Home ownership is the most popular religion of the 21st century. It’s even more popular than stupidity and that’s saying something. If you wish to become a pariah amongst your fellow natives simply tell them that owning a home is not an investment, then tell them it’s potentially one of the dumbest things they can do with their capital, then duck for cover.
Those who by choice rent are a fringe group that surely can’t have all their internal organs in the correct place. Maybe they need examining? Heart? Yep, brain? Yep, lungs? Yep, radiator… ah found the problem!
It’s promoted from every level of society, and even agnostics and atheists are devout believers. Keeping the rubes in one location, and tied to that location, serves the interests of bankers and politicians extraordinarily well. “Citizens of the State” should be renamed “Serfs of the kingdom.” What better means of achieving this than getting said rubes to willingly chain themselves to an immovable, illiquid item for an eternity?
There’s no need to follow this pattern, it’s not the 18th century anymore. Technology has changed our world and how assets are valued. I contend that assets which can be moved easily hold increasing value over those that are fixed.
The home ownership “dream” is an easy sell. Can you imagine if Citizen Joe was so flexible as to be able at any time to say, “the hell with your rules and regulations, I’m outta here.” – Not optimal.
Citizen Joe might find that he can play in many markets rather than just one. Better to have Joe and Sheila Sixpack moldering in their cubicles 5 days a week in order to buy those things they don’t need, with the money they don’t have. All this while governments insert themselves into this equation by promoting home ownership and actively mismanaging interest rates in order to induce the rubes to the punch bowl. It’s standard procedure for government to do poorly what they shouldn’t be doing in the first instance, but such is the world we live in. Take a look at interest rates in the developed world and tell me this picture makes sense.
Buying your own home isn’t a bad thing provided you look upon it the same way you look at buying a toaster, which is to say realizing it’s simply a consumer item with utility, but not an investment.
Some reasons not to buy your own home:
- It’s illiquid and doesn’t pay you.
- It’s usually highly leveraged.
- It offers zero diversification.
- The job market is ruled by supply and demand. With increasing pressures on this front, being flexible with regards to your ability to move is highly advantageous. Owning your own home detracts from this. The supply of jobs in your sector in your own area is finite.
- How many people actually calculate the maintenance costs, annual taxes, and sundry other expenses of owning a home?
- Choices become limited. What if you don’t like the neighbors? What if a freeway is built nearby?
Let’s take a hypothetical example from a nearby neighborhood to me here in NZ where I am presently. You can do the same exercise wherever you happen to find yourself.
|1st year buy vs rent|
|Debt servicing interest only 6%||$24,000|
|Deposit interest 4.5% for 12 months||$ 936|
|Total expenses (rent paid less int earned)||$ (19,864)|
In order to just break even you’ll need to achieve a 2.2% increase in value of your property after closing costs. This is all very simple, easy to follow math. But here is where it gets interesting.
The home owner has no surplus over the renter. The renter, by reinvesting this difference (money saved when renting), and compounding it creates the following situation.
|$100k over time (interest earned plus savings made)|
|Year 1||$ –||$ 111,136|
|Year 2||$ –||$ 116,137|
|Year 3||$ –||$ 121,363|
|Year 4||$ –||$ 126,825|
|Year 5||$ –||$ 132,532|
|Year 6||$ –||$ 138,496|
|Year 7||$ –||$ 144,728|
|Year 8||$ –||$ 151,241|
|Year 9||$ –||$ 158,047|
|Year 10||$ –||$ 165,159|
Admittedly I’m oversimplifying here and haven’t taken into account inflation in rents, however these will impact ownership costs too.
My point is that you’d better be damn certain that you are going to get capital appreciation on your home that beats the completely brainless exercise of depositing money in a term deposit account, and I know full well that I can achieve an order of magnitude better returns than a 12 month CD.
Even if you think inflation will take home prices higher then why not buy two or three higher yielding apartments which might allow you to break even on cash flows. this way you’ll get better cash flow returns while still participating in home inflation, and you won’t be tied emotionally or physically since you wont be paying the mortgage, your tenants will.
Next week I’ll talk about what I think of the real estate markets here in Australia and NZ. It’ll be fun!
Have an extraordinary weekend. Life’s too short to have an ordinary one.
“Never invest in anything that eats or needs repairing.” — Billy Rose