risks and diving right into high risk, high return markets. But, post-GFC, people think twice before taking risk on and prefer the “safer” investment options such as real estate; though it does not give returns as high as the stock exchange, it is still considered a fairly safe investment. Given the instability in the economy, people believe that stocks might not be very stable either.
Contrary to this belief, returns on stocks have gone back to what they were during the pre-GFC era. Looking long-term, the average annual return from the property market over the last 10 years has been just 2.5 per cent. Not quite the dizzying returns seen directly after the 2007 GFC crash, which saw thousands of Australian investors redirect from stocks, and pile into good old fashion property like a gold rush.
Before the onset of the GFC in 2007, the property sector produced total returns of 32 per cent in 2004, 13 per cent in 2005 and 34 per cent in 2006, according to AMP Capital Investors. During 2008, it lost 54 per cent, while the stock exchange lost only 39 per cent. But, during 2012, the property sector returned 33 per cent, as compared to the ASX, which returned about 20 per cent. As you can see its a bumpy ride in real estate if your valuing your asset every day of the week, like stocks.
Given the fact that post-GFC, the inflation rate has been constantly fluctuating, the interest rates have also fluctuated, making it difficult to invest in property market. Imagine you buy a $500,000 property by putting in $70,000 of your money, and borrowing the other $430,000. If inflation goes up 3% because the government printed more money, now each dollar is worth less, then the house value would go up to $515,000 in value. The actual ‘worth’ of the house has not changed, just the number of dollars it takes to buy it. Because you only invested $70,000, however, that represents a return of $15,000 on $70,000. That’s a 21.5% return. Backing out the 3% inflation, that’s 18.5% in real gains before factoring in the costs of owning the property. This is one reason why the property market has become very attractive post-GFC.
On the other hand, more than 100 years of research proves that despite all of the crashes, buying stocks, reinvesting the dividends, and holding them for long periods has been the greatest wealth creator in the history of the world. Though the stock market saw a huge fall post-GFC, it has now gone back to what it was in the pre-GFC era. According to AMP Capital Investors, if someone had invested $100,000 in 2002 in real estate, the value of that investment (if sold) would have bumped up to $167,048, as compared to $240,000 in Stock Exchange.
While all these figures are quite interesting, it proves that no one really knows what future holds for either property or stocks. Yes, there is always a great history to look back upon, but tomorrow is a new day with new circumstances to unfold. Financial advisers say that best investment depends on the person making the investment, and the purpose behind making that investment.
So which are you Gordon Gekko or Rich Uncle Pennybags? Leave a comment below and tell us what you’ve had better results with.
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