1 00:00:00,960 --> 00:00:04,200 Speaker 1: You're listening to a share these podcast. 2 00:00:03,960 --> 00:00:07,440 Speaker 2: When you're thinking about investing. A lot of people say 3 00:00:07,560 --> 00:00:10,120 Speaker 2: property investing is a way to go, but it's based 4 00:00:10,160 --> 00:00:13,440 Speaker 2: on leverage and on taking quite a big risk. If 5 00:00:13,440 --> 00:00:17,600 Speaker 2: the value drops, you've effectively lost your entire investment, Whereas 6 00:00:17,880 --> 00:00:20,840 Speaker 2: whether shareholding, obviously the gains might be lower, but the 7 00:00:20,880 --> 00:00:22,880 Speaker 2: losses tend to be a little bit lower. So I 8 00:00:22,920 --> 00:00:25,880 Speaker 2: guess there's probably a bit of a chance here for 9 00:00:25,880 --> 00:00:27,960 Speaker 2: people to get both sides of the story if they 10 00:00:27,960 --> 00:00:30,160 Speaker 2: look into it in some death. But on that idea 11 00:00:30,200 --> 00:00:34,040 Speaker 2: of leverage, talk to me a little bit about that 12 00:00:34,280 --> 00:00:36,519 Speaker 2: in property investment at the moment and whether it's a 13 00:00:36,560 --> 00:00:38,080 Speaker 2: good time to be leveraged. 14 00:00:38,320 --> 00:00:40,680 Speaker 1: Yeah. I think the thing in New Zealand is was 15 00:00:40,760 --> 00:00:44,040 Speaker 1: always considered property to be quite safe, and I think 16 00:00:44,120 --> 00:00:47,560 Speaker 1: that's really mischaracterized property because property is actually a pretty 17 00:00:47,600 --> 00:00:51,400 Speaker 1: high risk, higher return. But when we typically think about 18 00:00:51,400 --> 00:00:55,360 Speaker 1: property over the last kind of twenty five a year, 19 00:00:55,440 --> 00:00:59,400 Speaker 1: so since nineteen ninety six, the average property increase in 20 00:00:59,440 --> 00:01:02,120 Speaker 1: New Zealand has been about six point three percent, and 21 00:01:02,200 --> 00:01:04,600 Speaker 1: for shares it's been eight point six percent. So shares 22 00:01:04,600 --> 00:01:07,440 Speaker 1: have been higher return, and that's where a lot of 23 00:01:07,440 --> 00:01:10,000 Speaker 1: people start by saying cool shares, higher return, But then 24 00:01:10,040 --> 00:01:12,120 Speaker 1: we've also got to think about risk. Now, when we 25 00:01:12,160 --> 00:01:14,839 Speaker 1: think about risk and investment circles, often we're talking about 26 00:01:14,959 --> 00:01:17,800 Speaker 1: like the ups and the downs, and so we see 27 00:01:17,800 --> 00:01:20,840 Speaker 1: that with shares that you do have some pretty high ups, 28 00:01:20,840 --> 00:01:23,840 Speaker 1: you also have some pretty high downs. So if we 29 00:01:23,880 --> 00:01:26,360 Speaker 1: think about the best year and the s and P 30 00:01:26,480 --> 00:01:29,520 Speaker 1: five hundred, since Google Finance started reporting the S and 31 00:01:29,560 --> 00:01:32,200 Speaker 1: P five hundred and nineteen ninety six, the best year 32 00:01:32,200 --> 00:01:35,160 Speaker 1: has been about fifty four percent up. Great year if 33 00:01:35,160 --> 00:01:38,160 Speaker 1: you timed that. The worst year has been down forty 34 00:01:38,160 --> 00:01:41,319 Speaker 1: five percent. So shares higher return, but bigger ups and downs. 35 00:01:41,440 --> 00:01:44,039 Speaker 1: The worst year and property has been quite recent it 36 00:01:44,080 --> 00:01:47,720 Speaker 1: was about fifteen percent down and best has been thirty 37 00:01:47,720 --> 00:01:50,160 Speaker 1: percent up. So typically this is the way we think 38 00:01:50,200 --> 00:01:53,200 Speaker 1: about property versus shares in New Zealand that cool shares 39 00:01:53,520 --> 00:01:57,120 Speaker 1: higher return, but also about higher risk. But what that 40 00:01:57,240 --> 00:02:02,080 Speaker 1: conversation misses is the leverage part. So let's run through 41 00:02:02,120 --> 00:02:05,240 Speaker 1: those numbers, because we always think that when you add 42 00:02:05,280 --> 00:02:08,400 Speaker 1: debt to an investment, whether it's property or a business, 43 00:02:08,440 --> 00:02:11,280 Speaker 1: whatever your asset happens to be, that is going to 44 00:02:11,320 --> 00:02:13,520 Speaker 1: make the returns larger, but it's going to make the 45 00:02:13,680 --> 00:02:17,560 Speaker 1: down side much larger as well. I call it the 46 00:02:17,560 --> 00:02:21,600 Speaker 1: mortgage magnifier, just because I love my alliterations. Mate, who doesn't. 47 00:02:21,680 --> 00:02:24,080 Speaker 1: So let's say you're buying a five hundred thousand dollar property. 48 00:02:24,080 --> 00:02:26,120 Speaker 1: You put one hundred thousand dollars worth of cash in 49 00:02:26,240 --> 00:02:28,760 Speaker 1: and we've got four hundred K worth of debt. Now, 50 00:02:29,000 --> 00:02:32,400 Speaker 1: if that property goes up by five percent, that property 51 00:02:32,440 --> 00:02:34,880 Speaker 1: is no longer worth five hundred thousand. It's worth five 52 00:02:34,960 --> 00:02:38,600 Speaker 1: hundred and twenty five thousand. Now most people be like, oh, okay, yeah, 53 00:02:38,600 --> 00:02:41,160 Speaker 1: that sounds about right. But what that means is that 54 00:02:41,240 --> 00:02:43,959 Speaker 1: your equity within that property has gone from one hundred 55 00:02:44,040 --> 00:02:47,960 Speaker 1: grand to one hundred and twenty five grand. So yep, 56 00:02:48,000 --> 00:02:50,200 Speaker 1: the market went up by five percent, your house went 57 00:02:50,280 --> 00:02:52,880 Speaker 1: up by five percent, but your equity within that property 58 00:02:53,000 --> 00:02:56,280 Speaker 1: went up by twenty five percent. Now that sounds pretty good, 59 00:02:56,320 --> 00:02:58,040 Speaker 1: but we've got to talk about the downside as well. 60 00:02:58,040 --> 00:03:00,320 Speaker 1: What happens if it goes the other way. That house 61 00:03:00,360 --> 00:03:02,840 Speaker 1: goes from five hundred k drops by five percent to 62 00:03:02,919 --> 00:03:06,280 Speaker 1: full seventy five. You've now lost twenty five thousand dollars 63 00:03:06,480 --> 00:03:09,200 Speaker 1: and you're down twenty five percent, and we are. 64 00:03:09,080 --> 00:03:11,160 Speaker 2: Seeing that at the moment in some markets, aren't we 65 00:03:11,160 --> 00:03:14,120 Speaker 2: We are seeing values in some respects kind of dropping 66 00:03:14,200 --> 00:03:17,720 Speaker 2: backwards in places, or valuations not kind of coming in 67 00:03:18,040 --> 00:03:20,200 Speaker 2: where they were originally put out. So that's a real risk. 68 00:03:20,360 --> 00:03:22,440 Speaker 1: Yeah, the market's starting to smooth out quite a lot, 69 00:03:22,480 --> 00:03:25,240 Speaker 1: but it's actually even worse than than what you've made 70 00:03:25,280 --> 00:03:27,760 Speaker 1: it out to be. You know, in Lower Hut at 71 00:03:27,400 --> 00:03:31,160 Speaker 1: the largest peak to trough drop, property prices were down 72 00:03:31,240 --> 00:03:34,760 Speaker 1: like thirty percent. And so the reason that those property 73 00:03:34,840 --> 00:03:37,400 Speaker 1: drops hurt isn't just the fact that you know you've 74 00:03:37,440 --> 00:03:39,840 Speaker 1: lost thirty percent on your investment. It's that if you 75 00:03:39,840 --> 00:03:43,280 Speaker 1: put in a twenty percent deposit and your property value 76 00:03:43,320 --> 00:03:47,000 Speaker 1: dropped by thirty percent, you're now in negative equity. Your 77 00:03:47,120 --> 00:03:50,280 Speaker 1: return on the money you put in is negative one 78 00:03:50,400 --> 00:03:54,280 Speaker 1: hundred and fifty percent, because you're getting five times if 79 00:03:54,320 --> 00:03:55,960 Speaker 1: you put in a twenty percent deposit, you put in 80 00:03:55,960 --> 00:03:58,080 Speaker 1: a fifth of the money, you're getting five times the 81 00:03:58,120 --> 00:04:01,480 Speaker 1: market return. And so typically we think of New Zealand 82 00:04:01,600 --> 00:04:04,800 Speaker 1: property a little bit lower risk, a little bit lower return, 83 00:04:05,080 --> 00:04:08,480 Speaker 1: but an actual fact, if you're using debt, it's much 84 00:04:08,600 --> 00:04:11,440 Speaker 1: higher risk and much higher return than shares, and that's 85 00:04:11,480 --> 00:04:13,480 Speaker 1: the thing that I think people miss And I'm not 86 00:04:13,560 --> 00:04:15,560 Speaker 1: really trying to emphasize the higher returns here. I'm trying 87 00:04:15,600 --> 00:04:18,520 Speaker 1: to emphasize the higher risk when we take on debt, 88 00:04:18,680 --> 00:04:20,440 Speaker 1: because that's the thing a lot of people forget about. 89 00:04:20,560 --> 00:04:23,080 Speaker 1: Investing involves a risk you might lose the money you 90 00:04:23,120 --> 00:04:26,400 Speaker 1: start with. We recommend talking to a licensed financial advisor. 91 00:04:27,120 --> 00:04:30,880 Speaker 1: We also recommend reading product disclosure documents before deciding to invest.