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Debate: Should you count your own home in your net worth ‘number’?

Image of coins and a cut-out model of a house.

We’ve not one but two of our favourite bloggers guest posting today. What’s more they’re going at each other head-to-head! Roll up, roll up, for a bare knuckle cage fight – personal finance style! Okay, not really, Mr YFG and Fire v London are too polite for that. But we hope you enjoy their gentle jousting nonetheless.

There’s a divisive issue that has been tearing the nation apart forever. Bloggers are at odds over it. Family members squabble over it. Maybe you’ve even put off retiring because of it.

No, we’re not talking about Brexit. This is a far more ancient disagreement than that mere whippersnapper!

We’re thinking of the age-old question as to whether your home is an asset and an investment. And even if it is, whether you should count it as part of ‘the number’ you need in order to declare yourself financially-free and able to retire early, should that float your boat.

Parliament isn’t getting a great rap at the moment, but we see merit in a serious debate. So let’s have at it!

At the end you’ll even get to give your (indicative) vote.

  • Proposing the motion “This house believes it deserves to be included in your net worth” is FIRE v London, who is here to make the argument FOR including your home in your Financial Independence (FI) net worth figure.
  • Opposing the motion is Mr YFG, who will make the argument AGAINST.

And are you sitting down, dear reader? Because there’s a twist…

Warren Buffett’s wise sidekick Charlie Munger once said:

“It’s bad to have an opinion you’re proud of if you can’t state the arguments for the other side better than your opponents.”

We’re going to put this to the test: Each debater is arguing the opposite of what they believe.

Let’s see if we change anybody’s mind. (Maybe even our own?)

We now call upon FIRE v London to get proceedings underway.

FIRE v London: Property should be counted in your net worth

Gentle readers, the argument I am putting forward today is nothing short of simple common sense.

Property is big!

Property is the biggest type of asset out there. In the UK it is 51% of our net worth, dwarfing all other types of asset.

Why would retail investors like us FIRE1 types ignore the biggest asset class?

Of course not all properties are residential properties. And not all residential properties are your home. But what we are discussing in this debate is your primary home – where the FIREr lives – and whether this home, and any associated mortgage, counts in the Net Worth calculation you tend to do for FIRE.

The average home in the UK is worth around £250k. In London it’s more than £480k.

For most people, the savings needed for Financial Independence are around £1m. So in that context, the house you live in is an important number – potentially half of the total assets required.

Why would we possibly exclude the most important asset from the calculation?

Big as an asset but also big as an expense

Of course, property is also the biggest cost for most households. It is around 22% of disposable income in the UK on average, and a lot more for #GenerationRent – who in London pay on average more than £1,600 per month to rent a home.

From the point of view on somebody on the FIRE path, this is important. To be Financially Independent one needs to be able to meet all your living expenses, and this obviously includes housing costs. If you own your own house outright, with no mortgage, you’ll have a significantly lower cost of living.

So, in fact, this house believes not only that your primary home, as an asset, should be included in your net worth, but that your housing costs should be included in your assessment of FIRE. You can no more disentangle your primary home, as an asset, than you can forget about paying for electricity and broadband.

So far, so much common sense.

Rent vs buy? An important side question

In fact once you move beyond common sense, there are good practical arguments for considering both your asset and your housing costs in your FIRE deliberations.

It may even be that – counter-intuitively – renting rather than owning turns out to make FIRE more achievable.

Certainly in parts of London with low rental yields, renting may prove significantly cheaper, especially if you can obtain decent investment returns on the freed up capital.

This house might be better off sold! But you won’t know if you don’t consider it in your net worth.

UK property has important tax benefits

But never mind the size of it, look at the quality. Property is not just a large asset, it is also – especially as your primary home – one of the best assets. Particularly here in the UK.

In the UK property holds a special place in the heart and mind of everybody – not just those Englishmen whose ‘home is their castle’.  In Britain, property investment is ‘safe as houses’. Property is a ‘one way bet’. Stocks and shares? That’s ‘gambling on the stock market’, whereas you can put your trust in ‘bricks and mortar’.

As you can see almost every week in the Sunday Times’ Fame & Fortune column, where successful people make these arguments all the time. And they are successful people, so their arguments must be right, right?

In the UK, the taxman agrees with Fame & Fortune. Property is taxed differently to other types of asset. Crucially, there is no capital gains to pay on your primary home. If you pay off your mortgage, live in your home rent-free, and ultimately have no capital gains to pay, your primary home – the single biggest chunk of wealth for most of us – attracts no tax.

As in most places, here in the UK property is also arguably the key asset that it makes sense to borrow to buy. This means that you can get leveraged returns on it. This means you’d be crazy not to – especially for your own home, where mortgage rates are particularly low.

So, property is different. It is a large and obvious asset for retail investors to buy. In owning it you eliminate rent as a housing cost. There is no tax to pay, and you can leverage up your returns. You’d be foolish not to invest in it.

Let’s hear no more nonsense about excluding it from your net worth. Property is too big to exclude, and too attractive to exclude. That’s why this house believes it deserves to be included in your net worth!

But now I turn to Mr YFG, who is going to oppose the motion.

My YFG: Does my asset look big in this?

Whilst my honourable friend is right to call our home big, the case for it being an asset is less clear.

That’s because our homely abodes don’t generate any income or cash towards our FIRE target.

As Robert Kiyosaki of Rich Dad, Poor Dad fame points out, a home creates a negative cash outflow. For example, a mortgage, maintenance costs, bills and taxes. That makes it a liability!

My friend and rival also correctly points out that whether you should rent versus own your own home is a serious question to ask. This follows from the above. A bigger, more valuable house means you need to hold greater and greater amounts of other assets to balance out the cash outflow.

It also means leaving money on the table. The research shows that in the UK, investing in the stock market has beaten investing in property.  Money in your house is money out of the market. Money out of the market is the lost returns needed to finance FIRE.

Overall, the bigger your house, the harder it is to reach FIRE!

Alternative facts

Putting aside whether a house is an asset or not – can we even claim it’s big?

Valuing a home is very difficult. Unlike shares in an ETF (or FIRE bloggers), no two houses are alike. Sure, we can get a valuation from our local slick-backed-hair estate agent. But the ‘true’ value is only known when you come to sell.

Those mansions in Florida were quite valuable until they weren’t. Likewise the owners of former homes in Dunwich thought little was safer than houses… until the North Sea developed a taste for bricks and mortar.

This means that if you include your own home in your assets column the number is a little bit ‘fake news’.  It’s not a ‘real’ number like the cash in your bank account. It may never be realised.

Liquidity

The main point of our FIRE stash is to fund our living costs. All those craft beers and avocado on toast won’t pay for themselves! And this is very difficult with a house.

As mentioned above, a home generates negative cash flow. But even thinking in capital terms, it’s tricky to realise capital amounts, too.

Unlike stocks and shares, we can’t just sell piecemeal amounts of our own home into the market as needed. Nobody would be interested in buying a quarter of my guest bedroom, and not only because of the mound of bric-a-brac I’ve stored in there.

To realise money from our own house we have to sell it all or else take out big remortgages. That makes your own home a really bad investment for funding living costs.

Mums and their sons

My honourable friend is quite right: An Englishman’s home is his castle. I love my home. And this level of emotion makes it very difficult to stay rational.

My home is the best home. Just like my mum’s son is the best son in the world.

So when it comes to my home, I have a huge blind spot. I’ll always be tempted to bump the value of my home up in a way that I can’t with my index fund investments.

My home is more than a number in a spreadsheet. As a rational accountant I must guard against that, and discount whatever value I magic up for my home.

In summary my case is this: we can’t categorically say a home is an asset as it loses money. Whilst it’s a big expense, it’s hard to put a real number on it. Any number we do conjure up is contingent on a future star-crossed home we’re in love with making it rain in our bank account. And even that number is probably unrealistically high because who doesn’t love their home?

My case rests.

Who is right? You decide

Well, there you have it. Two opposing points of view on a key question facing any ambitious seeker of Financial Independence.

What do you think?  If you rent, is buying your own home part of your financial plan? If you own already, what will your financial independence look like in the future? What arguments are we missing?

Please vote in the poll and expand your thoughts in the comments below!

Should you include your home in your Financial Independence net worth sums?
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{ 74 comments… add one }
  • 51 chrisB April 19, 2019, 10:43 am

    For me, a home is a FIRE asset – but only the excess above the what I consider the minimum.

    For example: say my home is worth £750k and mortgage free, but I’d be happy to trade to a home worth £500k. I have to live somewhere, so that £500k baseline has no value to me. The FIRE value is the £250k excess that I could realise if I wanted or needed to.

    CB

  • 52 MrOptimistic April 19, 2019, 1:55 pm

    In terms of the intent of saving, the answer to me is a very obvious ‘ no’. It would be a peculiar interpretation of financial independence if you were to claim independence or freedom on the basis of having to realise the cash value of your home. Ok, if you want to set up a personal balance sheet and preen yourself at the next dinner party, then yep go for the biggest number you can. Could flog the car and sell the children into slavery too. So in terms of answering a real life question, like can I afford another expensive holiday this year on my drawdown retirement income, then the value of the house, or its equity, is irrelevant.

  • 53 ermine April 19, 2019, 3:48 pm

    Interesting debate and clarifies some of this for me. I consider net worth to be investable assets that generate income, so I don’t include my paid off house because it’s not investable. Though I do take the point on the income-like imputed rent I don’t have to pay 😉 It is an asset though. Sort of similar to a car- that is an asset inasmuch as it performs a useful service, but a car isn’t usually an investment, quite the opposite, as a wasting asset.

    I am puzzled by

    > In the UK it is 51% of our net worth, dwarfing all other types of asset.

    WTF? My half of the house is worth less than my ISA of 10 years standing. It is not a starter house, detached in a pleasant part of a provincial town. In no way does it dwarf other assets, probably less than a quarter of the rest of my NW. I bought the house a couple of years ago, so it is sort of marked to market, it’s not a place I bought twenty years ago for threepence ha’penny.

    I am low down in the wealth pecking order of Monevator readers, let’s just say things like the LTA don’t trouble me at all, one would expect fixed costs to be higher for me than average here.

    Maybe expensive London skews it for the ONS, more than 10% of Brits live in London. Perhaps Monevator readers are mostly BTLers or something, so they have a higher exposure to residential property than most. That stat looks fishy to me, and a lot of the assumption behind this debate is that a house is such a huge part of one’s assets that it can’t be ignored.

  • 54 ZXSpectrum48k April 19, 2019, 7:08 pm

    @ermine. Based on the most recent ONS data (https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/wealthingreatbritainwave5/2014to2016), total net UK private wealth was £12.7 trillion, of which property was £4.5 tr (35%), pensions £5.3 tr (43%), financial £1.6 tr (13%) and physical 1.2 tr (9%).

    Now I have some issues how with the methodology of these survey. I think, however, as a broad brush guess it may well be about right. ONS data is inconsistent on this partially because of the impact of DB pensions. If, as in this survey, you capitalize the DB pensions then this dilutes the impact of property wealth. If you ignore them and see them purely as a forward income stream, then UK private wealth drops about £3 trillion and property ends up being around 50% or so.

  • 55 ermine April 19, 2019, 10:12 pm

    @ZX I wonder if the ONS count housing wealth as unencumbered by a mortgage, which will massively overstate its value for most people for most of their working lives. It is the mortgage company that owns most of the house for most of the time, not the borrower.

  • 56 oz April 20, 2019, 10:09 am

    I can’t make my mind up here. They are most certainly assets and certainly do come with special tax status. Probably not good to include it in FIRE calc though, unless you have a specific plan to downsize and maybe realise 50% of the equity?

  • 57 MrOptimistic April 20, 2019, 11:33 am

    When do we get the result ? 🙁

  • 58 Doug April 20, 2019, 11:49 am

    Is you house part of your net worth? Yes. You should include the property value less mortgages.

    Should you include your house in your FI number – No. Unless you intend to sell in future.

    Should you include the interest cost of mortgage in your expenses as part of the FI calculation. Yes.

    Should you include any income you generate from the property as a deduction against expenses. Yes.

    Should you include any capital repayments to the mortgage in your expenses? Yes. Unless you plan to sell in the future to access these funds.

    Hope this helps the debate.

  • 59 The Rhino April 20, 2019, 2:42 pm

    @Ermine

    In no way does it dwarf other assets, probably less than a quarter of the rest of my NW.

    Right thats it! I’m moving to Somerset!

    @ZX – Thanks for the answer. I think your right – off-topic and an absolute hornets nest so best avoided (until its on topic anyhow ;))

  • 60 ZXSpectrum48k April 20, 2019, 2:59 pm

    @ermine. The ONS methodology implies wealth is net, so any mortgage should be subtracted. I have my issues with these surveys since I’m not really certain how they can possibly get accurate info on some of this. Wealth is so much harder to track than income.

    At the end of the day, however, I don’t find it hard to imagine property being between 35%-50% of net wealth in the UK. We are a property obsessed nation. Personally, I try to keep it below 25% but I think I’m the exception rather than the norm.

  • 61 The Investor April 20, 2019, 4:20 pm

    @MrOptimistic — There’s an update in the latest Weekend Reading in the Monevator section. 🙂

  • 62 MrOptimistic April 20, 2019, 8:33 pm

    Ah, so there is. The majority got it wrong again :).

  • 63 Vanguardfan April 21, 2019, 10:52 am

    Well this is only anecdotal, but in working as a Pensionwise guider in the north of England, I can absolutely believe that housing represents a high proportion of wealth. I see a lot of people on modest incomes who have a paid off house, which even in this area will be worth in the low six figures. I see very few with six figure pension pots. (The DB valuation is of course important – I don’t see people who only have DB pensions, there will be a lot of them out there, but any method that values DB pension as a cash amount will, I would have thought, end up with DB wealth coming a close second to housing).

    The reason I think is pretty simple – it’s the way that buying a house forces you to save – most people want to own a home, and will commit to their mortgage payments as a high priority. It’s much harder to feel committed to saving into a pension.

  • 64 Ecomiser April 21, 2019, 4:20 pm

    For inheritance tax and similar purposes, my house is an asset; for any other purpose, I don’t count it.
    I’m not going to sell it (and if I do, I’ll need somewhere else to live, which will cost money). I’m not going to make money by letting the spare room as 1) I value my privacy, & 2) it’s not really spare.
    If I count the imputed rent as income, I’ve also got to count it as an expense I have to pay, so there’s no point to that.
    The house is only about one sixth of my total net worth at a generous estimate, and my net worth is much less than many of the commenters here talk about, so overall, it’s not worth including in the calculations.

    It’s now ten years since I retired six years early, and I find I’m still accumulating because there’s nothing I want that requires spending lots of money. Maybe I’m doing something wrong.

  • 65 Matthew April 21, 2019, 4:39 pm

    We could include the annuity value of the state pension in NW… (If we do so for DB pensions)

  • 66 Lukas April 22, 2019, 7:53 am

    Very interesting debate!
    I would add some additional arguments:
    1) There is little doubt that the home should be an asset and the mortgage a liability (in accounting terms, not in Rich Dad, Poor Dad terms 😉 – so certainly it should be included in the net worth calculation
    2) Calculating net worth should be simple as opposed to making it a sophisticaed science on which assets are FIRE assets and which not
    3) The home provides a benefit, which is housing without having to pay rent. This benefit also continues if you FIRE! Thus, your home reduces your cash living costs which helps you reach FIRE earlier, through lower living costs.
    4) The calculation of FIRE should be based on the coverage of cost through passive income streams and not through an asset value

  • 67 Vanguardfan April 22, 2019, 9:50 am

    You shouldn’t count imputed rent from an owned house without also counting the ongoing maintenance costs, which can be substantial.

  • 68 TheFIJourney April 22, 2019, 6:15 pm

    I find the comments a very interesting read. I think for me, I consider my home an asset for sure. It would be included in any net worth figure for that reason but I don’t really think about net worth much so it goes unnoticed at times. My FI calculators certainly don’t include it but they are affected by it as I obviously require less income as a result of owning my home outright.

    Referring to my home as an investment is different, in one way it certainly is as I like to hedge my bets in some way and like the idea I still have my home even if this whole continuous stock market growth doesn’t quite pan out as hoped. In another way though, it isn’t as it doesn’t go into my spreadsheets as said earlier. I certainly would not want to rent out a room but it might one day be sold for downsizing or other reasons, who knows.

    I think the other arguments for, if I had my home would I be better selling it, renting and then pocketing more gains from stock growth etc might pan out as being true, maybe there is some opportunity costs in some ways but for me, owning my own home feels wonderful, I don’t feel the need to move or travel so I am happy here. I am close to family etc. I will gladly take a hit on opportunity costs if it means I sleep better at night. If my quality of life is higher because I feel more comfortable etc. It’s a personal thing and it’s a no brainer for me.

    I don’t include my personal or state pension in my FI calculations either as they are icing on the cake as it were and extra levels of defence in older age. I only count my cash liquidity and ISA investments. Waiting until 68 or older to release these makes me not include them for FIRE but they would be part of overall net worth.

  • 69 American Fool April 24, 2019, 10:10 pm

    Net worth includes your home. It is a potential resource. You can’t rationally assess your financial situation without factoring it in. At the same time, it is illiquid and allows you to avoid rent payments. Classifying your home the same way you do liquid assets is ridiculous. This is why so many people exclude a home from their calculations. However, just because you don’t think of a home as an “investment” doesn’t mean you shouldn’t think of it at all. A lot of people have significant equity in their home that can be used as a backup plan in retirement, or to fund a move to a lower cost of living location.

    I have two subtotals in my networth calculation. The first is all my liquid assets and retirement accounts. The second includes our home, our second property (purchased for a family member), and our business (whose sale price is also highly variable.)

    I utilize the first subtotal in our calculations of retirement income.

    I utilize the second subtotal as sources of potential emergency income… to fund plan
    D, plan E, as desired, should events conspire against us despite our extensive planning. (Plan B is our emergency fund, Plan C is our Heloc)

    This also allows us to celebrate passing net worth thresholds twice!

  • 70 Figure_me May 3, 2019, 2:00 pm

    Good article, but missing a few key points. You could rent your home via airbnb whilst living elsewhere therfore that generating profit if rent>mortgage.

    A home is only an asset when the mortgage is paid off. Yes you pay running costs but dont forget you pay running cost when you invest in stocks and bonds via – management cost, account/expense fees, stamp duty, trading fees and capital gains from rebalancing positions.

    Bottom line – if there is no mortgage the house moves from liability to asset on balance sheet.

    If this werent the case you wouldnt have inheritance tax to contend with when you die.

  • 71 The Investor May 3, 2019, 3:54 pm

    @Figure_me — Thanks for reading and for your helpful comment. However I disagree with your statement that:

    A home is only an asset when the mortgage is paid off.

    Let’s say I have a house I bought for £500,000 with a £490,000 mortgage. After 25 years I have one final £500 payment left to make.

    According to your statement it is not an asset at this point, it is a liability. I should pay you to take it off my hands! 😉

    I’m sure we’d both agree this is an absurdity. My house clearly has value to me; probably at least £499,500 of value (ignoring house price inflation).

    It is an asset.

    If we both agree that in this extreme case that it’s an asset, then it’s just a matter of arguing about where this is true on the spectrum. I’d argue it’s an asset at any point where housing equity is greater than outstanding mortgage. 🙂

    I understand thinking of a house as not-an-asset may be helpful from a mental accounting perspective. I also get that people may feel the special nature of home ownership makes it harder to value, or difficult to realize the value.

    By all means apply a discount to the asset in that case, to reflect those concerns. But neither one’s preferred mental accounting or one’s reluctance to rent means a home is not an asset. 🙂

  • 72 Matthew May 3, 2019, 9:51 pm

    Once you pay off a mortgage completely, you ‘re more vulnerable to “title deed theft” where somebody steals your identity and sells your house from underneath you, and in law an innocent buyer is more protected than the fraud victim, Landlords and people who don’t live in a house are more vulnerable since they wouldn’t necessarily notice viewings. You can (for free) register to be notified by the land registry of any searches on your property.

    Also when you sell, theres the risk that your emails will be intercepted and your conveyancer told to pay the proceeds into a different account, it has happened before and people have lost money.

    Ownership of property is only denoted by land registry computer, its no more tangible or “bricks and mortar” than shares and bonds

  • 73 Doug May 6, 2019, 5:04 pm

    I like your thought experiment. With your assumptions, you’re correct that your net worth position would remain unchanged. Unfortunately, transaction costs on a house purchase do reduce your net worth. So in your though experiment you will be worse off on a net worth basis assuming you have to pay stamp duty and solicitors fees. These costs are irrecoverable. Technically you should also factor in the PV of the costs to dispose of your property too.

  • 74 Richard June 4, 2019, 1:27 pm

    I live in a University town and have been renting rooms in my main homes for decades. They’ve *always* been a positive cash flow for me. I can tell you now from my house spreadsheet that my home generates a 4.6% positive return for me (including imputed rent, mortgage, taxes, bills, and maintenance) *on top* of capital growth. So there’s no way I’m not including it, and I don’t buy the argument for excluding any home from your calculations, as long as you take into account the liquidity of your various assets.

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