Shares beat property despite local trend

By MARY HOLM

Q: Everything I have read, including your Herald articles, clearly identifies shares as providing the best return on investment over the medium-to-long term (notwithstanding imprecations from estate agents to the contrary).

An article by Brian Gaynor in the Herald said that "residential housing has clearly outperformed the share market as an investment over the last 20 years".

My intention is to sell our freehold house and buy another at a lower value, so that the balance of cash can be re-invested, probably using a managed fund.

My question is, if Mr Gaynor is correct, then should I be looking at increasing my investment in real estate rather than decreasing it?

I'm sure Brian Gaynor's numbers are right. But - and this is an important "but" - in the sentence you quote, he was writing about the New Zealand sharemarket.

The world sharemarket, and most other developed countries' sharemarkets, have soundly outperformed housing in the period.

And one of the beauties of share investing is that it is easy to spread your investments around the world, via a New Zealand-run international share fund.

I think you'll find that pretty much every time I've recommended shares or a share fund as a long-term investment, I have suggested investing most of your money internationally.

The table that ran with Gaynor's article, in last Saturday's Business Herald, shows that although New Zealand housing has grown faster than New Zealand shares since 1980, Japan is the only other country where this has occurred. And in Japan's case housing only just beats shares.

In 12 other countries, shares beat housing. In the United States, Sweden, the Netherlands, France and Belgium, shares grew four or five times as fast as housing. In Germany, shares grew about 20 times as fast. Three other points:

* Housing has not been a consistent winner, even in New Zealand. Gaynor points out that, over some shorter periods in the past 20 years, local shares outgrew local housing. This happened 1980 to 1985, and again in the early 1990s.

* Past performance won't necessarily be repeated. Financial history shows this over and over. Given that New Zealand's performance has been so different from most other countries, I wouldn't want to bet that it will continue to be different.

* If you do decide to keep all your money in property, you are dangerously undiversified. If property goes through a bad spell, you'll be hit particularly hard - especially if you strike financial difficulties and have to sell during a property downturn.

Even if property keeps doing well, you could easily miss out on still better returns in shares. What if the next 20 years in New Zealand are like the last 20 in Germany? People concentrating on property would be left far behind their share-owning friends.

There will always be certain periods in certain countries in which housing outperforms shares. But the vast majority of research around the world shows that over reasonably long periods the reverse is usually true - often by a wide margin.

In light of that, and the fact that diversification substantially cuts risk, I would far rather see you invest in an international share fund than in more property.

Not yet persuaded? I asked Brian Gaynor if he had any further comments.

He did. "Unfortunately - from a New Zealand economy point of view - residential property has outperformed shares in this country," he says.

"But taking a 10 to 20-year forward view, my fear is that too few people have no superannuation and too many have all their wealth in housing.

"When the baby boomers' children leave and they retire, then they will have to sell their homes to raise money to live on.

"At some time in the next 10 years there will be a big bear market in residential housing, and it will have major implications for a large number of individuals because of the very high level of gearing."

In other words, those with big mortgages relative to the value of their houses will be worst hit.

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