Why buying a house is the worst and also the best investment?

A house is the biggest purchase people make in their lifetime. From a financial perspective, a house is a terrible investment (one should instead rent). But there are non-financial reasons that make buying a home worthwhile.

Why buying a house is the worst investment?

If you list out all the criteria you would want from a good investment; a house pretty much scores at the bottom for each of those criteria:

Returns: Return is the amount of growth in the value of the investment. House prices generally go up in value. But the fact remains that the stock market has better returns than the housing market – by a wide margin! Annualized housing returns in the past were 3.7% compared to 9.5% for stocks.

Liquidity: Liquidity is the ability of an investment to provide money when you need it – basically, how easy is it to sell an asset. It takes weeks, if not months, to sell a house.

Transaction Costs: Transaction costs are the fees you pay to buy or sell an investment. Fees on buying / selling stocks have gone down to zero. On the other hand, housing remains a high-fee business, with brokers charging 4 – 6% for selling a house.

Ease Of Transaction: Buying or selling a house can be a complex process with appraisals, inspections, reports, agreements, and a bunch of paperwork.

Carrying Costs: Carrying costs are the expenses you pay to maintain an investment. With stocks, the carrying cost is zero – in fact, stocks pay you money in the form of dividends. A house requires a lot of ongoing expenses – maintenance, insurance, property taxes, etc.

Diversification: A house is the biggest asset for most people. So instead of diversifying investments, it concentrates them in one asset. A house also locks you in a particular city, so there is no regional diversification. It further hampers moving to another place for better job opportunities.

Why buying a house is the best investment?

Despite all the drawbacks listed above, a house can actually be an excellent investment for three reasons.

Take emotions out of investing

Most people are terrible investors. If a stock goes down 50%, they become fearful and sell, thus locking in their losses. If a stock goes up 50%, they get greedy and sell, thus missing any further upside.

Frequent buying / selling is bad for investing. Real money is made by staying invested for long periods. It is a rare investor who can ignore the ups and downs of the market and remain invested for many years.

But this is precisely what a house does for you – it forces you to stay invested for decades.

If your home goes up or down in value, you will not sell it – because you live in it. So basically, a house makes you override your emotions. Your home protects you against your own emotional mistakes.

Time in the market is more important than timing the market!

Forces the saving habit

Saving is hard. Most people are terrible at saving money. If you tell someone to save a third of their income for their retirement, they will tell you a hundred reasons why that is not possible.

However, the same people will gladly pay a third of their paycheck as mortgage (home loan) every month to buy a house.

I think the reason is that a house is a tangible thing in the present, whereas retirement is something vague and too far out in the future. So it is easier to part with your hard-earned money for a house.

A house forces people to save money that they would otherwise spend.

Not all debt is bad

Investing using debt (borrowing money to invest) is never a good idea. However, housing is the exception that proves the rule.

A mortgage is the cheapest form of debt – the interest rates are low. A house enables you to borrow money cheaply and invest it for many decades. A house also offers the unique benefit of being able to restructure your debt at a lower rate (refinancing) if the interest rates fall.

In conclusion

Financially it makes no sense to buy a house. However, ‘personal finance’ is much more about the ‘personal’ aspects and much less about the ‘finance’ aspects. Given how we think and behave, it makes perfect sense to buy a house.

For us, it was the personal side of things (not the financial) that led us to buy a house.

---

Found this article useful? Enter your email below to subscribe and get new articles in your inbox.
This blog is free and does not have annoying ads. And no spam!

---