The case against home ownership

Home Ownership

The New Zealand property market has enjoyed a wild ride over the last decade with everyone trying to gain home ownership.

It’s hard to talk sensibly about the ins and outs of buying into home ownership when prices are only ever going in one direction. Shut up and take my money!

While it’s been one heck of a good run, the main hotspots are coming off the boil. The Reserve Bank expects historically low levels of house price inflation for the next few years. Hopefully we have a ‘soft landing’, and don’t follow Australia into a sharper correction.

As the dollar signs fade from our eyes, let’s take a more sober look at whether home ownership is actually a good idea.

Home Ownership

From an investing point of view, a house has five very unusual attributes:

1. Lack of liquidity

An asset you can free up immediately – say, the cash in your bank account – is ‘liquid’. By contrast, home ownership is one of the most illiquid investments out there. According to recent industry REINZ reports, it takes about 48 days to sell up after getting a property ready for market. That’s the median number – some properties languish for months or years without finding a buyer.

2. High transaction costs

Buying or selling a property is unusually expensive. The real estate agent’s commission and any staging or touch-ups required can gobble up about 3 per cent of the sale price. For context, that’s roughly 10x higher than the cost of trading shares.

3. Lack of diversification

The golden rule of investing is to spread your money between several uncorrelated assets, so that if any one of them fails, you won’t lose your shirt. Home ownership is as undiversified as you can possibly get. It ties most (or all) of your fortunes to one single asset, in a market you’re already heavily exposed to, assuming you live and work in the same area.

New Zealand’s huge home loans are crazy

4. High ongoing costs

There’s usually some overhead involved in holding assets. If you own a stake in a managed fund, for example, you’ll typically pay a bare minimum of 0.3 per cent in fees and expenses.

Again, houses are unusually expensive in this regard. Being subject to the ravages of time, they’re in a constant state of deterioration. That means you have to spend money just to keep them in the same condition. Then there’s rates and insurance to pay on top of that.

5. Highly leveraged

You wouldn’t go to the bank and borrow half a million dollars to invest in the sharemarket. But it’s entirely routine with home ownership using money you don’t have.

Leverage is a beautiful thing in a rising market. You might only have to contribute 10 per cent of the purchase price, and you get to keep 100 per cent of the capital gains.

In a falling market, it’s disastrous for the exact same reason. You have to eat all the losses, and might end up with negative equity.

Home Ownership

Looking ahead

Whether these factors matter depends entirely on what the market is doing. Over the last 10 years, it was actually a ‘good’ thing to be undiversified, up to your eyeballs in as much debt as possible, and incurring all those ongoing costs.

But that’s only with the benefit of hindsight. Who knows what the next decade will look like? If you get the timing right, you win big. If you get it wrong, you lose.

We have to make this huge decision on the basis of imperfect information, and the one variable we’re missing with home ownership is the one that can make us or break us.

This makes the whole business of deciding whether to buy a home through a narrow financial lens kind of silly. It’s an unappealing investment on the face of it, but I suspect the many New Zealanders sitting pretty on gigantic piles of capital gains might feel differently.

It also doesn’t make sense to ignore the non-financial benefits, which is the main driver for many buyers: having a secure roof over your head, and a place you can make into your own.

adapted from source