It comes after a report from Camelot Financial Group, which said property investor should consider shares for better returns. Its findings were heavily criticised – partly because the data did not take into account income from rent.
The RBNZ report used estimates of rental returns and the costs associated with property investment. It estimated that the cost of owning an investment property was about 2% of the purchase price, once costs such as insurance, rates and landlords’ time were taken into account.
Between 1989 and 2011, New Zealand investors got the best returns from investment in farms (11.9%), followed by residential property (10.2%). Domestic shares offered a 7.2% return and unhedged international shares 4.9%.
“On our estimates, property investment in aggregate generate d particularly high returns over the relatively short period from 1989 to 2011. Financial assets, on the other hand, performed less well.”
But the report pointed out that since the market peak in 2007, farm prices have fallen significantly and residential property prices to a lesser extent.
By comparison, shares offered lower returns and higher risk.
The study’s authors pointed out that while its returns were calculated on an economy-wide basis, most property investors were only able to achieve limited diversification, which increased the risk of their investment.
“While on an economy-wide basis, property might appear to have been a low-risk investment option, for real-world individual investors it has exhibited much higher volatility.”
The report warned that investors needed to take into account property’s “asymmetrical liquidity” – it’s difficult to move during downturns.
It said past returns were not a predictor of future returns and investors should diversify their portfolios.
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