The "Buying a House is Always a Good Investment" Myth Persists
The question of whether it makes more sense to buy a home or rent from someone else is off topic for a blog about exchange traded funds (ETFs). But buying real estate is often cited as the single most important investment that most people make and the more general theme of this site is about investing. So here goes.
What bothers me is that a lot of assumptions are made about buying a house. I think these assumptions aren’t necessarily true and in some cases support the argument that you’d be better off renting and investing your “extra” money in the stock market e.g. via ETFs.
The first assumption that people make is that as a home owner you will be paying the same amount monthly as you would be if you were renting. As it so happens, I live in an area where this isn’t true. A home that I would buy would actually cost me about twice the amount in monthly mortgage payments than what I pay in rent. Also, taxes in my area are quite high. In fact, property taxes on the house I would buy would come to more than half of what I pay in rent. Now while you might argue that your mortgage payments are contributing to your equity in the house, your tax payments do no such thing. They don’t add any value to your house or contribute to your nest egg.
The other assumption I take exception to is the notion that buying a house is an investment. If you’re living in a house you own then it isn’t generating income for you. For your entire duration in the house, it is an expense. Even tapping in to your equity requires you to pay interest to the lending institution which is yet another expense.
This idea of constantly paying for a house is countered with the fact that your home will appreciate. The problem with this is that every other house will also appreciate. You can’t move out of your home and go to a better one since the other houses will have increased in value along with yours. It’s just like inflation. The exception is for those that can move to other locations, but I believe that isn’t something you should count on being able to do until you retire. In fact, a recent article on the Real Estate Journal comments that smaller, new development for retirees are likely going to cost the same as larger homes because these new developments are including features specific to making retiree’s lives easier.
In cases like mine, renting makes sense. I can invest the money I’m not pouring in to a house and aim for returns that have, on average, exceeded those of the housing market (excluding recent years, of course). Mind you, real estate is an important part of a diversified portfolio. Since I don’t own property, I use a REIT ETF to get some exposure.