Abandon All Fear

What nobody else seems to be saying…

[Housing Market Lies] Your Home Is An Investment

Posted by Lex Fear on July 14, 2007

Previous Housing Market Myth articles: House Prices Always Rise, Low Interest Rates Means I Pay Less

This one is simple so it’s going to be a relatively shorter than my previous articles. Up till now, you could simply assume I’m a bitter late 20’s Gen-XYer who is sounding off due to not being able to get on the housing ladder. But don’t just take it from me, take it from property millionaire Robert Kiyosaki, to show you why the home you live in is not an investment.

Let’s start by getting a definition of investment:

“An asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price.” – Answers.com

Wouldn’t a home fall under that description?

We need to be clear what we are referring to. A house, can be an investment, since you can purchase a house as an asset and sell it later at a profit (or loss depending on the market). A home however, is not the same as a house. A home is something you live in. You can change homes, but you can’t really sell your home unless you intend to be homeless.

Of course, you may argue, people make profit on their homes when they appreciate.

This ‘profit’ is only made when the home comes to be sold, and unless you choose to move into a home that is smaller (ie. of less value) the ‘profit’ is not going to be realised as it is invested into the new house of equal or higher value. This is further backed up by the dictionary definition of profit:

  1. An advantageous gain or return; benefit.
  2. The return received on a business undertaking after all operating expenses have been met.
    1. The return received on an investment after all charges have been paid. Often used in the plural.
    2. The rate of increase in the net worth of a business enterprise in a given accounting period.
    3. Income received from investments or property.
    4. The amount received for a commodity or service in excess of the original cost.

Answers.com

Therefore profit is what you have left over when you have met all expenses. Profit is not increase, it is less costs. Profit is what you get to take home to spend on whatever you like.

Robert Kiyosaki, the author of Rich Dad, Poor Dad, further defines your home as a liability:

In “standard” accounting, if you buy a house, you consider it an asset. However, from a cash-flow perspective, if you have to make mortgage and property tax payments, while the house produces no income (i.e., it causes a negative cash flow), the house is a liability. Anything that produces income is an asset; anything that incurs expenses is a liability. – Basic Money Skills

Don’t jump on the housing wagon thinking you can sell if it gets tough. When interest rates rise it will be difficult to sell your house for a ‘profit’ because many others will be trying to do the same thing. The best advice for FTB is to hold out for lower prices. If you’re offer is not 30% lower than the asking price, then it’s not low enough. Meanwhile renting gives you the opportunity to walk away from bad deals. It also frees you up to leave your current property if the rent is too much.

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4 Responses to “[Housing Market Lies] Your Home Is An Investment”

  1. No.

    The reason is simple. You assume that by selling a house you have buy a new one, but if you go from being a home owner to being a tenant and paying rent then you can realise all the growth in the house price that happened while you owned it.

    The fact that in the medium to long term house prices have always risen at a reasonable rate means that now would have to be a very unusual time for it to be better to rent.

    That said, I am a late 20-something who has just bought a home so I am biased!

  2. Lex Fear said

    Realistically Gav I wouldn’t go from being a home owner to a tenant, I’d become a landlord and a tenant at the same time. But I would argue that most people sell to buy. This is usually down to growing family, or location change.

    However now IS a good time to rent as I’ve explained in the previous post “Myths: House Prices Always Rise”. Yes, long term, 20 years, you will see an *average* rise, however the housing market rises in cycles- real investors will tell you that. We are on the end of a peak and the tide is already turning as the MPC are forced to raise rates to combat inflation.

    Home owners are finding their houses linger on the market longer because they are over pricing them. I watch a number of property shows and in many cases the sellers usually get an average valuation, but ignore it and simply add £30k on top! Anyone who doesn’t try to negotiate a lower price to me is a fool to pay for that.

    Of course it’s honest of you to admit you just bought, as I must be honest and say I am renting. But I am free to find a better rental agreement (as we will be doing so soon), when we come to buy, we will be free to put in low offers and walk away from a deal that seems too expensive.

    Yes the seller will reject a lower offer, and yes we will call back 2-4 weeks later and ask if they sold their home yet… and then see how ridiculous our offer seems.

    In a rising market, sure rent doesn’t make sense, in a falling market as I believe we are about to enter, rent is smart.

    Having said all that, I’d be prepared to concede that London may be different from the rest of the UK in that most immigrants choose to settle in London and that the rich get richer, while the poor get poorer- the richer simply drive up the price in the capital.

    Let’s just consider if prices did continue to rise uninterrupted. For this to happen it would mean fewer people own more property. That is more and more of the population do not own (because it is unaffordable). Our nation would become very similar to the rest of Europe where most people rent.

    This could be achieved if the MPC chose to lower rates now down to GB’s target 2%, will this happen, I doubt it.

    The government could prevent this country becoming like Europe in 2 easy steps:

    – Tax all second homes/properties
    – Put a cap on sales (eg. by band)

    I don’t see this happening either, therefore it’s left down to market forces. Both the stock market and the housing market has historically risen in cycles (or booms and busts).

  3. Stef said

    LOL

    I was telling people the housing market was overcooked and they’d be better off renting five years ago. Fortunately for them none of them listened to me

    The reason why I was wrong was that I was assuming the lenders and the people who set interest rates would act with the best interest of the majority of ordinary people in mind

    They don’t

    The housing market (and consumer spending) has been deliberately overcooked through unprecedented levels of lending/ money creation

    And the people who lend the money and set the interest rates will decide when to pop that bubble when it best suits them

    You’re probably right and it might be soon but they could just as easily keep the circus going for another couple of years

    And to be honest even you are lucky/ smart enough to avoid getting smacked in the face by any crash you’ll only end up having to bail out those who didn’t through increased taxation, increased job insecurity etc

    There are some seriously crappy times ahead for all but the few…

  4. Lex Fear said

    Yes Stef,

    I think we have to admit that, in truth, we don’t know the future and so we are left to simply analyse the indicators.

    Except some people are better at reading the indicators (or ‘times’ you might say) than others.

    Whichever way this ends it’s going to be detrimental to most. It will also be difficult for everyone to get a mortgage (banks tighten up in a falling market- even though that it’s a dumb move they are bean counters, not investors).

    They could draw this out, and they would simply be adding another couple of floors to their metaphorical tower of babel, in the end it’s going to come crashing down- it will have to unless they want to go the route of Europe.

    I can’t wait to see the effect of the baby-boomers when they come to retire/die though, followed by increasingly smaller generations. Anyone thinking they will be able to use ‘equity’ from their house for retirement is going to be in for a shock, as well as those wanting to sell to pay off the inheritance tax.

    We will then know who the real investors were, and who were simply just jumping on the end of a bloated bandwagon.

    And true, those who win from this (of which I hope to be one) are going to be left bailing out those who did not listen in the first place.

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