Property is not a good (or bad) investment per se and, like every other investment on Earth, it most definitely can go wrong.
Why does this seemingly innocuous statement, however true, enrage so many? Why are so many South Africans blinded by unconditional love for this asset class?
Owning the home you live in is probably a good idea. You get to keep the money you would otherwise have to pay in rent and the benefits of entering retirement with a fully paid-up home are easy to see.
However, the belief that property is always as safe as houses (the idiom indicates the existence, not the veracity, of the belief) and a sure-fire way to grow your wealth is wholly irrational and patently delusional. When purely referring to "investment property" -- buy-to-let, holiday homes, vacant land, etc. -- it's clearly not all it's made out to be.
Property doesn't grow as fast as you think
According to the ABSA house price index, residential property lagged inflation for 16 years between 1986 and 2002. In other words, an investment in property would have lost you money. On the other hand, an investment in equities during this period outperformed property by a whopping 66 percent!
Then came the biggest property boom in South Africa's history. For five years property returned close to 20 percent, on average. This performance seems awesome, until you consider that equities returned 19.1 percent over the same period.
Whatever we as property-worshipping South Africans believe, the fact is that property attains much lower returns than equities (though with less volatility) over longer terms.
According to Matthew de Wet, Head of Investments at Nedgroup Investment, cash (i.e. money market investments, etc.) outperformed property, on average, by 0.5 percent per year since 1966.
The Herengracht Index
A fascinating study by Piet Eichholtz, entitled The Herengracht Index, lends further weight to this argument. The Herengracht Index is an ultra long-term study of the prices of property in the Herengracht district of Amsterdam. Records dating back to 1628 give us nearly 400 years of data to work with.
The houses on the Herengracht are well suited to a long-term study, because they have largely remained unchanged (although very well maintained) over the period in question. The Herengracht area has preserved its status as the finest area in Amsterdam in which to reside. This is important, because it means we are analysing an area that has retained its value relative to properties in other areas.
It is remarkable that real (i.e. taking inflation into account) house-price growth has averaged only 0.5 percent per year over the entire period. The results are fairly consistent over each century; the lowest real growth of -0.2 percent per year being in the 18th and 20th centuries and the highest real growth of 1.3 percent per annum being in the 17th century. Over shorter periods of time the real growth rate varies far more dramatically, with real price changes in excess of 50 percent over any 10-year period common.
Residential property doesn't increase at rates far above inflation over the long term. An investment in property is likely to be an excellent inflation hedge, but expecting rentals or capital growth to far outstrip the inflation rate over the long-term is completely unrealistic.
Shares beat property in the long-term
If you rent the home you live in -- and diligently invest the difference between your rental and what your mortgage repayment would've been in quality shares -- you'll almost certainly end up wealthier than those who concentrate on paying off their homes.
Human nature, of course, complicates things a bit and it's undeniable that the forced nature of regular mortgage payments means that homeowners usually fare better financially than those who rent.
Another advantage of real estate is that it protects people from their acting on instinct. Most frustrated owners won't sell their house after a few months of declining values, thereby locking in their loss, as they might do with their shares. Instead, they're often forced to be long-term investors who don't try to time the market.
Article continues on page two and three: property risks are understated while returns are overstated; the opportunity costs of investing in property and the question of whether or not you should buy property...