Speaker 1: You're listening to a share these podcast.
Speaker 2: When you're thinking about investing. A lot of people say
Speaker 2: property investing is a way to go, but it's based
Speaker 2: on leverage and on taking quite a big risk. If
Speaker 2: the value drops, you've effectively lost your entire investment, Whereas
Speaker 2: whether shareholding, obviously the gains might be lower, but the
Speaker 2: losses tend to be a little bit lower. So I
Speaker 2: guess there's probably a bit of a chance here for
Speaker 2: people to get both sides of the story if they
Speaker 2: look into it in some death. But on that idea
Speaker 2: of leverage, talk to me a little bit about that
Speaker 2: in property investment at the moment and whether it's a
Speaker 2: good time to be leveraged.
Speaker 1: Yeah. I think the thing in New Zealand is was
Speaker 1: always considered property to be quite safe, and I think
Speaker 1: that's really mischaracterized property because property is actually a pretty
Speaker 1: high risk, higher return. But when we typically think about
Speaker 1: property over the last kind of twenty five a year,
Speaker 1: so since nineteen ninety six, the average property increase in
Speaker 1: New Zealand has been about six point three percent, and
Speaker 1: for shares it's been eight point six percent. So shares
Speaker 1: have been higher return, and that's where a lot of
Speaker 1: people start by saying cool shares, higher return, But then
Speaker 1: we've also got to think about risk. Now, when we
Speaker 1: think about risk and investment circles, often we're talking about
Speaker 1: like the ups and the downs, and so we see
Speaker 1: that with shares that you do have some pretty high ups,
Speaker 1: you also have some pretty high downs. So if we
Speaker 1: think about the best year and the s and P
Speaker 1: five hundred, since Google Finance started reporting the S and
Speaker 1: P five hundred and nineteen ninety six, the best year
Speaker 1: has been about fifty four percent up. Great year if
Speaker 1: you timed that. The worst year has been down forty
Speaker 1: five percent. So shares higher return, but bigger ups and downs.
Speaker 1: The worst year and property has been quite recent it
Speaker 1: was about fifteen percent down and best has been thirty
Speaker 1: percent up. So typically this is the way we think
Speaker 1: about property versus shares in New Zealand that cool shares
Speaker 1: higher return, but also about higher risk. But what that
Speaker 1: conversation misses is the leverage part. So let's run through
Speaker 1: those numbers, because we always think that when you add
Speaker 1: debt to an investment, whether it's property or a business,
Speaker 1: whatever your asset happens to be, that is going to
Speaker 1: make the returns larger, but it's going to make the
Speaker 1: down side much larger as well. I call it the
Speaker 1: mortgage magnifier, just because I love my alliterations. Mate, who doesn't.
Speaker 1: So let's say you're buying a five hundred thousand dollar property.
Speaker 1: You put one hundred thousand dollars worth of cash in
Speaker 1: and we've got four hundred K worth of debt. Now,
Speaker 1: if that property goes up by five percent, that property
Speaker 1: is no longer worth five hundred thousand. It's worth five
Speaker 1: hundred and twenty five thousand. Now most people be like, oh, okay, yeah,
Speaker 1: that sounds about right. But what that means is that
Speaker 1: your equity within that property has gone from one hundred
Speaker 1: grand to one hundred and twenty five grand. So yep,
Speaker 1: the market went up by five percent, your house went
Speaker 1: up by five percent, but your equity within that property
Speaker 1: went up by twenty five percent. Now that sounds pretty good,
Speaker 1: but we've got to talk about the downside as well.
Speaker 1: What happens if it goes the other way. That house
Speaker 1: goes from five hundred k drops by five percent to
Speaker 1: full seventy five. You've now lost twenty five thousand dollars
Speaker 1: and you're down twenty five percent, and we are.
Speaker 2: Seeing that at the moment in some markets, aren't we
Speaker 2: We are seeing values in some respects kind of dropping
Speaker 2: backwards in places, or valuations not kind of coming in
Speaker 2: where they were originally put out. So that's a real risk.
Speaker 1: Yeah, the market's starting to smooth out quite a lot,
Speaker 1: but it's actually even worse than than what you've made
Speaker 1: it out to be. You know, in Lower Hut at
Speaker 1: the largest peak to trough drop, property prices were down
Speaker 1: like thirty percent. And so the reason that those property
Speaker 1: drops hurt isn't just the fact that you know you've
Speaker 1: lost thirty percent on your investment. It's that if you
Speaker 1: put in a twenty percent deposit and your property value
Speaker 1: dropped by thirty percent, you're now in negative equity. Your
Speaker 1: return on the money you put in is negative one
Speaker 1: hundred and fifty percent, because you're getting five times if
Speaker 1: you put in a twenty percent deposit, you put in
Speaker 1: a fifth of the money, you're getting five times the
Speaker 1: market return. And so typically we think of New Zealand
Speaker 1: property a little bit lower risk, a little bit lower return,
Speaker 1: but an actual fact, if you're using debt, it's much
Speaker 1: higher risk and much higher return than shares, and that's
Speaker 1: the thing that I think people miss And I'm not
Speaker 1: really trying to emphasize the higher returns here. I'm trying
Speaker 1: to emphasize the higher risk when we take on debt,
Speaker 1: because that's the thing a lot of people forget about.
Speaker 1: Investing involves a risk you might lose the money you
Speaker 1: start with. We recommend talking to a licensed financial advisor.
Speaker 1: We also recommend reading product disclosure documents before deciding to invest.