If you have a mortgage, you may find that the minimum monthly payments are slightly reduced. (Not as much as the banks went through those rate cuts completely!)
This gives you a nice problem to solve. What should you do with this little extra money?
Have a good time? Pay off your mortgage faster? Or invest in something else, like stocks?
As the economy screams for a little extra spending, let's assume you do the boring / wise thing here. Let's compare the investment yields of throwing extra money into housing versus stocks (noting that none of this is financial advice tailored to you, and that you need to get expert advice tailored to you).
Since 2003, the pair has performed reasonably similar to the price as the following table shows. Whether you put $ 10,000 in housing or stock, you would end up with about $ 20,000 so far.
But there are also obvious differences.
You don't need to be a genius to see stocks being much more volatile than houses. They go up and down, following the Wall Street whims, depending on the whims of Kim Jong Un and in response to all manner of malicious crimes that take place in foreign financial markets.
BRICK AND MASTER CURVES PROFITS
The actions are risky. But no doubt housing can also be more volatile than it looks.
Because when you buy a house, you don't buy the housing index. You buy a single house. Only one. And things that can affect its value can happen. It might get a hole in the roof or, as with some Sydney apartment owners, the theids may start firing.
Large apartment development can go upstairs from the neighborhood. Your local school may lose its good reputation. Trucks may start coming down the road. You can only buy one type of property that becomes unfit.
Of course, the opposite of all of these can happen. You could buy a house that just needed a warm, suburban color palette and your local grocery store could get a lot of cool new coffee. In that case, cha-ching! Your house purchase is a goldmine.
Therefore, it is important to look at the above scheme with some caution. While it is possible to buy the stock index (and many smart investors say buying the index is wiser than buying stocks), it is not possible to buy the housing index. That means investing everything you have in the house is not always a viable choice as it seems.
Strong in diversity
One of the great merits of investing in stocks is that when you do that, you diversify. The chart above clearly shows that there are times when stocks rise in value and houses go down. Diversification is a time-honored, mathematically proven investment strategy that should bring you the best risk-adjusted returns.
The Australian housing market has had little outcry. There may be another. Maybe even bigger. If that happens, and all your financial wealth is tied up in your house, you may be sorry for the bit.
It is important to note another thing about the table above. It includes one of the largest stock market crashes in history, and yet stocks end up fundamentally equal to housing. Actions historically do very well.
The other difference between housing and stocks is dividends. The shares pay you to own them, which can be profitable. Of course, housing also pays you if you rent the place. And your own property also pays you a kind of dividend called a "roof over your head", which is a tax-free dividend.
RISK AND FREEDOM
But in the end, the big question you need to answer is how will you feel when your mortgage is paid off. If getting rid of the monkey is the most stressful thing in your life and you expect to feel deep personal satisfaction when it's gone, then this is probably the right strategy for you. Feel free to get paid and also save a lot of money.
But if your mortgage is just one of a series of financial decisions you have made in pursuit of a higher level of wealth, then the diversification strategy may be for you. And of course, the lowest investment tax option as it will usually be through super.
Asoneyson Murphy is an economist @jasemurphy. He is the author of the new book Encentiology.