I've moved from Europe to Canada 20 years ago, and I'm still coming up against it all the time - I consider home/condo a utility, a bill paid for purpose; it can go up, but it can also go down. EVERYbody around me thinks I'm crazy and that houses are #1 best investment ever.
They also tend to only look at raw numbers that look impressive unless you don't think about it too much rather than the whole picture. Grandma bought her house in 1970 for $10,000 and sold in 2005 for $100,000 (made up example). Looks impressive at a glance, however, What's the carrying cost of the house, transaction costs, inflation, and the performance of other investment vehicles during that time period?
This thinking is part of what drove the 2000s housing bubble. Its also part of what causes people to become "house poor," meaning a very large part of their income and assets go towards their primary residence leaving them unable to save any money and have no retirement fund.
http://www.usatoday.com/story/money/personalfinance/2014/05/...
>a recent Gallup poll shows that Americans now believe housing is the best long-term investment, beating out stocks, bonds, and gold.
The reality is house prices stay about lock step with inflation on average over the long haul. There's other reasons why I house is a bad investment even if they did outpace inflation. Not that they are a bad thing to buy or own, I am a homeowner myself, its just not a great financial investment.
The American government also subsidizes home ownership in various ways which can play into the fantasy.
>I consider home/condo a utility, a bill paid for purpose; it can go up, but it can also go down.
This is a great attitude. A home can be a fantastic thing to own. It is great at providing housing! It can provide a sense of pride. Its just not a great financial investment and every portfolio should be diversified even if it were.
Most Americans have no choice, because you can't buy 1/3rd of a house or a room in a house, or a basement. You have to buy the whole house and very rarely will a family be able to outright get themselves into 2 mortgages on houses in a desirable area. In other words, you're painting a picture of choice where there is none. Renting has the same underlying problem - you alleviate yourself of depreciation risk, but you take on the risk of being at the mercy of the landlord and area gentrification and being priced out of it eventually.
> The American government also subsidizes home ownership in various ways which can play into the fantasy.
Not in as many ways as you think. It's rather the higher density urban areas that subsidize the suburban low density single family houses (most of which are very shoddily constructed).
> Its just not a great financial investment and every portfolio should be diversified even if it were.
Like I said earlier, most Americans don't have a portfolio of investments of any sort. Housing is a relatively stable asset for the risk-averse, and incidentally also provides you with a place to live.
> The reality is house prices stay about lock step with inflation on average over the long haul.
The reality is that discussing real estate prices without discussing location and separating structure value from land value is a gross and useless oversimplification. Look at property values in desirable urban areas: they far outpaced inflation and have recovered after the housing crash in less than 5 years.
This applies to home ownership as well. Taxes can increase to where you can't afford to live there anymore.
> It's rather the higher density urban areas that subsidize the suburban low density single family houses (most of which are very shoddily constructed).
I'm not sure I understand what you mean. I am talking about, mostly, income tax deduction that applies to everyone. There's also the 30 year mortgage and VA loans and (I think) FHA loans.
> most Americans don't have a portfolio of investments of any sort.
Many times it because they put all their income into their house because they believe it is their house that it the key to building them wealth!! My only point was this is a common misconception. Housing is for living in, unless its an investment property that generates cash flow but that's not what we are talking about.
Buy a house, or rent, there's tradeoffs. There's pros and cons of both. Its different for everyone at different times in their lives. As I said, a house is a great place to live in! My only point is the American/Canadian mindset that buying a house is the ultimate way to build wealth is false. It might, if you are really lucky, but don't bet on it. Especially don't bet your future on it!
Yes, you have to buy housing, you need somewhere to live. A house is a good choice for many. A house may be cheaper than renting. It's just not a guaranteed generator of wealth like most people believe. You shouldn't disregard funding your retirement to buy a house. You shouldn't stop saving to buy a house. Diversify your assets.
That's a bit long winded, just don't want people automatically rule out home ownership since not only can it be a point of pride, it actually can be financially beneficial if you're willing to do the math for your own situation.
I don't think people are saying you'll never come out ahead (like one might say about someone who wants to take up daytrading). Most of the arguments I hear are, "houses are a terrible investment" or "don't think about it as an investment" and they're not trying to dissuade people from buying houses--just from buying them as an investment. Calling it an investment encourages people to buy when they should rent, or buy larger houses than they should. Houses being the largest purchase most people make and the one thing containing most of one's wealth (and the fact people only do it a few times in their life) should mean people need to be very careful about the decision. People also tend to undervalue the subjective attachment to the houses they live in, causing them to make poor financial decisions.
Like others have said, houses generally perform slightly less than inflation, there are additional costs like maintenance, taxes, and insurance people generally don't always consider. Houses are illiquid, you can move to a place with smaller rent, but you can't divest yourself of half your house (you could take a second mortgage, thought). It's also much easier to relocate when renting even if you're paying the same rent. When fixing up your house it's easy to not think about cost/benefit or blindly think your upgrades will pay for themselves.
Like I said, I am a homeowner. I love being a homeowner. But I just can't stand the myths around homeownership that people tell me. I didn't buy a house in order to get rich, I bought a house for consumption, to live in. I hope I come out ahead when I sell my home. I'll be happy as pie if I break even.
My dad asked me why I was buying a house if I thought it was a poor investment. "To live in." He was honestly confused as to why someone would buy their primary residence other than "because it's an investment."
Nobody believes a car is a good investment but we all still buy them, to use them.
>When fixing up your house it's easy to not think about cost/benefit or blindly think your upgrades will pay for themselves.
This is a great point that should not be overlooked. I think HGTV is terrible in this regards. One of my coworkers told me you should always get every single upgrade you want because you will always get that money back when you sell. This is just so untrue I find it difficult to believe that anyone would actually believe that.
Historical Graph: http://www.calculatedriskblog.com/2017/01/corelogic-house-pr...
Now, it hasn't (and hadn't) gone up as quickly as the stock exchange, but it typically is a safe place to park your equity and let it grow. And especially during the height of the bubble and currently, it's growing in value rather quickly, so people (perhaps influenced by HGTV) started viewing it as not only a safe investment but one that, with a little DIY work, could be a rather fast growing investment!
EDIT: added graph/article
https://www.moneyunder30.com/why-your-house-is-not-an-invest...
* A house has a more important primary purpose
* A house can’t be an investment if you never plan to sell it
* Thinking of your house as an investment can lead to equity stripping
* The carrying costs of a house are too high for it to be an investment
* Your house won’t generate cash flow
* Price appreciation is the magic ingredient, but it’s not guaranteed
I'm not actually arguing against home ownership, I am a home owner myself. A primary home (for most people) should be thought of more as a commodity item.
Aren't houses purchased for the intent of renting them out investments? This would argue that they are not. Seems to be proving too much.
Despite the title, this section of the article is actually about how illiquid houses are. Which, again, proves too much - old bonds are also extremely illiquid, but no one says they aren't investments.
> A house can’t be an investment if you never plan to sell it
I buy plenty of VFINX that I don't intend to ever sell. I buy them for the dividends (incidentally, the same reason I would buy a house).
> Thinking of your house as an investment can lead to equity stripping
This says that thinking of your house as an investment leads to poor decisions, not that it is wrong. Sure, maybe it does, but that's a completely different argument.
> The carrying costs of a house are too high for it to be an investment
The carrying costs of a house are typically negative, unless you conveniently forget that a house covers a short position and is thus paying you back (in the form of covering your rent). Which the article does.
> Your house won’t generate cash flow
Again, it is covering a short position. It saves you from paying rent, which is mathematically identical to forcing you to continue paying rent but paying you the same amount.
> Price appreciation is the magic ingredient, but it’s not guaranteed
This is true of all investments.
Those are investment properties which is a different thing than we are talking about. We are talking about a primary residence bought to live in.
Yes, some investments are illiquid, I have some personally, but its stupid to have your entire portfolio in illiquid assets.
>I buy plenty of VFINX that I don't intend to ever sell. I buy them for the dividends (incidentally, the same reason I would buy a house).
A house doesn't provide dividends. Unless you are talking about investment properties, which, again, isn't what we are talking about here.
>The carrying costs of a house are typically negative
Doubtful. Very, very, few people are going to spend as much on rent as they would a house. Houses have a way of eating away at your money in a way renting does not. The carrying cost of my house is certainly not negative.
Of course, "you have to live somewhere" muddles the water a little bit. But its designed to get you to think about your house as more "somewhere to live" rather than "something to build wealth."
>This is true of all investments.
Which is why we diversify, to minimize risk. The American mindset is "buy a house because your house will make you rich." So people overspend on houses neglecting any other investments or savings in the process. That's the real problem.
A house pays you by saving you rent, which as I pointed out farther down is mathematically indistinguishable from renting it to someone else and continuing to pay rent (although this is muddied a bit by tax laws that care about whether the owner is also the tenant).
> Very, very, few people are going to spend as much on rent as they would a house.
This can only be true if you're not comparing similar housing - like, yeah, if I buy a house twice as big as the one I was renting I've lost money. But if you're comparing like for like, this assertion implies that investment properties are a net loss. It's a bit curious how those rental companies stay in business.
I agree with most of your responses, though. But they are all arguments that your house is a _bad_ investment, which is different from it not being an investment at all.
Oh, yes. "So before we reno'ed your house, it was worth $300K. We put $50K into renovations and it's now worth $400K!"
Just like ... "magic". Now I know this is simplistic, as the value of an actual improvement which has had the planning, effort and time in does have a premium over the pure investment. But some of this was farcical, and lead many to believe they could do the same.