Last Updated on 23, March 2014
Property investment appears to be a better investment due to the following reasons:
- The property value appears to be less volatile than the stock market
- The capital gain seems to be larger compared to stock investments
For (1), the property value appear to be less volatile is due to the fact that property are illiquid assets that are seldom traded on the open market. At any one time, the number of properties being traded is many time less than the total properties in the market. Due do this lack of liquidity, those who wish to know their property value is required to make a valuation. The valuator will use various appraisal techniques which tends to "average" out the property price. What will be observed will be a property price that seems to be less volatile compared with other type of investments such as stock. In reality, the fair price of a property is the actual transaction by two informed parties at arm's length. Since properties are seldom traded, the "fair price" is only estimated using appraisal techniques. In other words, the seemingly low volatility of property price is merely an illusion.
For (2) The capital gain appears to be larger because most property investors leverage using mortgage loans. Secure loan such as mortgage loan is easier to obtain than unsecured loan. The leverage effect tends to amplify the gains (or losses). However, the cost of capital which is the interest of these loan is based on the borrowed amount and not the investor's own capital. Thus, many people fail to account for the large interest that they are paying. Hence the seemingly larger capital gain can be quickly eroded by the high interest being paid. Much of the transaction cost (like agents' fees) are based on the price of the property and not the investor's own capital. Thus, the transaction fee is extremely high for leveraged purchase.
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