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If you’ve got a stash of cash to invest, which investment option offers the best returns: real estate or shares? Canstar investigates.

Money in the bank, as the old adage goes, is money in the bank. It’s always going to be a reliable asset. But in these days of ultra-low interest rates, money stuck in a bank term deposit ain’t what it used to be.

If you’ve a lump sum earning peanuts in a term deposit, your money could be working harder on your behalf. But what to do with it? Should you invest in real estate or shares? Which is better and which is going to maximise your returns?

Real Estate vs Shares – Crunching the Numbers

All investments come with inherent risks. Over the past 20 years, the tech bubble, the global financial crisis and COVID-19 have all rocked markets. Housing and shares have risen and fallen but, ultimately, they’ve continued on their steady climb upwards.

Looking at the statistics, in terms of growth, it’s clear which asset class has offered the biggest opportunity for profit.

NZX 50 Index (NZ50) – the main stock market index in NZ
House Price Index (HPI) – measures NZ house prices

Index	Index as of Jan 2000	Index as of June 2020	% Increase
HPI	705	2626	273%
NZ50	1172	11,180	854%

The first conclusion we can draw from the above figures is that it’s clear that stocks have massively outperformed housing over the past two decades. But it’s important to remember that the NZ50 is just an average. To have made the most of that growth, your investments would have had to track that index, for example in an exchange-traded fund.

It’s also important to remember that, again, those gains are over 20 years. During that period there have been sharp drops in the NZ50. Had you cashed out your investments at the height of the COVID-19 sell-off back at the end of March, when the NZ50 slumped to 8498, you would have locked in your losses and missed out the massive rebound. So if you are going to invest, you should set long-term goals, and not make panicked decisions.

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In regards to the housing figures, it’s pertinent to keep in mind that although big institutional investors and listed property trusts do not invest in residential property, many Kiwi Mum and Dads and small-time property investors have made healthy profits from the housing market.

If you own your home, with or without a mortgage, you are already investing in property. Real credit card numbers with money on them 2017. In 2000, the median house price in NZ was $170,000. In May 2020, it was $620,000. If you’ve owned a home during that period, you house will have earned you a tidy return on your mortgage payments and general maintenance costs, on top of providing you with somewhere to call home.

Ultimately, investing is about choosing the right asset class to meet your goals.

Setting Your Investment Goals

Regardless of their historical returns, before deciding whether to invest in bricks and mortar, or stocks and shares, you need to set out your investment goals. Some of the important questions you need to ask, include:

Do I want long- or short-term returns?
Do I have the right level of knowledge about my investment?
What risk level am I happy with?
Have I the time to manage my investment properly?
Have I sought professional advice?
What are the tax implications?

Then you must balance the pros and cons of each type of investment and how they fit with your goals.

Investing in Property: Pros and Cons

Property Pros

Good historic long-term growth
Measurable and reliable rental yields (The national average is currently 3.2%, according to CoreLogic)
Banks willing to lend
Housing market less vulnerable to global shocks
Costs are tax deductible, including interest on mortgage
No capital gains after five years of ownership

Pr

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