Where you put your money now, could make a big difference in the future. Picture: Supplied
Where you put your money now, could make a big difference in the future. Picture: Supplied

How to make money: Graph that exposes mortgage myth

If you have a mortgage, you might find your minimum monthly repayments have gone down a little bit. (Not as much as if the banks had passed those rate cuts on in full!)

This gives you a nice problem to solve. What should you do with this little bit of extra money?

Spend it on something good? Pay off your mortgage faster? Or invest in something else, like shares?

While the economy is screaming out for a bit of extra spending, let's assume you're going to do the boring/wise thing here. Let's compare the investing returns of dumping some extra money into housing vs. into stocks (noting of course that none of this is financial advice tailored to you, and that you should get professional advice that is tailored to you).

Since 2003, the pair have performed reasonably similarly in terms of price as the next chart shows. Whether you put $10,000 into housing or shares, you'd have ended up with about $20,000 by now.

Shares have historically performed very strongly. Picture: Supplied
Shares have historically performed very strongly. Picture: Supplied

But there are also some obvious differences.

It doesn't take a genius to see shares are much more volatile than houses. They go up and down, following Wall Street fads, depending on the whims of Kim Jong-un and in reaction to all manner of vile misdeeds that happen in foreign financial markets.

THE VOLATILITY OF BRICKS AND CRUMBLING MORTAR

Shares are risky. No doubt. But housing, too, can be more volatile than it seems.

Because when you buy a house, you don't buy the housing index. You buy a single house. Just one. And things can happen that affect its value. It might get a hole in the roof or, like what happened to some Sydney apartment owners, the walls could start cracking.

A big apartment development could go up next door. Your local school might lose its good reputation. Trucks might start coming down the road. You might just buy a type of property that becomes unfashionable.

Of course, the opposite of all these could happen. You could buy a house that just needed a lick of paint in a suburb that suddenly turns hot and your local shops could get a very cool new cafe. In which case, cha-ching! Your house purchase is a goldmine.

So it is important to look at the above chart with some caution. While it is possible to buy the share index (and many smart investors say buying the index is wiser than buying the shares that are in it), it is not possible to buy the housing index. That means investing everything you have into a house is not always as stable a choice as it seems.

Making the right choice could put you in a much better place. Picture: Supplied
Making the right choice could put you in a much better place. Picture: Supplied

STRENGTH IN DIVERSITY

One of the big merits of investing spare money into stocks is that when you do that, you're diversifying. You can clearly see on the above graph that there are times when stocks go up in value and houses go down. Diversification is a time-honoured, mathematically proven investing strategy that should get you the best risk-adjusted returns.

Australia's housing market just had a little wobble. It could have another one. Maybe an even bigger one. If it does, and all your financial wealth is tied up in your house, you might feel a little regret.

It's important to notice another thing about the above chart. It includes one of the biggest stock market crashes in history, and stocks still end up basically equal to housing. Shares do historically do very well.

The other difference between housing and stocks is the dividends. Stocks pay you to own them, which can be lucrative. Of course, housing pays you too, if you rent the place out. And your own property pays you a sort of dividend called "a roof over your head", which is a dividend on which there is no tax at all.

How you spend your hard-earned cash can make a big impact on your future. Picture: Supplied
How you spend your hard-earned cash can make a big impact on your future. Picture: Supplied

RISK AND FREEDOM

But ultimately the big question you need to answer is how you'll feel when your mortgage is paid off. If getting that monkey off your back is the biggest stress in your life, and you expect to feel deep personal satisfaction when it's gone, then that is probably the right strategy for you. You're going to feel freedom when it is paid off and have a lot of spare money too.

But if your mortgage is to you just one of a range of financial decisions you have made in pursuit of higher levels of wealth, then perhaps a diversification strategy is for you. And of course, the lowest tax option for investing like that is usually going to be through super.

Jason Murphy is an economist @jasemurphy. He is the author of the new book Incentivology.


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