Real Estate vs Shares: Which is the Better Investment?

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

So if you’ve a lump sum that you want to invest, what to do with it? Should you invest in real estate or shares? Which is the better option that 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.

Mid last year, in June, when we first published this story, it was clear which asset class had offered the biggest opportunity for profit over the past two decades, when tracking these two main indices:

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

NB: approximate figures used

HPI vs NZ50: 2000-2020

However, since then, as we all know, house prices have skyrocketed. Over the past year, national median prices have soared to $795k. This has pushed up the HPI by nearly 30%, while the NZ50’s trajectory upwards has been by a more modest 19%.

HPI vs NZ50: 2020-2021

However, while the HPI has risen more precipitously than the NZ50 over the past year, the long-haul results show that stocks and shares have still outperformed bricks and mortar in NZ over the past 20 years. Well, at least on paper…

HPI vs NZ50: 2000-2021

Real estate vs shares: the finer details

Although it’s clear that the NZ50 has experienced massive growth over the past two decades, 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 2020, when the NZ50 slumped to around 8460, 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.

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 mums 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. In 2000, the median house price in NZ was $170,000. Now it’s around $800k. 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.

→ Related article: Sharesies: NZ’s Best Online Share Trading Platform

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
• Banks willing to lend
• Housing market less vulnerable to global shocks

Property Cons

• Need sizeable deposit to invest
• Less diversification
• Less liquidity and higher costs involved with selling asset
• High maintenance/management costs
• Capital gains if sold within 10 years of purchase
• New legislation preventing offset of interest charges on taxable interest (new builds exempt for 20 years)
• Returns dependent on long-term trends that are difficult to predict, including population growth and housing market

Investing in Shares: Pros and Cons

Shares Pros

• Easy to diversify and spread risk across a range of investments
• High liquidity and low associated costs
• Possibility of no capital gains if you’re a long-term investor
• PIE tax rate lower than top income tax rate: 28%, rather than 33%
• Low-cost entry point
• Low outgoings

Shares Cons

• Banks aren’t going to lend you hundreds of thousands of dollars to play the stock market!
• More prone to global volatility
• Investing, even in simple exchange traded funds, can involve complex issues
• Tax implications if you’re regularly buying and selling for profit
• Easy to be swayed by emotions and make irrational decisions

Ultimately, if you do your research and invest wisely, both real estate and shares have the potential to earn you considerably greater returns than leaving your money in a term deposit account.

But if you’re thinking about investing for long-term results, one of the easiest ways to build your portfolio is to add to your existing KiwiSaver investments, which should already match your investor profile.

Compare KiwiSaver Providers with Canstar

If you’re comparing KiwiSaver funds, the comparison table below displays some of the products currently available on Canstar’s database for a KiwiSaver member with a balance of $20,000 in a Growth fund, sorted by Star Rating (highest to lowest), followed by company name (alphabetical) – some may have links to providers’ websites. Use Canstar’s KiwiSaver comparison selector to view a wider range of retirement funds. Canstar may earn a fee for referrals.

To read more about our latest KiwiSaver Awards or to compare KiwiSaver providers, click on the button below.

Compare KiwiSaver providers for free with Canstar!

About the author of this page

This report was written by Canstar’s Editor, Bruce Pitchers. Bruce began his career writing about pop culture, and spent a decade in sports journalism. More recently, he’s applied his editing and writing skills to the world of finance and property. Prior to Canstar, he worked as a freelancer, including for The Australian Financial Review, the NZ Financial Markets Authority, and for real estate companies on both sides of the Tasman.