Housing as an Investment
Housing is still good as an investment vehicle, especially as part of a retirement plan. The trick to making it work is buying at the right time. That time may soon be coming.
The housing market is more complex than most people realize. The prices of housing and rent are determined by more factors than simple supply and demand, but are affected by government policy,
manipulation by the banking industry and the effects of the broader economy. House prices fluctuate from area to area, depending on local employment conditions, for example. Nonetheless, housing should not be looked upon as a foolish or overly risky investment, since, as we have said before, it is one of the few things which most people can invest in that are tangible and directly controllable.
The term Nouveau riche refers to people who have become wealthy during their own lifetime from a prior state of relative poverty. Usually it refers to these people’s inability to handle their newfound affluence. There are good reasons for the new rich to appear to be mishandling their new wealth. Of course, there are bad reasons too.
People who come into money without having worked for it, without having appreciated its value, tend to waste it. Nothing else needs to be said there.
People whose income rises sharply for whatever reason will want to improve their living standards. For many, this means being able to go out more, drink in coffee shops, own the latest gadgets and so on, but there are physical limits to this kind of activity. A person can only wear one pair of shoes at a time, for example.
These two aspects of the ‘new rich’ are what makes many of them a laughing stock of the older and wiser among the wealthy, as they are seen as wasteful. Indeed, many people automatically adjust their expenditure to match their income. They never think to just live as they are and use the extra to lower their costs down the track.
Contrast this to old money. Over generations, the wealthy have accumulated land and houses. The houses are furnished with the highest quality, durable furniture, carpets, fittings and so forth. When the next generation grows up, there is no need to save for a deposit on a house, no need to buy beds, tables, cutlery, crockery and so forth. Gardens are geared to food production, fruit trees are mature and have generous yields, and so forth. There is plenty to inherit. No debts, only wealth. It can even be the case that the base cost of living for these people is much lower than the average for a given community.
Yet this situation of established wealth does not require incredible amounts of money, but it can take a lot of patience, especially if debt is to be avoided. It can be achieved on a relatively humble basis if people work together and set realistic standards of living. It does require conscious resistance against the prevailing winds of consumerist opinion that constantly beat against the brows and ears of the public. Living without a television is probably a prerequisite if such a lifestyle is ever to be maintained for a prolonged period.
The Myth of Home Ownership
In the Economist is an article entitled “Shelter, or burden?” in reference to owning a house. There is a view held by many that where a person lives is unimportant, and that this part of life should be looked at purely from an economic standpoint. The Economist article makes a case that renting is usually cheaper than the cost of ownership (when all expenses are taken into account), plus it offers more flexibility. It’s a particularly easy case to put, given how poorly real estate has fared recently with regards to price. However, the article does not make a clear distinction between those who buy, largely with cash, but often with a small loan intended for a short (eg: 5 year) purchasing period, and those who buy with as little as 5% deposit cash, becoming indebted with the rest. They equate that with home ownership.
Being in debt is the same as being a slave. You cannot run away, you are forced to work hard and cannot take a break when you want, and if you fall, your master is ready to punish, to take away what little you have. For this loss of freedom, however, one is permitted to put nails in the walls, dig up the garden, renovate the kitchen and so forth, but if a repayment is missed then reality hits – the real landlord is still the bank. In many cases one is not even permitted to conduct major works on a house without the bank’s permission, so the situation can be eerily similar to renting. The number of people who own their house outright is somewhere around 40%, and less than that in Australia. Therefore, most people are really renters.
Owning a house only occurs when there is ownership of title. In many cases the tenant of a rental property is really paying the bank interest on the house via the supposed ‘landlord’. In fact, the tenant is merely abrogating himself of the risk of repossession. In such a scenario it is better to rent and not to own, all else being equal. However, there is the niggling fact that housing prices tend to rise and fall, sometimes rapidly, such that it may seem that, by not buying now, one will never be able to hop onto the ‘home ownership’ bandwagon and forever be a renter. It needn’t be so.
Different Kinds of Investment
Investment is the buying of something for the purposes of generating a profit. The idea is to have more money at the end, but this needs to be differentiated further.
On the one hand, ‘more money’ can be seen as nothing more than protection against inflation. That is, getting out of cash and into asset ownership (such as a house, or gold bullion) might be seen as a way to avoid one’s savings from being whittled away by the rise in the cost of living and taxes. Alternatively, investment may be a means to generating an income, so that eventually the investment can obviate the need to work for a living.
All investments have aspects of speculation and earnings.
The housing bubble is neither bad nor good. It represents a speculative cycle for housing as a market. As a speculative item, the inflated prices of housing several years ago were still a good buy, given that one sold at the peak of housing prices a year or so ago. Now, owning houses looks like a terrible idea in retrospect, especially for anyone who bought at the top and is now thinking of selling. However, when someone buys a house, they need to have in mind that thousands of people out there are riding the market movements, purely from a speculative standpoint. The housing crash was largely due to these speculators exiting the market in a mad rush. Just like in a stock market, the buyer needs to be mindful that, at a given part of the housing cycle, the seller might be a profit taker, taking money from suckers who have no idea about markets, least of all housing markets.
From an earnings point of view, housing can only make sense if the amount of money that the house generates (rent) less expenses is positive. If one wishes to compare this to renting, then the cost of ownership can be compared with renting to work out the balance. No better place is there than bubblepedia.net.au, to learn about this comparison in the current context. In the larger cities of Australia, for example, it is decidedly cheaper to be a renter currently. In some cases the difference can be so extreme that one has to read the text twice to confirm that one is not fooling one’s self! The point is not that housing should never be considered as an investment choice, but that now is simply not the right time to go in.
But home ownership, in the true sense of the word, should not be discounted altogether. A time is very likely to come when the price of buying and holding a house is close to that of renting in the long term. At that point, houses become a worthwhile investment as an alternative to more abstract financial instruments such as superannuation funds. There are several ways of deciding if it’s a good time to buy. If one considers the price of a house to be a certain multiple of one’s regular income, then considers the rent that is expected to be generated from the house as a fraction of one’s income, then one can estimate how many houses are needed to be bought over a given number of years to match one’s current income.
Amount of ‘House’ to Buy ($) = [ Current Pre-Tax Income $’s ] / [ Annual Rent ($) per $ of house bought]
It might mean that, to generate an income of $1000 per week, one will need to buy houses to the value of about $1,000,000, given a 5% return (a realistic and actually fairly decent amount). That’s a lot of savings, and unachievable by most people individually, since too much of their income is spent on ongoing living costs. This point illustrates, not the extreme price of housing, but the very high costs of living as brought about through high taxes and high expectations. Nonetheless, this kind of investment should not be considered unreasonable.
Housing as a Retirement Scheme
While it might take someone with one income 50 years to save a million dollars (assuming $20,000 savings per annum), it would take two people twenty five years, or three people 16 or so years, given a savings goal of 20 or so thousand per annum. Three families could save this much money to buy enough houses to provide a pension for their common parents, for example, and would have gone a third of the way already to providing for their own pensions, which their own children could contribute towards. The advantage of such a pension scheme is that it does not cease generating income after the people have died. Also, because the houses need not be owned in the pensioners’ names, the pensioners may be able to continue receiving income from other sources (such as the aged pension or their own superannuation fund).
When costing and planning a retirement scheme, it soon becomes clear that the banking industry is best avoided if at all possible. Excessive cash savings are also a liability, since fluctuations in inflation rates can quickly evaporate much of the hard earned savings. Therefore, on the way to making a cash purchase on a house there is the need to pool resources and invest in smaller things (possibly shares) to protect against inflation, but this needs to be done with utmost caution.
One stumbling block to commencing this kind of investing scheme is that many people are already indebted to a bank, and are fixated on paying off their loans first. This is a trap, because, unless their interest repayments are substantially less than rent, they are merely benefiting the bank and not themselves. One way of looking at it is to say that if one cannot afford to buy a house outright before leaving their parental home, then they should consider living in with other people for a time to minimize costs as far as possible, until they have the required savings and until the housing market is at the lower end of its cycle.
The cost of financial independence may seem prohibitive in the short to medium term, but if one were to do the sums, it becomes very clear that this freedom is bought for much less than the total cost of lifelong, trans-generational slavery to banks and government aid programs. The dividends of making good decisions now have pay-offs that can potentially last for many generations after you are dead. Since housing is a tangible, directly manageable asset which can generate a steady and reliable income, it should still be taken seriously as a way to save for retirement.