After the jitters of the world stock markets last week one could be forgiven for wondering whether or not it makes sense to invest in the property market. Whilst all investments offer some risk, the benefits of investments can vary greatly.
When stock markets drop, your investment value is impacted immediately. Last week illustrated this with stocks losing 8% or more in just one day. Having that said, your loss is only realised when you sell. For those who retained their investments last week, most of those losses would have been recovered, on paper.
Had the stock markets not rebounded it would have been a very painful experience for many investors. When investing in the stock market you are hoping for 2 things: an increase in the share value, and a dividend. Potential returns in a bullish market can be good, but as we’ve all seen, the stock market can be very volatile.
Contrast this to the property market. Whilst stock markets experienced turmoil last week, the property market remained the same. That’s because the property markets are less volatile, and take much longer to react to emotion and the panic selling that can hit the stock markets.
In a downturn, whilst a property market is impacted, the effects take longer to manifest themselves. Again, even in a depreciating market, a loss is only realised when you sell.
And therein lies the major difference between property and other forms of investment. Even in a depreciating market, the rental return is strong. If fact, when people can’t purchase a property they have to live somewhere, and there is drastic upwards pressure on rentals. So the return on investment is even greater in a downwards-moving market. We only have to look at the high rentals in our area to confirm this.
If your property is also your residential home, then you derive a tangible benefit from owning it. You enjoy the use of the property instead of paying someone else’s bond off in the form of high rental.
Property has always been a medium to long-term investment. So when purchasing, the intention shouldn’t be to flip it and make large profits in a short time. Steady growth in property values over time has shown that the property market is resilient, much more stable, and offers the investor a strong return, even in a falling market.
In addition to this, when investing in property you can borrow funds from the bank to finance your acquisition. You can’t do this on the stock market. Clearly the risks of property investment are substantially lower. Budget for increased interest rates. But be confident that property investment is one of the best forms of investment there is, in any market.
Principal of Harcourts Platinum
Director of Harcourts South Africa