Buy a house, invest in shares, or have it all?

It didn’t surprise us to learn that Kiwis love investing in property. In our survey with Smartshares, we found that nearly 60% of Kiwis own homes, while only 20% own shares. This makes sense, because half of the people we surveyed believed that owning a home is less risky than shares. 

Here’s the reality for the other 40%: it’s hard work to buy a house, especially if it’s your first house. Even a 10% deposit on a $500,000 home is $50,000—that’s pretty steep! 

While investing in a house does give you somewhere to live, property isn’t necessarily the best (or only!) investment you can make. With this in mind, we thought we’d work through some of the benefits of investing in a home and investing in shares. 

Point for housing: putting debt to work

We’ve written before about the difference between different kinds of debt. Mortgages can often be very useful debt, for a couple of reasons.

For one, it’s basically a guaranteed savings plan. You have to make regular payments towards your home loan, or the bank will take your house off you. A chunk of those payments helps to pay off your loan—resulting in you owning more and more of your house over time. If you pay off some of your home loan that has a 5% interest rate, that gives you roughly the same effect as putting money into a savings account that pays 5% (after tax), not bad! 

The difference is that it’s a lot easier to be disciplined about paying your mortgage than it is to stay disciplined about saving money every week. So buying a house more or less forces you into saving money, by paying an expense you’d be paying anyway.

The other useful thing about a mortgage is that it gives you leverage. When you put down a deposit to buy a house, you are investing just a portion of the house’s total value, and having the bank take care of the rest (in exchange for interest). If the house grows in value at a faster rate than your interest rate, then you’ll automatically be getting some pretty solid gains. It is much harder to come by leverage for investing in shares in NZ (particularly lending that is economical).

Point for housing: all about control

Another appeal of owning a house is that you have more control over its value. When you buy shares in a company (or group of companies), there’s not a lot you can do to change their value. If the companies do well, you’ll get a nice return, and if they don’t do very well, you won’t get a return—it is not so easy to go into the boardroom and force the bosses to run the company the way you want it to be run.

With housing, you have a bit more control. You can save some money and improve your home in all different ways—a lick of paint on the walls, or another whole bedroom. If you wanted to, you might be able to knock it down and build two houses in its place, although that would be... not cheap. 

These two reasons together make housing a pretty compelling investment for lots of Kiwis.

Point for shares: financial flexibility

Let’s take a closer look at the control you have over your house. While it’s true that you can increase your home’s value by investing in improvements, it’s also true that improvements are kind of expensive. You’d have a hard time finding a way to improve a house for $5 a week! 

Shares, on the other hand, have a lot more flexibility. You can invest much smaller amounts in shares, especially if you use Sharesies—and you don’t even need to save up a deposit! 

Shares also come with less hassle. Even if you had thousands of dollars to invest, investing in your home would involve hiring tradespeople, getting materials delivered, and living in a construction site for a while. With shares, there’s less friction: you just choose to buy some shares, and a couple days later, you have them. 

This flexibility also works for selling. You can’t really sell part of your house. The closest you could get is renting out a bedroom, which comes with its own set of annoyances. It’s just as easy to sell some of your shares as it is to sell all of your shares. With housing, it’s usually an all or nothing deal. 

Point for shares: lifestyle flexibility

One of the great things about shares is that they follow you wherever you go. They don’t need any maintenance or management either—they just sit there, regardless of what you do or where you live. 

This can be a major benefit, depending on your lifestyle. For example, one of the best ways to increase your salary is to change jobs.  Some people make the most of this by hopping jobs every couple years, and moving cities to do so. If your lifestyle looks like this, then shares can be a much easier investment than a house. If you get a great job offer in a different city, you can just pack up and leave. You don’t need to rent out your shares, or get someone to look after them. 

This is particularly useful when you compare it to the first few years of home ownership, when mortgage payments and other costs (like rates and insurance) will probably be more than you could get renting your house out.

So if you don’t want to own a home, shares can be a great way to put your money to work, without having too much of an impact on your lifestyle. 

Point for both: diversify, diversify, diversify

But it’s not an all or nothing deal. If you want to buy a house, and are able to do so, there’s no reason that property needs to be your only investment. We’re all about diversification, and housing is no exception. 

If you own a home, you can protect yourself from the ups and downs of property investment by also investing in shares. Here are some ways that could help you:

  • By investing some of your wealth in shares, you can protect yourself from your specific house losing value. For example, your roof falling in has no effect on the share market, so you’re protected.
  • You can protect yourself from regional economic problems by investing in overseas shares. For example, if you own a house in NZ, you could invest in the US 500 fund. That way, if something happens to the NZ economy and your home loses value, you have some of your wealth invested in the American economy. 

It’s all about staying diverse. This approach opens you up to more opportunities, and it also protects you from some of the downsides of investment. In other words? You can have it all, if you want. 

What’s the answer?

You’ve probably realised by now that there’s no hard and fast answer to this question. Rather, it’s about your personal circumstances and goals. Investing in property may not be for everyone, and investing in shares may not be for everyone. The key is to take a hard look at what you want and when you want it, then make your investment decisions based on what works best for you. 

Ok, now for the legal bit

Investing involves risk. You aren’t guaranteed a return, and you might lose the money you started with. Before investing, you should read your fund’s product disclosure statement. It contains the investment objectives, risks, fees and other information. You should carefully consider this information in relation to your investment time frames and goals. 

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