Property or Shares?
27 May '09
I was recently asked by my friends at The Motley Fool in Washington to write a snapshot of Ireland for their Global Gains service. Radio, TV and newspapers were an endless stream of inspiration with stories ranging from the closure of Waterford Crystal to the implosion of Irish bank share-prices. One of the many aspects of national adjustment I reported was the change in attitude toward property ownership and valuation.
I wrote: Over the past 10 years, the entire nation was engaged in casual conversation about the spiralling cost of Irish property; double-digit annual capital appreciation became the norm. Anyone with their own home felt rich. Normal people with normal jobs swapped stories of new holiday houses in Spain, France, and Florida, or in new economies further east, such as Bulgaria and Croatia. How things have changed.
Last night while working through a few property valuation models, I recalled several Sunday paper articles from just a year or two back where stock analysts were pitched against real estate agents in a head-to-head debate on where money is best invested. In an oversimplified nutshell the property argument was that someone else's money is working for you when you buy investment real estate, so, in an example where you invest 30k of your own money and borrow the remaining 270k, when the property rises 10% you've doubled your thirty grand. Easy! The stock argument on the other hand usually went something like this: since the 1950's an investment in the stock market has risen 11% per annum over the long term. Shares are infinitely more liquid than property and you don't need to borrow to buy. You can imagine which argument I sided with, and side with today more so than ever.
So, why was I working through valuation models when I don't own an investment property? Simply because I own the house I sleep in, and using metrics such as Gross Rental Multiplier and Price per Square Foot comparisons, I believe my own pile of bricks will drop a further 45% from today's levels. There are plenty of studies to substantiate such an opinion, in fact David McWilliams recently wrote a very nice article called Exposing the lie of the land that's well worth reading. If my calculations are even partially correct there's good logic in selling up and renting for the next couple of years, buying again when Dublin prices are on par with midtown Manhattan, Paris's hottest arrondissements or London's priciest postcodes.
Do I believe that a diversified portfolio of shares will fall 45% from today's prices? Absolutely not. There may be some more minor slides, but I believe the vast majority of downside is behind us. Now, can someone please help me talk my wife into selling our family home...
