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June 4, 2012
Home Ownership: An Investment or Just a Place to Live?
An article from last month by a an American pundit predicts that housing prices in the U.S. will never recover, and in fact, except for the boom of the mid-2000s, housing prices have remained relatively flat for the last century. In 2007 he was advocating that "Renting Makes More Financial Sense Than Buying" and then last year he was advocating "It's Time to Buy that House".
He backs this up with research by S&P / Case-Shiller numbers and states that now, with inflation taken into account, U.S. housing values are equivalent to 1895 levels.
The implication of this very last somewhat startling sentence is that buying property may not be the strong, long-term investment it has often been positioned as. The article does not discourage buying property however, instead it argues that “...buyers should stop focusing on the vague hope that house prices will jump from here and focus instead on the functional value houses provide for the money.” In other words, buy your house for shelter and comfort, not as an investment. I'd argue that it should be, "Don't buy it solely as an investment."
Whether you're renting or own your own home, you are making payments for "shelter and comfort". In home ownership, house values (as per the chart above) typically retain their value over time. Over the term of your mortgage, you are paying both principal and interest. The interest can be considered similar to rent - a direct expense that never returns value. The principal repayment can be considered as your savings vehicle. Given that there is no capital gains on a principal residence in Canada, the gains are significant relative to other more risky investments that do attract taxes.
In Calgary, house values plunged in mid-2007, then when the financial markets crashed in late 2008, values plunged again. In 2012, we are just now reaching the values of the real estate market peak. So similar to the chart above, we are now in an area where it no longer makes sense to be ONLY considering renting. As the author says, there are deals out there and it may now be the time to buy that house.
Question: Should you consider the home you own in Calgary as solely a place that provides shelter and comfort, or should you also consider it as an investment vehicle that helps preserve your assets?
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