Homes as investments (again)
I am revisiting this subject (I last wrote about it here), and I know it's a slightly contentious one. I have come to realise that people love houses, and generally they think of them as good investments. You can touch them, feel them, see them and of course live in them. They feel safe. But how safe are they really? A saying I heard recently (I can't trace the origin) is that a house is a large liability masquerading as a safe asset.
The thing with home ownership is that people tend to do it for a really long time. Decades or more. So when you look at the appreciation you think you've made a lot of money. As Morgan Housel pointed out, if you bought a house for $100,000 in 1970 and it's worth $600,000 today, you've earned nothing after inflation. You think you've made a fortune, but you haven't gone anywhere. If you take your costs into account (insurance, taxes if you had to pay them, renovations and repairs) then you're down. Well down.
An article published this year by Ken Fisher was particularly illuminating. He writes about the myth of housing as a good investment:
"Yes, you might make money if you spot some trend, then buy right, at the right time and the right location, then put lipstick on a pig (which few do well), and flip it. It’s a comforting mythology, like reality TV. Folks routinely fool themselves by calculating returns dead wrong."
He goes on in the article to cite some interesting figures. He takes a very profitable decade for home ownership in the US and a very profitable part of the country. He took the medium home price in 1995 in San Mateo in Northern California of $305,083 and supposed that you put 20% down. He then assumes that you sold at the medium home price ten years later which was $763,100. Using a few assumptions on mortgage etc. he calculates you would have made a gain of $551,263 (read the article for the full analysis). That's an annualised return of 23.4% on your original investment of $61,000 (your 20% deposit). Not bad you say!
But that's before costs.
"Problem is you forgot a mega boatload of expenses."
Once you take into account the principal and interest payments, along with average home upkeep, closing costs including real estate agent's commission, property tax, and a small amount on renovations, your annual return was around 10.8%.
Still not bad you say.
It is comparable to the return of the stock market over the same period.
But this was amazingly lucky timing in one of America's then hottest markets. Most Americans haven't been so lucky.
Ah, yes, but Cayman is different I hear you say. Is it though? Really? There are hotspots here for sure, but again, it's all about lucky timing.
I do tend to agree with Mr Fisher:
"The real value isn’t the investment, it’s the roof over your head, the satisfaction it brings and the memories it creates. Home ownership doesn’t compare with real saving and real investment, where real retirement millions compound over your lifetime."
We all need a home to live in. And for many, there is great joy to be had from a vacation home. Buy the home that is right for your family. And if you can afford to then by all means own a vacation home (or two or three) in a part of the world that you love to visit and where you know you will create lasting memories for your family, your children, your grandchildren. But don't go into house purchases thinking they will be your retirement plan. For that, a wise diversified portfolio of investments really is the only way to go.