When it comes to investing, there are 2 major asset classes, Property and Shares. Most people are going to feel comfortable with one or the other. So if you are a share investor, I am not going to try and talk you into investing in property. (However, if you hold all of your investments in shares I would advise you to diversify) If you are unsure about which way to turn, or thinking about getting started in property investment let’s discuss benefits and drawbacks of each.
Where do you think the term “safe as houses” came from? It is the security of property investment. I think probably the biggest attraction of property investment is that it is the safest and the most stress free asset class. Residential property values do not fluctuate like shares do. This has been proven in the Global financial Crisis (GFC) of late where even the best blue chip shares more than halved in value. This did not happen to property, in fact, many key areas close to the capital cities actually increased in value through the Global Financial Crisis. If you do just a little bit of research there is no way that you will wake up one day and find that your property has halved in value. Why? A home (shelter) is a life necessity. It is not optional. We cannot live without it. The majority of houses owned in Australia are owner occupied so people just don’t sell if the market gets shaken. They can’t just go and live on the street. Also the entry and exit costs of property are too high for people to trade property. While the high entry costs of property may be seen as a drawback, they are also a benefit to keeping values stable.
Most people feel comfortable with property being their number one asset class because it is tangible. You can see it, touch it and add value to it if you like. Unlike shares where it is just a number on a computer screen and you have no control over what happens to your investment or how the company is managed. The decisions are made on your behalf by some guy sitting in an office on the other side of the world who, in most instances is thinking about his bank account and not yours. Some classic examples of big corporate losses include “Enron” in America, “Great Southern” and “Storm Financial” here in Australia.
You can borrow up to 95% of the value of a property where as banks will only let you borrow 60% – 70% on shares due the difference in security. So if my property goes up in value by 5% or 10%, I am able to get my second where as if I had invested in shares, it would need to go up by 30% – 40% to be able to do the same thing.
Do as the rich do
If you ever get a chance pick up a copy of BRW “Top 200 Richest”. You will notice a common thread between them. They all hold the majority of their wealth in property. Why? For all of the reasons above.
This is where shares have it over property. Shares held on the ASX can be sold much easier and faster than property.