# NCB report Property Vs. Equities



## Brendan Burgess (28 Aug 2004)

NCB has today published a report comparing equities to residential property. Here are some points from a very detailed report:

To find the full report, click on [broken link removed]. Click on Investment Strategy on the right hand side of the page and it is the first report. 


```
Real growth in values from 1976 to April 2004

Dublin Property         * * * * 386%    5.81% per annum
National Property               255%* * * * 4.62%
Irish Equities                  652%* * * * 7.47%

Real growth in Earnings from 11/89 to 5/04

Rental Income nationally* * * * 12%* * * * 0.78%
Earnings yield on shares* * * * 98%* * * * 4.83%
```



> We estimate that the entry price/earnings multiple for investing in Irish residential property is currently in the region of 38 times the initial earnings level.  This compares with an entry mutiple of under 14 times when looking at a diversified portfolio of Irish equities on an equivalent basis.
> 
> For residential property to offer an adequate risk premium over the risk free prospective return from an inflation protected Government bond, we estimate that rents would need to grow from current levels at a rate equal to inflation plus 2.3% over the long term.  For prospective returns on property to match those from a diversified portfolio of Irish equities, we estimate that long run rental growth would have to equal inflation plus about 4% per annum from this point forward.  Historic data suggests that rental growth has fallen well short of each of these benchmarks despite the buoyancy of the economy.
> 
> ...


----------



## Brendan Burgess (28 Aug 2004)

It's a very interesting and detailed report. It's basic assumption is:



> ... if is it accepted that property is no different to any other type of equity investment, then sustained and consistent capital appreciation in excess of inflation can only be justified if it goes hand in hand with sustained and consistent growth in net rental income in excess of inflation.



I don't think that we can accept that residential property is no differerent to any other type of equity investment. The main impact on the price of residential property is the demand for homes, not the demand for investments. True, the increased prices of residential property have not been justified by the increases in rents. But they have been justified by the increased demand of a wealthier population for new homes and their relative affordability in times of low nominal interest rates. 

It's a bit like saying that works of art should not have increased in value over the centuries because their earnings have not increased. It's not their earnings capacity which determines their value. 

Brendan


----------



## d53 (30 Aug 2004)

*Property versus equities*

I haven't read the report.

In the long term, rents cannot grow by more than earnings, as there is a limit to what tenants can pay.  It would seem to me that it is quite reasonable therefore for property returns to be in excess of price inflation.  

The same logic applies to equities: it seems reasonable that equity returns will also keep pace with earnings (or more precisely total wealth, probably GNP) rather than price inflation.  So I cannot see any justification for the often-heard argument that property will outperform equities.

d


----------



## A1 (30 Aug 2004)

*Report*

The price of residential property is determined by two main factors:
The demand for homes by people who want to live in them
The demand by investors

Investors are really piggybacking on the price as set by the demand for homes. Looking at property as a discounted cash flow investment, the current prices cannot be justified. In other words, the present value of future rental income discounted at the interest rate gives a net negative value. 

So investors are taking a gamble that the demand for homes will continue to push up the prices of residential properties. They are investing for capital gain rather than rental income. 



A1


----------



## ninsaga (30 Aug 2004)

*Re: Report*

There is a fundamental error here...

..one has to take into account the risks associated in property v's equities. Yes the yields on shares have outperformed property - but these are the yields one can make money on as long as they have invested in the right equities. Perhaps in 10 yrs time when this is measured again, equities may still out perform property - but try telling that so someone who has lost money on investing in the wrong shares. Real estate does continue to increase in value overtime - so the 'expectation' is that this trend will continue - the population is growing - people need a place to live & this is where property investors can benefit.


----------



## Brendan Burgess (31 Aug 2004)

*Re: Report*

Ninsanga

It's much easier to make these errors in property than shares.

Most people who invest in shares buy a diversified portfolio. If you have ten shares, you are very well diversified. Your portfolio return will be very close to the overall market.

Most people who invest in property can only buy one or two properties. They are very exposed to individual risk:
They overpay for the one property
They get a long term bad tenant
The area develops problems. 

Property is much riskier than people realise and the great returns on property in the past few years have blinded people to the real risks.

Brendan


----------



## ninsaga (31 Aug 2004)

*Re: Report*

Brendan,
           Each investment type carries its own risk - no dispute there. 

An informed property investor & an informed equities investor will both most likely do well. Both will have researched & accessed their ventures in advance so the risks are somewhat reduced.

However my belief is that as the level of 'expertise' decreases then the equities investor is most likely to lose out alot quicker..

A property investor 'should' be looking to yield in the long term due to the substantial outlays in order to get started. The property investor is not looking to offload in the next 12 months or so.

The very minute shares are bought they may just drop in value due to the bid v's ask spread. So - does the novice investor know when to call it  a day when the share price starts to tumble - do they hold on hoping that  it will turn for the better but in the meantime the share price just tanks out. 

ninsaga


----------



## Brendan Burgess (31 Aug 2004)

*Re: Report*

Ninsanga

The very opposite is true of most of your arguments!



> However my belief is that as the level of 'expertise' decreases then the equities investor is most likely to lose out alot quicker..



The stockmarket is efficient to all intents and purposes. The property market is very inefficient. If I decide to buy shares in AIB, my research will simply not matter. The price is decided by the analysts in the various stockbrokers and institutions around town. If I want to buy no. 27 Back Lane, I have very little reference for that price. I may well pay way over the odds for it, because I don't know as much about property as I thought I did.



> The very minute shares are bought they may just drop in value due to the bid v's ask spread.


Not technically correct in the Irish market, but the principle is correct. If I buy shares in AIB today, I will pay 1% stamp duty and 1% commission. If I sell them tomorrow, I will pay 1% commission. That is a round trip cost of 3% which is huge and very difficult to overcome. But if I buy a property, I will pay 9% stamp duty and around 3% in other buying and selling costs between solicitors and estate agents and furnishing. So, the property drops immediately in value by 12% compared to 3% for equities.

Brendan


----------



## Max Hopper (18 Sep 2004)

Let's get the perspective right. Houses in Ireland are *not* generally purchased as an investment, simply because of the poor liquidity in the marketplace *and* disruption factors. I am deaf from buyers that spout off about their 'gain' whilst having no intention of selling. Ergo, no gain. Shares, bonds, metals, warrants, options, etc. all benefit from active international markets. It is completely sound to lock-in a gain anywhere along the upward curve (duh!). And live to play another day. This scenario (the _only_ scenario in investing/gambling) is not easily achieved with a portfolio of housing, especially if the one owned is a primary residence.<!--EZCODE BR START--><!--EZCODE BR END--><!--EZCODE BR START--><!--EZCODE BR END-->In the sideways market that we have seen over the past eight months, it is perfectly reasonable to actively manage a portfolio (excluding on-shore, as Brendan observed) for a 8 - 10% return. To European nationals, Luxembourg offers trading at discount prices and internet access. Yes, the Exchequer is still there with it's hand out in October and December, but 20%?!? Beats the punishing 42% belt (oops, band), <pun> hands down </pun>.<!--EZCODE BR START--><!--EZCODE BR END--><!--EZCODE BR START--><!--EZCODE BR END-->Alternatively most Irish mutual funds permit unlimited free transfers between products and cash, thereby affording an opportunity to indulge in a bit of ½ to ¾% weekly gains. Over a year, ½%  _biweekly_ gains (excluding a well deserved four week holiers) boosts your account an annual 12%.


----------



## fumed (18 Sep 2004)

*Burned by Tipster*

Last Dec, I came across some advice by a columnist in the financial supplement in a prominent Irish Sunday newspaper - that the shares being held by shareholders of a major Irish financial institution should be sold off. So I acted on that - only to find that the current value of shares of that institution is on the increase.  If I had timed the sale to now, I'd be E2K better off.... I rue the day when I read that darned newspaper!
Fumed Shareholder


----------



## Max Hopper (19 Sep 2004)

Sorry about that, fumed. But what most 'punters' (not the hardcore investors that haunt this board) do not get is that there are *many* forces against the retail investor. Time to make things work for you, eh? Think about the number of 'shorted' shares of either publicly traded (by this I mean listed outside othe Auld Sod) Irish banks owed by speculators (aka 'open interest'). Then, mix with a solid earnings announcement, a bit of ECB laissez faire, a dash of options expirations, and a good measure of cash in mutual funds. Taste and season by increasing dividends. Delicious!<!--EZCODE BR START--><!--EZCODE BR END--><!--EZCODE BR START--><!--EZCODE BR END-->Here's the tip.<!--EZCODE BR START--><!--EZCODE BR END--><!--EZCODE BR START--><!--EZCODE BR END-->Get informed about these ingredients before you buy or sell. Too much of one or too little of another and the thing can become a dog's dinner. Personally, I find the to the major quarterly earnings announcements a great _buy_ opportunity coupled with _selling_ at the close before the news (buy on rumour and sell on news). This  one was bought at €1.50 (yeah, I broke my rule, but hols fell during the 'buy' window) and sold at €1.81 (20% gain in 6 weeks). Look at the tight trading on the 5 day chart. Shorters buying in an attempt to cover their exposure. But a word of caution here, when you place your buy orders, simultanteously place _stop loss_ and a _limit_ orders. So if either your *pain* or *greed* thresholds are reached, you are *gold*.<!--EZCODE BR START--><!--EZCODE BR END--><!--EZCODE BR START--><!--EZCODE BR END-->But then, I am a guerrilla investor. WTF, CGT is the same, short or long!


----------



## tyoung (19 Sep 2004)

*A Modest Proposal*

I'm skeptical.
As of Friday' the go anywhere,use loads of leverage masters of the universe( the hedge funds) are up on average 2% this year(see Friday's FT), but you're going to make 12%.
 Here's what I suggest. I will lend you 100,000 euros. You guarantee me 6% over one year plus safe return of my capital and you can keep the other 6% or what ever you make. You can use your house as collateral.
 Sounds like a winner for both of us.
 What say you?
Tyoung


----------



## Max Hopper (20 Sep 2004)

Sure! Will you agree to pay all the CGT owed on the year's gains (it might just eat into your capital). In other threads on this board I have been critised for believing everything I read in the Indo (data from the CSO, DKM Consultants (Davy's), and Goodbody's). Here comes a post that quotes pinkie as saying X. The Fantasy Financial competition in the SBP that ran June to this month saw 5 retail investors with 200 to 250% gains.<!--EZCODE BR START--><!--EZCODE BR END--><!--EZCODE BR START--><!--EZCODE BR END-->*fumed* was upset about leaving some money on the table (after what I presume was a sale to the good). How will you feel when your 6k is paid in the 3rd week but the capital remains out of your control for another 49 weeks? Just asking that the envy factor be considered.


----------



## Brendan Burgess (21 Sep 2004)

Hi Max

Askaboutmoney is a serious forum. I will delete all further rubbish posts from you. If you want to talk rubbish, there are loads of other places on the net that would really appreciate your style. It's wasted on us. 

Please acquaint yourself with the Posting Guidelines:

No discussion of individual shares
No defamatory posts.
And no discussion of editorial decisions - especially with unregistered users. 

Thanks

Brendan


----------



## Dr Moriarty (21 Sep 2004)

Hear, hear... (ho-hum...)

So — back to the point..?

Hopper had _one_ good point — about people believing that they're sitting on a 200%/300% "gain" on their property investment without taking into account (a) that the "gain" is gross, not net, (b) that valuations (and their own convictions) aren't worth a rat's a*se until and unless they're translated into a concrete transaction — no pun intended!    — and (c) that rental incomes look set to continue their sorry slide...

I'm no expert, and am just going on pure "gut" cynicism here —but if I were to be in a position to sink a hundred grand or so into an mid/long-term "investment vehicle", I'd be hard pressed to decide who to believe on this issue (i.e. property vs. equity). Good thing I'm not! :rollin 

Next..?

Dr. M.


----------



## Brendan Burgess (21 Sep 2004)

This thread is for discussing property vs. equities. 

All rubbish and irrelevant posts will be deleted without further comment.

When the Suggestions Forum is opened, contributors can discuss editorial policy.

Brendan


----------



## tyoung (23 Sep 2004)

*Property V Stocks*

Max Hopper
   No offense intended. Good Luck with your trading.
  On the actual discussion itself, I think Dr Moriarty has a good point.
   Certainly residential property looks expensive and I do'nt think a rational investor can put fresh money there.
 The 10 year Irish govt. bond now yields under 4%. Unless you believe we headed for a deflationary depression this hardly represents the investment opportunity of a lifetime. 
 For a number of years I have believed that the Irish stock market was undervalued. It never really got caught up in the 90's bubble and with the arrival of the Euro many Irish fund managers sold their Irish stocks to diversify into other euro holdings. However these stocks have had a good run over the last 18 months or so. While they are not expensive it's hard to make the case that they represent a great buying opportunity.
 Furthermore stocks will be greatly influenced by global markets and in this area I'm very cautious.
 That justs leaves cash or gold. I haven't yet bought the gold-bug's argument so for the last 9 months or so I have been accumulating cash and accelerating payments on my mortgage.
Best wishes 
Tyoung


----------



## Dan The Man (24 Sep 2004)

*Property V Stocks*

I can see that one of the biggest attractions of property over equities has not been addressed on this post.

As an ordinary punter I can obtain property using funds I dont have (93% or so).
I can rent out that property, and while I would have to subsidise the repayments initially, the rental yield will eventually surpass the repayments.

I will then have no outlay and repeat the whole process to fund another property.



To make the same return on equities, I need the lump sum up front.


----------



## sluice44 (27 Sep 2004)

*Re: Property V Stocks*

Hi Dan,


> To make the same return on equities, I need the lump sum up front.



You could get into hedge funds or spreadbetting (?).

Sluice


----------



## Dan The Man (27 Sep 2004)

*Re: Property V Stocks*

Holy Burgess! Spreadbetting?

Even with spreadbetting you need to have the full amount available on deposit, hence you do need lump sum.

I'm a bit ignorant on the hedge funds though!


----------



## daltonr (6 Oct 2004)

*Re: Property V Stocks*

There are other ways to borrow for shares.
I'm not advocating this, I'm just saying the option is there.

If you like the look of a couple of shares that have a Dividend Yield of say....7%.    You can also get a loan at about 7%.  

Now you've got a portfolio of shares paying the interest on a loan.  You just have to pay off the loan itself.   Also your 
dividends are likely to increase each year.

At the end of the loan period you've got the shares without paying any interest, and you've gotten the Capital appreciation based on the share price 5, 10 years ago.
And you've got a dividend income.

Many people remortgage their home to buy an investment property.   But wouldn't dream of doing the same to buy shares.

The only difference in my opinion is people *think* they understand mortgages and property, but don't understand shares.

As Brendan pointed out the so called risk associated with the two types of investment are often misunderstood.

There are a lot of myths that go into this.

1.  Shares are more expensive to get into than property.
Not True, Property is more expensive.  See Brendan's Post.

2. Shares require greater knowledge and research than 
    property.
Not True, anyone can buy a share, picking the right ones 
can be done almost mechanically.

3. Property Prices Never Fall.
Tell that to anyone with Negitive Equity.

4. Share prices go down as often as they go up.
Not True, the overall trend has always been up.   

6. You can't borrow to buy shares.
Yes you can.  You can borrow to buy jelly babies if you like.

7. Property Performs better than shares in the long term.
Shares perform better than property in the long term.

8. You can't get an income from Shares, you have to sell them
to make any money.
Not True, high yielding shares return an income just like high yielding property does.   The only difference is that Big companies are less likely to default on their dividend than a tennant is to default on his rent.

-Rd


----------



## rainyday (6 Oct 2004)

*Re: Property V Stocks*



> If you like the look of a couple of shares that have a Dividend Yield of say....7%


While I'd agree with the general thrust of your post, I'm not aware of any shares offering this kind of dividend yield - 3% or 4% maybe - but not 7%, afaik.


----------



## daltonr (6 Oct 2004)

*Re: Property V Stocks*

You can find almost any dividend you like if you look outside Ireland.  E.g. UK Shares smaller companies.   

I've seen Yields of 20%, but I wouldn't put the contents of my piggy bank into them much less borrow on the strength of them.

Obviously high yield sometimes means a bargain and sometimes it genuinely is a dog and if your borrowing to invest you better be careful that you're confident which it is.
The higher the yield the more likely there's a serious problem and the price is reflecting that.

Also if you have to look outside the country to find the higher Yield you face additional risks, but that's the same dilemma faced by people who think buying property abroad is good because Ireland is over valued.

Again, I'm not advocating this strategy, It's not even something I'd do myself.   But it's an example of A WAY to borrow while investing in shares.

Of course in many cases rental yields from property doesn't cover the interest on the mortage that services it.  People bank on increasing yields and eventually owning the asset outright. They are willing to plough in more money over time to get there.

To come back to the original point,  people think they understand Property, and often they don't.   
They think Shares are more complicated and risky than they really are.

I sometimes wonder if as more and more Irish people discover the benefits of long term returns from shares and more Irish people get involved in direct investment in equities, will there be a surge in the ISEQ from the new found interest.

It's clear that the 20 and 30 somethings today will be far more willing to buy shares than their parents were.   With such a low percentage of the population invested directly in shares today, is the ISEQ about to blossom?

We live in interesting times.

-Rd


----------



## Brendan Burgess (6 Oct 2004)

*Re: Property V Stocks*

Hi Rd - an interesting general point and I do agree that people should consider borrowing to invest in equities in some circumstances. However...

1) If you are borrowing to invest, you are probably better off investing in property. The main reason is that you can write the interest paid against your income for tax purposes. You cannot write the interest paid on borrowings to invest in shares. ( This is a general point. Although I am reluctant to time or predict the markets, right now I believe that there is far more risk in property than in equities, so right now I would not let this tax planning point switch me from equities into property).

2) I don't think that you should invest in shares if it is costing you 7% to borrow. If you can remortgage your home at 3% or less then it may be worthwhile. 

3) I don't think you have to restrict yourself to high yielding shares. If you borrow to invest in shares, you probably should simply pick the top 5 blue chip shares. You should be able to service the loan interest and repayments from your other income. If not, then you probably should not be borrowing. 

4) The case for investing in shares has always been very strong in Ireland, yet most individuals shy away from them. But the big money is in the institutions who have usually preferred shares to  property. In the event that there was a mass conversion of private investors to equities, I don't think it would affect the market significantly. And at the first downturn, they would all be running out again.

Brendan


----------



## daltonr (6 Oct 2004)

*Absolutely*

Brendan,

I absolutely agree, if you have the option to borrow at 3% rather than 7% then it makes sense to do that, regardless of the yield.

I was making the point that you don't necessarily need to stake your house on an investment in shares.   A loan with a higher interest rate could still be considered, if the Yield was high enough.

It's a shame the Eircom thing went the way it did.  I know people who will never dip their toe into equities again as a Result.

Similarly I know people who happened to start pensions a few years ago and got hammered when equities fell.  They now consider Pensions as a bad idea.

-Rd


----------

