Gearing up works both ways - Mary Holm

Thursday 25 March 2004

Q. I have been following with interest the debate between investment property versus alternative investments, particularly shares.

By The Landlord

While I understand that most people recommend some diversification in investment and can see that historically the sharemarket does provide good returns, I have seen no mention of one point that seems crucial to me.

I borrowed $1 million from the bank to invest in property, by putting up $100,000 of my own money. Over the past five years the property has almost doubled in value, thus returning almost $1 million on paper.

If I had invested my $100,000 in shares the profit would be what? About $100,000 at best, I would guess.

Is it not true that if you can access 10 times as much money via the bank, that over a long period of time, say 20 years, property is always the winner because your gains increase tenfold?

Consumer magazine (March 2004, page 17) says "the average New Zealand house price has grown at over 8 per cent per year over the past 25 years".

Please explain how alternative investments can ever match this return over a long period of time.

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