Stocks v Property… Again
As the Rabbit prepares to dive into its burrows and the Dragon primes itself to emerge from the water, the journalists were busy writing on what might be the hits and misses for the new year. The main article on the last day of the Year of the Rabbit is on Stocks v Property. Well, I had written an article on it some time back. Thus, there is special interest from me on this article. There are some issues I would like highlight.
Data-mining
The article produced some numbers from an SGX study which showed that from 2001 to 2010, the STI returned 4.9% annualised (without dividends) compared to 3.9% from property (excluding rental, maintenance fees and taxes). There were comments that this is an unfair comparison as 2001 was low point in equities due to the burst of the dotcom bubble and 911 terrorist attacks. Well, there is true. However, there was also data over 5 years (2006 to 2010), 3 years (2008 to 2010) and 1 year (2010) which shows that property outperformed stocks. Historical performance would be affected by the time frame selected.
Volatility
The owner of a real estate consultancy was quoted as saying ” There is one big difference between stocks and property: No matter what, a piece of property will also have value“. I simply disagree.
It is true that there is a chance that a single stock could drop to nothing. However, that does not happen to a well diversified basket of stocks eg, an index. That’s what diversification is all about. It is also easy to diversify in stocks compared to property.
A piece of property will not always have value. In Singapore’s context, I have not heard of any property dropping to zero. However, most properties here are lease-hold. What happens when the lease runs out?
How property prices are reported gives an illusion of low volatility. Property prices are reported monthly. This creates the same issue with monthly priced funds.
Leverage
The article gave an example of how an investor who invested $100,000 and borrows $400,000 can make $25,000 if the price moves up by 5%. That’s a 25% return (not taking into account other costs like interest and lawyer fees). That good. But what if the price move down 5%? The opposite happens, the investor loses 25% ($25,000). Leverage cuts both ways. I’m disappointed that the downside was not mentioned. However, giving the benefit of the doubt, the consultancy owner may have mentioned but it was not mentioned in the article.
It is more than meets the eye when it comes to comparing equities to properties. There are other issues like concentration risk, regulatory risk, ease of management etc. Readers can access my previous article here.
Wishing all readers a blessed and prosperous Year of the Dragon!
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