by Neville Kennard, preaching and practising capitalist
One of the underlying causes of the Global Financial Crisis was a government-induced over-investment in houses and property. Governments found it to be politically convenient to make special concessions and incentives to people to own their own home. In the USA, for example, home interest-payments have been tax-deductible. In Australia a home has been Capital-Gains Tax Free. Many countries have relaxed-lending criteria for home-ownership leading to people spending and borrowing more than is prudent on their home.
All this has lead to an over-investment in houses. On top of this the house-market in many places has been buoyant, leading people to think they have made a “good investment” in their home.
For many people their home, the house or apartment they live in, is the single biggest purchase they make in their life. People tend to keep their home for a long period, sometimes changing and moving as needs and wants change. Quite often the value of their home increases over their life or ownership period. This is often due to inflation, where it just seems to increase in value, but doesn’t in real terms. Sometimes supply and demand pushes the price up, or down. Actually it is mostly the land on which the house sits that increases in price or value; the house itself mostly depreciates with age and declines in value.
With the house we live in we mostly have a loan to finance it and we pay it off over a longish period. It is a means of saving — a forced or disciplined saving regime for us. So after ten or fifteen or twenty years our house may be paid off, and when we choose to cash in and sell, it gives a nice lump sum, probably tax-free, that has kept up with inflation, and we can take our nest-egg and perhaps buy something less expensive, with something leftover to invest or play with.
Thus it seems like it has been a “good investment”. But the Global Financial Crisis has caused the house mal-investment chickens to come home to roost and house prices are dropping in many places.
There is another side to home ownership which puts the purchase of a house in a different light.
A house/home is really a “long-term consumer-durable”; it is like a refrigerator or appliance. It will last twenty years or more years and serve us well. It will have running costs, such as rates and taxes, maintenance. It will need to have leaks fixed, plumbing maintained, paint and various repairs over its life. It will depreciate; it will get old and out of date.
And a home will not give a financial return over its life; it will cost quite a lot to own. The land under the house may go up (or down) with supply and demand, but a vacant block of ground will not give a return; rather it will cost money to keep.
Now this is not to say that one should not buy and own a house to live in. Quite the opposite, owning your own home is an attractive and desirable thing to do and most people do it. It can be shelter and accommodation; it can be a source of self-expression with decorating and furnishing. You can alter and change and expand your home when you need or want to. And it is “home”. It is more of a “home” when you own it rather than rent it. And there is a sense of pride and satisfaction and security in “owning your own home”.
But it is still not a Financial Investment. If you rented your home instead of buying it and put the money into a business or the stock market or even an income-producing property you would most likely come out well ahead.
The property market has swings. Prices go up and down. Should you be skilful or lucky enough to buy when prices are low, and then sell when they are high, it will look like a good investment. But this then turns it into a speculation. And mostly we buy a house when we want or need to, and sell when we want or need to. There are often other factors at play that push us into buying and selling our home — family, job or just because it’s what we want to do.
Look upon your home as a long-term-consumer-durable. Own it, pay it off, make it the way you want it, move and swap when you want or need to, and look for other things for your Financial Investments. Look for investments that will hold their value or increase in value (in real terms) and give a return. A business, shares, investment property may do this. Enjoy your home, and if it does actually give you a financial return when you sell it, look upon that as a bonus.
Over-investment in housing and home-ownership has meant less investment is available for business-investment and more productive uses, Let’s hope the home-ownership binge is behind us. Politicians can’t be trusted to make good investment-incentive rules, so we must each think for ourselves and choose what is in our individual long term interest.
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