You're listening to a share these podcast.
When you're thinking about investing. A lot of people say property investing is a way to go, but it's based on leverage and on taking quite a big risk. If the value drops, you've effectively lost your entire investment, Whereas whether shareholding, obviously the gains might be lower, but the losses tend to be a little bit lower. So I guess there's probably a bit of a chance here for people to get both sides of the story if they
look into it in some death. But on that idea of leverage, talk to me a little bit about that in property investment at the moment and whether it's a good time to be leveraged.
Yeah. I think the thing in New Zealand is was always considered property to be quite safe, and I think that's really mischaracterized property because property is actually a pretty high risk, higher return. But when we typically think about property over the last kind of twenty five a year, so since nineteen ninety six, the average property increase in New Zealand has been about six point three percent, and
for shares it's been eight point six percent. So shares have been higher return, and that's where a lot of people start by saying cool shares, higher return, But then we've also got to think about risk. Now, when we think about risk and investment circles, often we're talking about like the ups and the downs, and so we see that with shares that you do have some pretty high ups,
you also have some pretty high downs. So if we think about the best year and the s and P five hundred, since Google Finance started reporting the S and P five hundred and nineteen ninety six, the best year has been about fifty four percent up. Great year if you timed that. The worst year has been down forty five percent. So shares higher return, but bigger ups and downs. The worst year and property has been quite recent it was about fifteen percent down and best has been thirty
percent up. So typically this is the way we think about property versus shares in New Zealand that cool shares higher return, but also about higher risk. But what that conversation misses is the leverage part. So let's run through those numbers, because we always think that when you add debt to an investment, whether it's property or a business, whatever your asset happens to be, that is going to make the returns larger, but it's going to make the down side much larger as well. I call it the
mortgage magnifier, just because I love my alliterations. Mate, who doesn't. So let's say you're buying a five hundred thousand dollar property. You put one hundred thousand dollars worth of cash in and we've got four hundred K worth of debt. Now, if that property goes up by five percent, that property is no longer worth five hundred thousand. It's worth five hundred and twenty five thousand. Now most people be like, oh, okay, yeah,
that sounds about right. But what that means is that your equity within that property has gone from one hundred grand to one hundred and twenty five grand. So yep, the market went up by five percent, your house went up by five percent, but your equity within that property went up by twenty five percent. Now that sounds pretty good, but we've got to talk about the downside as well. What happens if it goes the other way. That house goes from five hundred k drops by five percent to
full seventy five. You've now lost twenty five thousand dollars and you're down twenty five percent, and we are.
Seeing that at the moment in some markets, aren't we We are seeing values in some respects kind of dropping backwards in places, or valuations not kind of coming in where they were originally put out. So that's a real risk.
Yeah, the market's starting to smooth out quite a lot, but it's actually even worse than than what you've made it out to be. You know, in Lower Hut at the largest peak to trough drop, property prices were down like thirty percent. And so the reason that those property drops hurt isn't just the fact that you know you've lost thirty percent on your investment. It's that if you put in a twenty percent deposit and your property value
dropped by thirty percent, you're now in negative equity. Your return on the money you put in is negative one hundred and fifty percent, because you're getting five times if you put in a twenty percent deposit, you put in a fifth of the money, you're getting five times the
market return. And so typically we think of New Zealand property a little bit lower risk, a little bit lower return, but an actual fact, if you're using debt, it's much higher risk and much higher return than shares, and that's the thing that I think people miss And I'm not really trying to emphasize the higher returns here. I'm trying to emphasize the higher risk when we take on debt, because that's the thing a lot of people forget about. Investing involves a risk you might lose the money you
start with. We recommend talking to a licensed financial advisor. We also recommend reading product disclosure documents before deciding to invest.