Should your home really be seen as purely an investment?

Posted by admin on June 4, 2009 in Real Estate

There is an interesting, sometimes surreal discussion, going on at Canadian Money forum about buying real estate. It is a bit surreal because it is like listening to two sides have different conversations about the same thing. Those who discourage anyone from buying real estate primarily speak from an investment angle- valuations cannot be maintained, macro-economics are not good, this is only the beginning of the end etc etc. Those who take a more conciliatory or opposite approach tend to view real estate as more than just a mere investment but as a place to live and do whatever you want to do with your life. I am simplifying greatly- there’s actually about 4-5 different themes going on at once in the back and forth.

The fundamental issue really is do you view your house as more of an investment or more of a place to build memories? It is not an either or proposition but a matter of degree.

As pointed out by others, I would argue more than any other investment (and I use this term broadly) buying a principal residence (as opposed to investment property or real estate stock) is influenced greatly by life-cycle and localized factors.

For example, if you live in a 700 square foot condo with you just had triplets, I am not exactly sure your decision would be driven greatly by where you think the valuation trends will head on a 3 bedroom home. Instead, I would venture to guess that 3 wailing babies and a very cranky spouse would basically destroy any argument based on the Case-Shiller Index (any married person relying on economic data in an argument is not married for long regardless).

Correspondingly, in large urban regions, certain neighborhoods are always seen as desirable to live and valuations tend, relatively speaking, to maintain themselves. Neighborhoods like Rosedale, Shaughnessy, Westmount, Upper East Side, Gold Coast, Georgetown etc. etc. were deliberately set up as wealthy enclaves so the question for the residents and the real estate they occupy is not “how bad are you off?” but “how much smaller is the trust fund?”

These are extreme examples but the underlying point is your home is not purely a ROI calculation. There may be family needs for additional shelter or local needs- the school zone for the good school just shifted and you have to move 10 blocks east now to be in it- which may more pressing than looking at real estate through a purely investment eye.

And this may be part of the ultimate problem. In our ADD and disposable culture we live in, we have shifted towards looking at our home as places to build memories to looking at our homes as just another investment we can day-trade in just like a penny stock and worry about its value on a constant basis.

Remember what Buffet said recently, mortgage defaults occur not because you have an upside down mortgage (the mortgage is worth more than the house) but because of negative cash flow. But look at where the dialogue on real estate is- don’t buy real estate because the valuations are too high etc. etc. its like we are talking about a stock and not the place you live.

We shifted the dialogue towards looking at our homes more as investments than places of memory. There is room for both but the pendulum shifted towards the investment end for some.

I don’t know about you but if I lived in a home for 10 years plus and built great memories in it, I am not sure I would be kicking myself if I over-paid for it in the beginning or sold it for less than what I thought it was worth. Instead, I would think it was an integral part of my life’s experience and, if my over-riding memory after all that time is I paid too much or got too little, that says a lot about me.

What are you- do you view your principal residence more as an investment or a place of memory?

8 Comments on Should your home really be seen as purely an investment?

By Mark on June 4, 2009 at 8:49 am

My wife & I decided last August to sell our 2 condos and move provinces (Quebec to Ontario).

If we would have listened to most of the peoples giving us advice, we still wouldn’t have made a decision! From “it’s not the time to sell” to “wow, you’ll have a hard time selling”… I think the best advice was from a very close friend of mine (who had done the same thing last year), who just asked me: “if that’s what you feel you should do, don’t question it, just do it and things will present themselves accordingly”…

Well, I won’t say that it wasn’t a roller-coster of emotions but we did sell our 2 properties and bought a fantastic house in our new city!

Being an Army Brat, for me a home is definitely an investment. Yes, I’ve got great memories from the time I’ve lived there but those memories will never leave me; that’s why they call them memories and the investment from both homes gave me the opportunity to not only trade up with my next home but the luxury of being able to chose the home I wanted because of the investment.

By tax Guy on June 4, 2009 at 10:29 am

I am an accountant so I tend to look at things from a financial perspective.

I personally do not look at my principal residence as an “investment” per se. In my mind, an investment is something that you generate a return over time. My feeling is that the growth rate of suburban real estate over the long term is really not that great and if you consider maintenance, renovations to keep up the property, and the impact of inflation, you will break-even at best.

By Steve on June 4, 2009 at 12:22 pm

It drives me nuts when I hear people discussing homes as investments.

You hit the nail on the head when you point out some people look at them as a commodity that can be traded instead of a place to build memories. I feel sorry for those people. If they’re only looking at the dollar value of a home they’re missing out on life. When I look at the trees in my backyard and the swing and hammock there, I see my family and the great times we shared laughing in the backyard – not a sticker price for each item.

By Canadian Capitalist on June 4, 2009 at 1:49 pm

Apart from the lifestyle factors you mention, the biggest problem I have with the investment angle is that the proponents seem to be sure of where the market is headed. My opinion is that there is a range of possibilities with asset values, each having a certain probability of occurring. Since, we don’t know the future, we can only operate with what we know today. For most people, most of the time, buying a home they can afford will work out okay irrespective of what is happening in the housing market.

Thanks for mentioning CMF.

By Potato on June 4, 2009 at 11:12 pm

I don’t really consider it an investment, but it is, at least partly, a financial decision.

“Remember what Buffet said recently, mortgage defaults occur not because you have an upside down mortgage but because of negative cash flow. But look at where the dialogue on real estate is- don’t buy real estate because the valuations are too high etc.”

See, to me the “don’t buy because valuations are too high” is not because of thinking of it like an investment, but as an expense — valuations are too high in some areas, which makes the cashflow situation worse for owning, which makes it more likely that one would run into problems. In fact, to my mind that’s how I define the valuation — if it costs so much that the interest and the property taxes and the maintenance and the insurance make it take more cashflow per month than renting, then the price is too high (and should correct any decade now).

There are a lot of factors that are attractive to owning a house, not the least of which is that finding detached single-family rentals is tough (we’re in one now and it’s gorgeous, but it’s one of the only rentals like this in the area). We hate moving, so the permanence of owning is appealing, and are perhaps willing to pay a bit more for that, against all financial sense and formulas to the contrary…

Of course, as much as my buying sooner/later seems to be influenced by the financial side, once you get into a house you like and can afford I can’t fathom treating it like an investment — selling out because you think the market peaked, for instance.

By A Lap Of The Blogs : WhereDoesAllMyMoneyGo.com on June 5, 2009 at 12:06 am

[...] Thicken My Wallet wonders if a house should be viewed purely as an investment. [...]

By FJ on June 5, 2009 at 3:16 am

Growing up, my family went through 5 different homes before I left the nest. With the exception of the last 2 homes, I couldn’t tell you if my parents owned or rented the first 3. But that’s absoutely irrelevant because it wouldn’t have changed the memories of my childhood. I think the implication that only homeowners can build fond memories is preposterous.

It’s interesting that many financial bloggers often promote the idea of living within the means. Don’t overextend your future for a splurge on today’s luxuries. Sure, spending $20,000 on a family Mediterranean trip would create memories that can last a lifetime, but at the end of the day, one has to balance the tradeoffs between costs and value.

I live in a pretty small Downtown condo but in a fantastic location. I can upgrade to a 1000sq unit, but I won’t for the same reason I don’t own a Beamer or a 52″ LCD TV; I’m content with what I have and am living within my means. As someone who has been both a homeowner and a tenant, I can tell you the memories I built in my old home is no different from the ones I’m building today in the rental. I’m gettng the same utility from the condo, and not depriving myself of anything regardless if I own or not. My furnitures would be arranged the same way. Life wouldn’t change one bit.

Hyperthetically, I can buy my landlord out by writing an exorbetent $370k cheque, but I KNOw I’d suffer from buyer’s remorse as soon as the money leaves my hand. Why would I put myself through the agony? Can you promise me that homeownership will guarantee happiness?

By jesse on June 6, 2009 at 5:24 pm

I have thought about this a lot and other people on other forums have provided great insight as to how to view the personal residence vs. investment dilemma. The “investment or not” disconnect comes from two perspectives, the macro and the micro.

First the micro. A desire to own property instead of rent will cause individuals to put a “premium” on ownership. In other words, they are willing to pay a premium to own a same property that could be rented because they want stability and control over its use (i.e. renovations, additions, etc.). This means, if a large group of people are suddenly willing and able to pay a premium to own and occupy, they will drive up the marginal price of housing.

However an investor has NO ownership premium. This means he generates his return from rents and receives no intangible benefits from owning. This means when he goes head-to-head with a bid on a property, the competing owner-occupier will win every time. And owner-occupiers have been winning — look at the increase ownership rate in the past 10 years. This has had the effect of driving down rental yields while driving up prices and has led to some landlords becoming speculators and not hedgers (i.e. relying on cash flows for their return).

Now from the macro perspective, things look very different. While individuals may prefer to own and will pay a premium to do so, with a market composed of both investors and owner-occupiers, the investors will eventually become marginal. In other words the so-called “ownership premium” must disappear for rational investors (who are not speculating) to buy again. Long story short: while you may be willing and able to pay a premium to own compared to rent you don’t have to.

So from a micro perspective, one can always justify paying more to own if their specific situation warrants paying this price. However as long as investors are acting as marginal players, the ownership boils down to being a personal preference and does not require paying a premium. It also means that those buying to occupy should be cognizant that they are overpaying from a strict financial perspective — and that’s OK: overpaying is fine if you receive benefit greater than the cost — but they should never justify ownership as an astute investment if an investor wouldn’t touch the property with a 10-foot barge poll.