Last summer, real estate prices reached all-time highs while stock markets staggered in the downturns. In a blog post at the time, we pointed out that even real estate was not immune to the economic risks that sent stocks down.

The real estate market just tends to take longer to incorporate changes in the economy into prices, which naturally follows from their lower liquidity, long-term use by consumers, and interest rate fixes on mortgages.

We have argued that factors such as rising interest rates and lower interest from buyers (whether due to an inability to save 20% of the amount or relatively cheaper rents) can send properties into a downturn or slow their growth.

Such a situation presented an ideal opportunity to sell an expensive property and buy shares at bargain prices. It could be taken advantage of, especially by people who had made a decent profit on the previous property growth and would gradually like to convert their assets into forms that require less time and nerve to manage, offer higher returns over the long term, and have a shorter time test for tax exemption.

With the benefit of hindsight, we were right. The NBS recently released data showing that cumulative property prices in June 2023 were almost 10% lower than the peak last July. According to nehnutelnosti.sk, the declines reached double digits in several districts. And even this applies only to those who managed to sell the property (many owners are waiting in vain for interested buyers even at a higher discount, or sold at a strike price, which was still slightly lower than the offer prices recorded in the statistics).

On the contrary, stock indices have been steadily recovering since the beginning of the year. Our 100% equity portfolio returned 3.3% between July 2022 and July 2023 and is up 12.2% this year alone

The chart below compares the price performance of the property and 100/0 portfolio for the period 31/12/2020 - 30/06/2023. The orange line shows the month when we highlighted an opportunity to sell property at the top and buy equities at the bottom.

People who switched assets into equities in the third quarter of 2022 based on our advice have almost 20% more money today from that investment (as they also avoided the downturn and almost exactly captured the October stock market bottom). That said, it is not impossible that the gap will widen further as rising interest rates and people's low ability to save for expensive properties continue to pose risks to the housing market.

More Comfortable Assets With Higher Yields

This blog is not to say that any prediction you hear in our communications is automatically correct. However, we wanted to point out the accuracy of this forecast because it demonstrates several valuable lessons about investing.

First of all, it proves that even real estate is not immune to downturns or stagflation. After five years of record growth, we have been faced with the notion that real estate can continue to grow at double-digit rates despite the poor economic situation. Experience has again shown that such growth is unsustainable.

We saw something similar after the 2008 crisis when real estate gradually declined for 5 years after a sharp rise and then took several more years to recover. You can see this troubled evolution in the chart below.

It therefore makes no sense to invest only in real estate in the blind belief that it will continue to grow indefinitely. Diversifying across asset classes will increase the likelihood that your assets will grow even in times of stagnation in the property market. Also, long-term data shows that stock markets tend to grow at a faster rate than real estate.

Second, it has been confirmed once again that stock markets always start to recover sooner or later. In doing so, they often react to economic data before real estate does, as processes such as selling do not take place in a millisecond, but last for a few weeks or months. Stock market downturns can therefore present a great opportunity to flip real estate into equities.

Why would you ever want to do this in your lifetime?

Shares are a more convenient form of property as you don't need to worry about them as much. With investment properties, you have to run around dealing with minor repairs, leaking toilets, slammed doors, tenant outages, or regular renovations. Even if you live in the property yourself, you have to spend a lot of energy maintaining it (many people realised this when their children moved out of the house and they were left on their own to clean and heat unused rooms and work in the garden).

Yet the goal of asset building should be to get rid of the responsibilities that take up our time and energy. So if you flip properties into shares after a certain point, you get more time for hobbies or time with family. The same argument applies if you sell the house and buy a smaller property after the children move out, investing the difference in a portfolio that will provide you with a supportive income in retirement.

Finax will offer you a discount for moving your investment when you do so. Simply provide evidence of the sale of the property and we will manage half of the amount transferred for free for 2 years. For people who decided to turn their property into shares last summer, this action has already kicked in a return. We'd be delighted if it helps you in the future too.