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Why your house is an investment, and an asset, too

Your house may be your home, but it’s also an important asset and a big investment

Some of you who read the headline above are wondering what revelation Monevator will bring you next.

Magic beans aren’t legal tender? Money doesn’t grow on trees?

Of course your house is an investment. Of course it’s an asset.

But from experience I know other people are up in arms:

“My house is not an investment! I will not consider it part of my net worth. My house is my home. It is not for sale. I have to live somewhere!”

The best that can be said for their viewpoint is that unlike much wrongheaded financial thinking, this particular form of fiscal foolishness doesn’t do much harm (aside from raising my blood pressure).

It’s not like thinking you borrow money from a bank (no, you borrow from your future self) or ignoring the impact of compound interest (clue: it’s enormous) or ignoring the time value of money.

In fact it’s likely a beneficial delusion.

Treating your home as a long-term commitment rather than a token to trade is a big reason why people usually do much better owning their own property than they do investing in shares.

But that doesn’t make them right.

Your house is an investment, an asset, and a big part of your financial net worth, regardless of what imaginary friends you had as a child or whether you avoid walking under ladders or whether you Feng Shui your home, or any other irrational thoughts you have about money.

The things they say

It’s so blatantly obvious to me that your own house is an investment, I’ve put off writing this post for years because I’m afraid I’ll sound like a patronising nursery school teacher asking if everyone is happy.

“Yes miss, I’m very happy today as I haven’t yet fully integrated my prefrontal cortex. Also, I think I’ve wet my trousers.”

Instead I’ve decided to just sound angry.

Twice in the past month alone, two financially astute people who I have a lot of time for declared to me that their house was not an investment.

And something snapped.

This madness has to stop!

Since by any normal measure it’s abundantly clear that your house is an investment – you go and buy a house, it increases in value, one day you likely sell it – normal weapons clearly don’t work on this form of muddy thinking.

Instead, we’re going to turn their own puny but persistent arsenal back on itself, by tackling each of their feeble defences in turn.

So let’s run through the things they tend to say, and why they’re wrong.

Incidentally, I’ll use the words investment and asset interchangeably, because they both apply.

You can also insert “part of my net worth” because they also claim a house that’s worth many multiples of their annual salary is not part of their net worth, too (I know! And these are sane people!) but it’s very clumsy to write that out.

“My house is not an investment because I don’t intend to sell it.”

Just because you don’t have plans to sell your house, that doesn’t mean it’s not an investment.

It’s an investment that you’re not selling right now. Simple.

Many of Warren Buffett’s friends and family never sold all their Berkshire Hathaway shares, and they became mega-rich because of that. They’d maybe borrow against shares to buy homes or similar, but they never sold out completely.

And you’ll notice that financial journalists don’t tend to write:

“What a shame Warren Buffett’s early friends and family didn’t make an investment in Berkshire Hathaway, because it looks suspiciously like they’re very wealthy on the back of those shares they didn’t sell. I guess it’s some sort of money illusion. Nice sports car, mind.”

Most people move houses several times. Strangely enough, when they come to buy a new house, they usually sell the current one.

When they do sell, they expect not to see change from a twenty. And the rest.

They want paying! From the sale of their house that isn’t an asset or part of their net worth. (Right…)

Young people renting houses up and down the country are not priced out of the market because estate agents will only sell to people who’ve painted their own walls and visited a Dunelm.

They are priced out of the property market because people bought houses, and those houses have gone up in value – like good investments do – and sure enough those homeowners want paying if somebody else would like to own their house.

If it walks like a duck…

Your house is an investment.

“My house is not an investment because I need it to live.”

No, your house is a very valuable investment because you need it to live.

It’s funny how people don’t consider their homes an investment, and yet they’ve no such confusion about pensions.

One day you’ll need to live on your pension, too. It’ll prove a good investment. Like buying your own home.

“My house is not an asset because I need to live somewhere.”

I know this will shock the smugger homeowners out there, but everybody needs to live somewhere. Those of us who haven’t bought our own homes don’t retreat to the woods at night to forage for snails and sleep upside down with the bats.

The fact that you need to live somewhere is one of the very good reasons to buy your own home. It can be the cheapest way to pay for living somewhere, in the long-term, not least because you end up owning a valuable asset. (Oh the irony).

If you chose to you could sell your house tomorrow, bank the cash, and start renting. You wouldn’t die like a clownfish flapping about on the High Street pavement, gasping for air.

You’d have traded one investment (a house) for another (cash in the bank).

“My house is not an investment because it doesn’t generate a return.”

Yes, people really do say this. Push them and they might say:

“Well I don’t even know how much prices have gone up, I don’t even look in the estate agent’s window. I don’t even check on Rightmove three times a week. Not usually. Not before lunchtime! My house is not an investment”.

Well, good for you, but even if that’s true, your ignorance about the value of your investment doesn’t mean it’s not an investment.

Warren Buffett says he wouldn’t care if the stock market didn’t open for a decade. He doesn’t care about day-to-day prices either. But every one of his shares is an investment.

It’s one of the biggest divisions in this country that those who’ve owned property for more than 20 years can utter this sort of nonsense with a straight face, having bought their homes for the equivalent of couple of iPhones and a pint of fancy cider.

But there you go. Their house has been an outstanding investment – likely multiplying their initial deposits five to 30-fold or more – but, I know, it’s a home!

That long-term tax-free capital gain is only one part of the return that you get from owning your own house, by the way.

You can also rent out rooms in a house. You happen to rent out rooms to yourself and your family. Economists call it imputed rent.

As we all agree, you have to live somewhere, and generally you have to pay rent for that somewhere, too. (Don’t tell your parents, generation boomerang…)

If you own your own home, it’s imputed rent all the way for you. Which means you’re a money-grabbing landlord (to yourself) as well as a moony-eyed homeowner.

The truth is you’re killing it in this investment game by owning your own home!

“I have to spend money doing up my house.”

This doesn’t mean it’s not an investment.

It means you have to spend money maintaining (or increasing) its value.

It means it’s not as lucrative as it might seem. It means it’s a less convenient asset than a fund held in an online broking account.

It’s still an investment.

“A house is illiquid.”

I agree. It’s an illiquid investment.

I have small cap shares that I bought in batches of a few hundred at a time to avoid moving the price. They’re still investments, too.

In the midst of the credit crisis, the Qataris and other sovereign wealth funds bought half-finished skyscrapers across London that nobody else wanted. They got them cheap, and it’ll be years before they sell. They’re investments.

I could go on for hours.

“My house is not an asset – I have a huge mortgage!”

Aha! At least here we have an appreciation of assets and liabilities. However it’s still wrong.

The fact that you have a £200,000 mortgage, say, on your £300,000 house does not mean you don’t have an investment in property worth £300,000.

You do. It’s just you also have a debt secured against that property to the tune of £200,000. The net asset value of your investment in property is £100,000.

This is true even if you’re in negative equity, incidentally. In this case you have a negative net asset value. Not good, though a lot better than if you had no house at all to net against the £200,000 of debt.

By the way, your bank won’t make the mistake of not counting your house as an asset if push comes to shove.

Despite the fact you live in it, that you have to live somewhere, that you have pictures of your kids on the walls and you painted those walls yourself – ah the memories! – your bank sees your repository of dreams as an entry on a spreadsheet that enables it to lend you the money to buy a house in the first place.

Just ask somebody who’s had their house repossessed.

Alternatively, go to the bank tomorrow and explain to them that you don’t want to buy a house at all. You’ve read on some different blog that a house is NOT an asset and NOT part of your net worth – I know, bizarre – so you really can’t see the point of owning one.

But you would like to borrow £200,000 to spend on a fancy tent and a lot of camping fees.

Oddly enough, your bank won’t lend money against your vagabond dreams.

“I don’t pay tax if I sell my house, so even the government knows it’s not an investment.”

Someone actually said this to me once. I didn’t know whether to laugh or commandeer a bus to run him over, and then reverse to make sure.

I know I’m inclined to take this one personally, given I juggle capital gains tax on a few puny thousands of pounds worth of shares while countless friends have made six-figure sums on their homes tax-free over the past two decades – and then I even take stick on this blog for trying to minimise my CGT bill – but anyway, for the love of all that’s Holy, just because you have an almighty tax break on your house doesn’t mean it’s not an investment.

It’s just another way in which it’s potentially a great investment.

“There’s no point me considering my house an investment, because it would make up most of my net worth!”

This doesn’t mean it’s not an investment.

If you actually totted up your own personal balance sheet properly, you might better appreciate that you’re very exposed to one asset class – property – and very light in most of the others – cash, bonds, and equities.

“House prices don’t go up so much once you take into account costs and inflation.”

An interesting point. But while I’d take a lot of persuading that houses are a bad investment, presuming you don’t buy in the middle of a bubble – I’m not actually arguing in this article that houses are a good investment.

I’m arguing that houses are an investment, good or bad. Which they are.

“It’s only worth something when you sell it. Otherwise it’s all paper.”

An ex-girlfriend used to say this all the time. She was smart but had some funny views about money.

By this measure only people who keep all their money in cash are rich, and the rest of the world’s wealthy are phonies.

This means Forbes will have to rewrite its rich list to focus on drug dealers, prostitutes, tin can millionaires, and Scrooge McDuck.

While it’d make for an interesting read, it’d also be wrong.

As rich people everywhere know, you don’t have to sell something for it to be worth something.

Another brick in the wall

It’s very simple. You invest in a property, you probably bought it with a mortgage that you pay off over the years. Eventually you own the house and you can live in it or roll the money into a new one.

While owning it you live seemingly rent-free (or more accurately enjoying that imputed rent, and please note I didn’t say ‘cost-free’) until the day you die or achieve immortality by cryogenically freezing your brain and encamping yourself in your living room amongst all those lovely things you own and those nails you hammered into the walls (“my house is not an investment, I just don’t want to ask a landlord for permission to bang in a nail!”) for all eternity.

And you can sell or downsize or trade-up your investment along the way, too.

If a 70-year old woman sells her rectory to buy a smaller and more manageable two-bed flat, she is not obligated to pretend she hasn’t got a six-figure sum in the bank that doesn’t really exist because her house was a home not an investment.

She’s allowed to spend the money she gets from selling her investment, including the capital gain she made it.

Somebody else might end up renting all their lives (foolishly, in my opinion, but it’s what I’ve done so far so there you go), investing in shares or other assets, and eventually have a portfolio that pays their rent when they retire.

Their share portfolio is an investment, too, even though it pays for them to live somewhere, which we agree is essential.

The fact that your house’s gains roll-up capital gains tax free, or that it’s illiquid, or that you bought it using leverage (a mortgage) does not mean it’s not an investment or an asset – it just tells you more about what kind of an asset it is.

The last time I tried to convince a good blogging buddy of mine that his house was an asset, he retorted that his house had:

“… absorbed capital that I cannot liquidate without exposing us to hazardous renting and the UK housing market that appreciates above the rate of inflation – that’s a dangerous thing for a retiree to do financially.”

Talk about making my case for me!

Yes, a house is not some useless consumable item – it’s a damn useful asset/investment to have when you’re retired for exactly the reasons he states.

Just ask the old boy who rents next door.

Things that aren’t assets:

  • dishcloths
  • mistresses and toy-boys
  • budgerigars
  • leftover pizza

Something that is an asset:

  • a house

Our property-disowning, home owning democracy

The worst thing about this whole nonsense is it infects social policy, too.

We live in a crowded country where we’re invited to feel sorry for wealthy pensioners living alone in four-bedroom houses whose Council Tax has risen because their home, well, it’s not like a big house is an asset they could sell, is it?1

We also have situations where old person A doesn’t have to sell his house to pay for care, but old person B who saved the money in cash instead is judged as having the means to pay for it. (I paraphrase, but that’s the gist – and it applies to all sorts of means-tested benefits).

The incredible thing is that even after getting through these 2,541 words (count ’em!) someone, somewhere, is thinking:

“Yeah, but that’s rubbish, because my house is not an investment”.

Look, I get it. You like the security of owning your own home. You don’t intend to sell. You dealt with the dry rot. You love the wisteria. You haven’t considered what you’d get for the house if you put it on the market since the day you bought it and carried an IKEA bag over the threshold.

Fine, that all makes sense.

Just don’t tell me that your house is not an investment or an asset. Because that’s exactly what it is.

  1. Seriously, why do we feel sorry for a homeowner who has to sell up, but not for a renter who is already renting? It’s muddled. []

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{ 72 comments… add one }
  • 1 dearieme August 15, 2013, 9:11 pm

    While you are quite rightly ranting about other people’s follies, you do make an error of your own.
    “… you probably bought it with a mortgage that you pay off over the years. Eventually you own the house”: no, you’ve owned the house from the beginning – it’s just that it was encumbered, and now it ain’t.

  • 2 dearieme August 15, 2013, 9:17 pm

    I once pointed out to a colleague close to retirement that he was a millionaire; he hit the roof and went through a rigmarole of socialist reality-denial. So I added the value of his house to the value of his final salary pension and the value of his state pension, subtracted a bit on the assumption that the house was in joint names and, bingo, distinctly more than a million. And did he thank me?

  • 3 oldthinker August 15, 2013, 9:52 pm

    @dearieme

    >…and, bingo, distinctly more than a million

    …much of which (that is, the notional value of the two pensions) is effectively tied up forever in an annuity contract – a far cry from having a million in cash and/or liquid investments, which is how many people would define being a millionaire.

    Besides, £1M is not what it used to be, and even having such a sum at one’s full disposal does not make one rich any longer, so the very term ‘millionaire’ has been devalued (but kept its emotional connotations so far – so you were misleading your friend on two counts :-)).

  • 4 ermine August 15, 2013, 10:02 pm

    Don’t hold back 😉 However, I can say from personal experience that you’re making the odd sweeping assumption of your own:

    it increases in value, one day you likely sell it

    I have only done that once. For about 60% nominal for what I foolishly paid for it, that’s about 50% in real terms. House prices do not always go up, particularly in real terms. It’s happened before, and it’ll happen again, it’s arguably happening right now unless help to buy gives us a three year fillip…

    I run up the white flag as one of the asset refuseniks, though I’m still not counting it in my networth because I’m personally unlikely to realise the sale (I know, like your BRK holders)…

    Everybody knows that shares are volatile, hazardous and There Be Dragons. Everybody knows that you can’t lose on UK residential property… Even I am investing, though in paper instruments, I can’t be bothered with BTL. My presence in that market is probably the sign the top has passed 🙁

    An asset class that comes with such emotional baggage should always be treated separately, ringfenced and treated with great care, because people do particularly stupid things around it. That is why I don’t count it as part of my networth – it’s lethal, it hurt me seriously before, and it’s hard to mark to market.

    I liked Magical Penny’s article you linked. It’s a good balance. I’ll go as far as to say while you have technical accuracy on your side, MP has the big picture more in balance IMO.

    You are unusual and can probably get away with considering (future) property as a fluid part of your networth, and an a Londoner won’t have the need to sell up to chase work problem. So you’re right for you, but MP’s view, though not technically as right, is probably the safer way for most people to look at it!

  • 5 KL August 15, 2013, 10:02 pm

    I have mixed views about this and incidentally this is something I sometimes think about. Lets say it’s any asset, not necessarily a house or a stock. Lets call it A for convenience.

    One way to value A as an investment today ( vs buying it because e.g. it tastes good ) is to discount all future income payments ( could be dividends, rental income, royalties or whatevs ) to today and find a fair value. If the market price is such that there’s a margin of safety below that fair value, we can buy it as an investment and enjoy the income stream.

    Now if A never gives us any income, because it’s a closed end fund whose manager wont give divs, an eternally growing tech company or a house we won’t rent to someone. Then if we buy today as an investment, we do so in hopes of capital gains in the future, that one day we can sell it at a higher price.

    When we both get no income from it ( because we won’t rent it ) and won’t get any capital gains ( because we won’t sell ), then what is it ? an investment or something else?

    For our children, who may sell it or rent it, it could potentially be an investment. For us I’m not so sure, unless we relax a bit the never rent & never sell constraints.

    Maybe it’s worth checking the spread between paying of that mortgage and renting to value it.

  • 6 oldthinker August 15, 2013, 10:12 pm

    @KL

    > Now if A never gives us any income, because it’s a closed end fund whose manager wont give divs, an eternally growing tech company or a house we won’t rent to someone.

    For this logic to apply to a house, you should have added ‘…and won’t live in it either’. As long as you live in a house, you are drawing from it a tax-free income equivalent to the cost of renting a comparable house in a comparable area at a market rate.

  • 7 KL August 15, 2013, 10:18 pm

    @oldthinker, you pay a mortgage, so in total, you have to compare renting + paying down a mortgage, which of course you can only know only if you know in advance what the rates and inflation will look like for about 20 years ( mortgages are fixed only for 2 years, then you are exposed to the rate, most rent contracts have annual increases according to the RPI ).

    You need to compare the two, by having views on both and of course on what growth rate you can achieve on a mortgage downpayment if you decide to do something else with it.

    Not saying it’s good, bad or anything to buy a house, just that it’s hard to see it as an investment one can value given the never-rent & never-sell constraints.

  • 8 KL August 15, 2013, 10:21 pm

    btw personally I’d rather own a house, if only because I don’t want to be seeing a landlord if I ever reach 70

  • 9 oldthinker August 15, 2013, 10:24 pm

    @KL

    > you pay a mortgage, so in total, you have to compare renting + paying down a mortgage

    Only if you give the house away to a good cause once the mortgage has ben paid off. Otherwise you end up with a house, owned outright, on top of the saving/loss made over the years – back to square one.

  • 10 KL August 15, 2013, 11:13 pm

    @oldthinker, then the question really is what is the worth of something you don’t get income from and you can’t sell ( if anything because of self-imposed restrictions ).

    So what is the value of anything that will *never* give income or capital gains?

  • 11 oldthinker August 15, 2013, 11:35 pm

    @KL

    > So what is the value of anything that will *never* give income or capital gains?

    I thought we were discussing a house, not the hypothetical asset desribed by you. Owning a house gives you tax-free income in kind (equal to the rent that it would attract) for as long as you live in it. In a typical scenario this income is initially offset by mortgage payments, but once the mortgage has been paid off (which in your case will happen before you sell the house, because you will never sell it), 100% of that income in kind is yours to play with for the rest of your life, because you will never sell the house. Of course, if you die with most of the mortgage still outstanding, you will probably not have gained much for yourself from owning a house – granted.

  • 12 KL August 15, 2013, 11:43 pm

    So we agree that what’s to compare is paying the mortgage vs paying rent?

    This – at least for me – is an impregnable task as it much depends on future rates and rpi values.

    There is a possible answer to this question btw, if we had access to the relevant data : inflation curves and swap curves ( which may not be necessarily accurate predictors but are what you need to hedge both today ) we would be able to give a partial answer that, assuming that the buyer doesnt want to make punts on where rates & inflation will go.

  • 13 oldthinker August 16, 2013, 12:11 am

    @KL

    > So we agree that what’s to compare is paying the mortgage vs paying rent?

    Only as long as one expects to die before one pays off the mortgage.

    The situation is very different for survivors, who are the vast majority statistically. Being only a couple of years away from clearing my mortgage, I can look forward to quite a few years of tax-free £x/month in kind, rising in line with the market rent. So I would consider the house (which, incidentally, I am not planning to sell in the foreseeable future) a reasonably valuable asset even ignoring the capital gain aspect. My situation is typical, dying with an outstanding mortgage is not.

  • 14 KL August 16, 2013, 12:15 am

    Well in any case the-never-sell-never-rent house value can be my rents and my children rents too etc but these payments from a point and on become deeply discounted to today.

    Still what we need to value this today is the rate curve and the inflation curve to value this never-rent-never-sell house.

  • 15 Ben August 16, 2013, 12:28 am

    People just say it’s not an investment as a sign that they reject the scumbag British love of ever-rising house prices. They understand it has a value.

    Brits love housing because it’s the only leveraged speculation the average punter can lay their hands on. Try going down your bank and asking if you can borrow ten times your salary because “you think ARM is going to go up”. They will escort you out the door. Meanwhile in the next cubicle someone is getting a huge mortgage.

  • 16 oldthinker August 16, 2013, 12:49 am

    @KL

    > but these payments from a point and on become deeply discounted to today

    So is the future pension of a young person, which does not mean that young people should not pay into a pension plan.

    You are right that the difference between mortgage payments and rent, with all the uncertainties involved, has to be taken into account when valuing a house as an asset. However, historically this difference has not been massive, and usually it favoured buying over renting in medium to long term. The pension in kind derived from not having to pay rent in one’s advanced years, is arguably a much more significant factor even after discounting for the time horizon, so I think that you are putting too much emphasis on the smaller of the two factors involved. A 35-years-old buying a house on a 20 years’ mortgage can realistically expect to enjoy, say, 25 years of free accommodation (not considering the children’s rent or your aversion to seeing a landlord) – this surely cannot be dismissed as insignificant, even after discounting.

  • 17 Dave August 16, 2013, 2:21 am

    The Investor,

    I understand all your arguments, but I am still going to risk sending you into an apoplectic rage by saying that I didn’t view my house as an investment when I bought it and even after reading this post I still don’t. The reason, quite simply, is that if I did view my house as an investment I most likely wouldn’t have bought it. Let me explain why.

    I expect to get a decent return from my investments and when I am faced with a choice between two different investments I try to assess which will give the best return without taking what I consider to be excessive risk. If I was considering my house as a potential investment I would assess the likely return as the current net rental yield (after administrative and maintenance costs) plus an estimate of future growth in rents. (Capital gains are nice if you can get them, but aren’t guaranteed and are usually just a reflection of the increasing value of the growing income stream anyway, so I prefer to leave them out of the assessment.) When I assess my house in that way I come to the conclusion that there are much better alternatives available, so if it was an investment decision I would sell my house tomorrow and put my money into the alternatives.

    Why did I buy a house if I consider it to be a poor investment? I bought a house because my wife and I wanted to be the ones who decided how long we could stay in it, not our landlord, and I was prepared to pay to get that security. We are currently considering moving to Germany, where renters have much greater security of tenancy so we won’t feel the same need to buy. If we decide to stay there we will sell our current house because I don’t consider it to be worth keeping as an investment.

    So then, buying a house for me was a lifestyle decision aimed at getting security of tenancy and the only financial consideration was making sure that I didn’t pay too much for that security compared to the costs of renting. If I had viewed my house as an investment I would have expected to get a return on my investment comparable with the alternatives, which is a much higher hurdle to jump over and I would not have touched it with a barge pole unless the price dropped substantially. The lack of diversification in my portfolio would also worry me.

    I hope that hasn’t upset you too much. Feel free to tell me that I’m stupid for not viewing my house as an investment if you still need to let out some more of that pent up frustration. I can handle it.

    Cheers,
    Dave.

  • 18 SemiPassive August 16, 2013, 8:49 am

    Dave, The Investor was at pains to point out that your home is not the BEST investment relative to altetnatives, that it doesn’t offer the highest yield or capital gain potential, but it is an investment and asset nonetheless.
    I won’t repeat the advantages of inflation proofed imputed rent, tax free capital gains, leverage etc.
    Robert Kiyosaki makes much of “your home is a liability, not an asset” mantra, but the chap with a 300-400k mortgage on a million pound house in London that has gone up 100k pa in recent years is going to struggle to believe that messing about with shares and bonds would have been more worthwhile.
    They may moan that they can’t capitalise on that gain as they don’t want to move, but that is a lifestyle decision as they could easily free up 600k by moving to the shires without even “downsizing” in purely size terms. Its part of your net worth whether you like it or not!

  • 19 gadgetmind August 16, 2013, 9:22 am

    OK, let’s accept that my house is an asset and part of my net worth and see where it takes us.

    As it’s mortgage free, it nicely bulks up my net worth when thrown into the pot and means it’s now 35x my annual income needs so I can retire.

    Except I can’t. My house is 15x my income needs and my pension/ISA/etc. investments only 20x. That 20x really doesn’t give me any wriggle room, so I’m going to have to work for a few more years before I can comfortably retire.

    So, while I might accept the case for regarding my house as an asset, and even an investment, for retirement planning purposes I need to focus on my other investments and keep my property out of the picture.

    Those who do include their main property as part of their retirement plot better have worked out the tricky details!

  • 20 BeatTheSeasons August 16, 2013, 9:57 am

    This mindset of classing the house that you live in an asset can be dangerous to your net worth. From a cashflow point of view it’s far better to own two houses that cost £200k each and rent one out than buy one for £400k and live in it. But using your estate agent valuation minus the outstanding mortgage you’d put both in your spreadsheet at the same value.

    Borrowing the maximum amount that the bank will lend you to take out an enormous mortgage in your 20s or 30s is the number one reason why people don’t reach financial independence at a young age. The interest payments cripple their finances for decades and they have nothing left over to acquire other assets like shares.

    And if you start valuing your home according to ‘imputed rent’ then where does it all lead? Should I value my greenhouse based on the money it saves me on buying tomatoes? Should my carpet fitting experience go on my personal balance sheet? What about our personal friendships that get us free tickets to music festivals?

  • 21 RogertheLurker August 16, 2013, 10:01 am

    Come on play the game, he said it was an asset not a silver bullet to solve all retirement problems! 🙂

    I share the investor’s perspective/bemusement/scorn.

    Not to focus on you gadget mind (I have enjoyed reading your thoughts over the years and would love to hear more about your start-up company exploits, maybe in a guest article for the Monevator website?) but it’s very elementary.

    If you hadn’t purchased a house, your income needs would be much higher. (Because you would still have to pay rent).

    As you have bought a house your future income needs are lower (because of imputed rent to yourself) but you have sealed away a large portion of your net wealth in your property.

    If you wanted to as was said in the comment by “semipassive” above you could release that equity and turn it into income generating assets, and then choose to rent.

    If you choose not to then it is either:

    a) a lifestyle decision because you prefer to live in your own home or
    b) it is an investment decision because you think it’s better to own than to rent.

    Nothing to argue with either point of view. It’s a choice. As the investor would say “it’s still an investment” though.

    Best regards!

  • 22 Neverland August 16, 2013, 10:16 am

    @Investor

    My irony antennae are twitching nicely now that you are saying property is an investment etc

    Six years ago (almost to the day now) this blog started with a string of polemics on inevitability of a property crash in London

    Didn’t turn out to be the greatest of predictions yet…

  • 23 The Investor August 16, 2013, 10:52 am

    @Neverland — So what? I didn’t say above it would be a great investment from here, that’s not what this post is about. And I’ve lamented many times that I’ve erroneously thought London property is overpriced.

    One reason people read those early articles is because I freely and candidly link to them.

    I understand all your investment decisions are faultless, as you without fail chime in on this blog to point out the perceived flaws of others.

    Unfortunately the rest of us are mere mortals and get some things wrong and some right.

    @All — thanks for the comments so far! I fear I’ll just repeat myself so I’ll keep listening for now, though I owe at least Ermine a reply for being a sport, albeit a tricksy one. (Ermine the fact you haven’t sold your house for a profit is irrelevant. The fact is you could tomorrow, I’ll wager for a massive gain. That’s the whole point of this article! 🙂 ).

  • 24 BillyBow August 16, 2013, 10:55 am

    If anyone is still any doubt that a house should be considered an asset, think about it this way. When we shuffle of this mortal coil, HMRC will certainly class houses as assets to collect Inheritance Tax.

  • 25 Dan August 16, 2013, 11:00 am

    While I agree that there is a fault with the line “my house is not an investment as I need somewhere to live”, there is perhaps some strength to a weaker statement “you are naturally short housing”.

    I can’t take credit for this idea (though I can’t remember the blog I read it from, sorry) but the idea is that you will always need somewhere to live and that place will have a minimum standard. Anything you own that is in excess of the minimum standard will mean that you hold a long position on property. Anything less than that minimum standard (i.e. if you rent) will mean that you are short on property (i.e. betting against property gains).

    If you like this line of thinking, only the amount that your current home exceeds your minimum requirement for housing should be regarded as an investment.

  • 26 smiling vulture August 16, 2013, 11:22 am

    Finding the rent,when your 65+ ,doesn’t appeal to me,owning a flat,home is my investment giving me the freedom to do what i like,hav a dog,paint the bedroom,wooden flooring,update central heating when I want,over pay mortgage in good times.

    my sworn enemy is the buy to let crowd,that why I will never rent

  • 27 SemiPassive August 16, 2013, 11:33 am

    I get what you’re saying Dan, chimes with BeatTheSeasons point on owning one nice 400k home vs living in a 200k terrace and renting out another for income. Thats a choice where quality of life plays a point vs generating an income, a compromise one way or another depending on what is important to you.

    I must point out in hindsight I wished I HAD taken out an enormous mortgage in my late 20s or 30s to buy London property, it would have made a much bigger impact on ultimate (future) financial freedom compared to not overstretching, buying modest property outside of London and investing the difference in ISAs and pensions.
    Of course going forward that may well not be the case, indeed it would be a gamble.

  • 28 Dave August 16, 2013, 12:04 pm

    SemiPassive, I know The Investor pointed out that a house is not the best investment, which is why I say that if I viewed my house as an investment I would sell it. Why continue to hold an investment when you know there are better alternatives available? It just doesn’t make sense to me. It clearly doesn’t make sense to The Investor either, which is why he doesn’t own a house (or flat, since he lives in London). It is only because I view my house as something other than an investment that owning it makes sense to me.

  • 29 Chris August 16, 2013, 12:27 pm

    I’m 39 years old and have owned just one property for several years. i.e. the one I live in. I can safely say that my apartment is firmly seated under liabilities even though I’am mortgage free.
    The fact is, I incur costs each month in the form of bills, which I have to pay, hence the branding of a liability.
    I dont care if its up in value, down in value if I were to sell tomorrow, I just know that I have monthly outgoings which I minimize like all other liabilities.

  • 30 dearieme August 16, 2013, 12:59 pm

    @Chris: if you bought an Old Master you’d have outgoings for security, air-conditioning and insurance. Does that mean it wouldn’t be an asset?

  • 31 Chris August 16, 2013, 1:10 pm

    haha excellent analogy dearime-albeit hypothetical for myself.

    I would put the master in my liabilities column as well. Although the master would be accounted for in my total assets.
    It’s an age old question of is your house a liability or an asset and there are fair arguments for both sides of the coin. Personally I treat it as a liability. If my brother counts his house an an asset, then I wouldn’t call him wrong-he just has a different point of view that’s all.

  • 32 Tronader August 16, 2013, 1:18 pm

    @The Investor:
    “I’ve lamented many times that I’ve erroneously thought London property is overpriced.”, what do you mean by ‘erroneously’? ie, one thing is that prices have not gone down (or stayed at the same level for many years to come) due to the government messing around with the free market and creating artificial workarounds for real problems, but London property has been and still is way overpriced for what they’re selling out there.

    Regarding whether or not a house is an investment or an asset, I think people could argue both ways and have reasons to justify either. If you think about all the interests that go out as part of your mortgage repayments, the purchase of a house might not be such a wise investment after all.

    My personal view is that there are times where a specific asset is a good or a bad investment depending on the outside circumstances and at the moment it seems that London house prices are being artificially increased in the short term but that situation cannot carry on forever, otherwise no one from the new generations would be able to buy a house ever. Time will tell, but history is full of examples with people buying terrible ‘investments’…

  • 33 The Investor August 16, 2013, 1:54 pm

    I know it’s a futile task, and I had my five minutes (and the rest! 🙂 ) but:

    1) If you live in a house but don’t rent it out to third-parties, you are still effectively renting it to yourself. You can have some amusing disagreement about this with me if you want, but it’s a fact. (See that imputed rent bit). You are consuming a housing good by living in your house.

    2) The fact is people *do* value their houses based on imputed rent. The first thing most new homebuyers say is “renting is dead money, I may as well pay a mortgage”. They very explicitly swap rent that they’ll have to pay anyway (the “born short housing” argument mentioned above) for their mortgage payments. Does anyone think houses would be worth 5% of what they’re worth today if you couldn’t live in them when you own them, or if the alternative was buy a house or live rent-free in some (hypothetical!) free accommodation, with the same benefits or otherwise as a renter who has to pay their rent today? The relationship between mortgage payments and rent varies, but it’s explicit.

    Questions about whether friends who get cheap tickets etc are assets are intellectual interesting (and would make a good article) but are not comparable.

    3) Some people do buy houses and don’t ever live in them nor do they rent them out. They are oligarchs and Hollywood stars, in the main. They are beyond the scope of this article.

    4) Some people are reading “a house is an investment” as “a house is a good place to put your money as an investment”. It may or may not be, I just aspire to get us to the “investment” stage first. 😉 Gold, ostrich farms, Picasso paintings, and first editions are all assets and investments of a kind, too. They have very unattractive qualities, but they are different from consumable goods and liabilities (such as a loaf of bread, a dog or a cinema ticket).

    5) The fact we’ve had this spirited debate shows it’s debatable. But I’m still right!

    6) The Accumulator is (whisper it!) on the “my house is not an investment” side of the fence. And he’s excellent, otherwise. So those of you who are wrong are in very good company. 😉

  • 34 Neverland August 16, 2013, 1:59 pm

    @Investor

    “And I’ve lamented many times that I’ve erroneously thought London property is overpriced.”

    If there is one thing that should be taken from the recent history of assets like gold, Irish houses or Greek bonds its that an asset that is already over priced can proceed to rise to even higher priced for several years before exploding spectatcularly

    I remember quite well from 1999 or 2000, just at the top of the last bull market when Tony Dye, a well known bear, was sacked from his job at then large fund management group Philips & Drew (a name which has disappeared now and Tony Dye is dead)

    I remember also at the time also being asked by a relative whether he should buy some technology shares. I asked him whether after something had doubled in price it was more or less likely to double in price again

    The lesson I have chosen to take from this is that when the concensus for the outperformance of a particular asset class is particularly positive, its probably not a good time to go into it

    This is I think a point you have made several times in relation to other types of investments

  • 35 Grumpy Old Paul August 16, 2013, 2:35 pm

    @Ermine,
    The “emotional baggage” associated with property is reflected in the number of comments posted on this article.

    Unless I’ve missed it, I don’t see any definition of the word “investment” above which makes the ensuing debate somewhat moot. Even if the term was defined, the definition given would not necessarily match what any particular individual meant when they stated that their house was or was not an investment.

    How many angels can dance on the head of a pin?

  • 36 AJ August 16, 2013, 2:57 pm

    Simple fact: if you don’t own, you need to pay rent. Therefore you get an (indirect) financial return on owning your house. You don’t need to pay rent, because you have an investment in a house. Others might have an investment in shares, but need to pay rent.

    Not including your house in your net worth is nonsensical. If you didn’t have the house, your net worth would need to be higher to sustain the same lifestyle in retirement because you would have to pay rent! I can’t really see how on any non-emotional level there can be any dispute!

  • 37 BeatTheSeasons August 16, 2013, 3:15 pm

    Imputed rent doesn’t increase in line with house size. The £400k house in my example doesn’t rent for twice as much as the two £200k houses.

    And if you’d never have rented the massive house anyway, what makes you think that buying one saves the cost of renting it?

    Simply including the net market value of the house you live in into your net worth spreadsheet completely ignores the opportunity cost.

  • 38 BeatTheSeasons August 16, 2013, 3:16 pm

    @ GOP

    For my money the word ‘investment’ implies ‘good investment’, and to suggest otherwise would be somewhat disingenuous.

    Otherwise the shares I bought through a boiler room scam would count as an investment, just a spectacularly poor one. Whereas I’d argue they’re as much of an investment as my dog!

  • 39 David August 16, 2013, 3:18 pm

    I’m happy to accept that my house is an investment.

    Perhaps this is the place to therefore consider how much I should be willing to invest in my house? In these days of worse-than-hopeless savings rates and (for some at least) better-than-ever mortgage rates I’ve been over-paying on my mortgage. However, I’m fortunate to have both savings and investments and the financial security to continue to contribute to both – not a lot, but enough if I wait long enough (I’m with The Accumulator on this). Of these, the rainy-day emergency savings appear almost superfluous; if used to reduce the mortgage term they can still be realised in an emergency.

    I recently searched for this topic on Monevator and hope I’ve not missed it. Why bother holding savings which – at best – get 3% (minus 40%) per annum with Santander, when they could be lumped into the mortgage? Since the latter is at about 2.25% I’m losing about £7/annum for every £1000 I have in the bank as opposed to offsetting my mortgage.

    This is probably where the offset mortgage bank account setups work well, though the interest rates available when I last looked were unattractive and there are often very good reasons for staying with your current mortgage provider.

    Have I missed something?

  • 40 The Investor August 16, 2013, 3:46 pm

    @BeatTheSeasons — Yes, it does. 🙂 Basically, a £400,000 house rents for more than a £200,000 house. So the imputed rent is higher.

    Imputed rent is not some basic cost of living allowance, it is an economic input.

    You may say you don’t *need* to pay the higher imputed rent on the £400,000 house but that’s the choice you’re making if you live in a £400,000 house. Perhaps if more people realised their houses were investments this maths for them would be instinctive.

    I am sure we can put our heads together and get on Rightmove and easily find some example of two properties that rent for more than you get for one twice their value. But we’re dancing around on a pinhead then — the principle holds.

    I’m not going to get into the semantics of the word ‘investment’. I do wonder what people expect sometimes. I’ve written 2,500 odd words above, stuffed with clauses and caveats, and then someone says “investment implies “good investment” because I didn’t write an extra 300 words explain an exact definition of the word investment.

    No, “Investment” doesn’t imply “Good investment”. “Good investment” implies “good investment”. That’s what we’ve got the word “good” for.

    Minor apologies as I’m being facetious, but I’m a bit exasperated by that sort of comment.

  • 41 Neverland August 16, 2013, 3:48 pm

    @AJ

    If you didn’t include the family home in the calculations of net worth I don’t think most Britains under 40 would have any!

    The Mrs and I have met a lot of people in their 50s who have an expensive house, a flash car …. but nothing in the way of a pension

    I looked at one of the ONS wealth surveys once and virtually all household wealth in the UK was either property (mainly homes) or final salary pensions

    The generation who started work in the 1990s will not have final salary pensions (unless they work for the government) and the generation who started work in the 200s won’t have either homes or property…great isn’t it

  • 42 Neverland August 16, 2013, 3:56 pm

    @David

    Offest mortgages advantages depend on a lot on your personal employment , your tax position and, as you say, what other investments you could be making

    E.g. for a small business owner they are brilliant or for anyone who pays most of their tax outside the PAYE system they are very good, basically because it means you can park cash that isn’t yours in an account to offest against your loan balance and reduce interest you have to pay

    The other aspect to consider is the return you could get from investing the money you might have in an offestting bank account into a short term investment that had a high return, I don’t think you can’t do this with the overpayment of a conventional mortgage

  • 43 Simon August 16, 2013, 4:48 pm

    I think this is a great post, I consider everything purchased to be an investment, though most, ie. dishcloths, burgers, pints are effectively written off immediately in terms of what may become as asset. Things like primary residence (home), and cars sure are assets, and investments, houses may well return a profit over the long term, a car rarely will, even more a poorly treated car just means you have to buy more of them, eating up more cash that could otherwise be used doing something more useful..
    I do however think leftover pizza is an asset, it might not appreciate in value, but it sure does taste good for breakfast, and it saves money on going out for lunch, so in a roundabout way it’s a good investment compared to throwing it in the rubbish!

  • 44 smiling vulture August 16, 2013, 8:35 pm

    I remember the day reality hit me,we all cant have the house,flat we want,althought some go for it even if finances are borderline.

    Im a blackcab driver and dropped off at private road housing estate.the houses were arty stunning,modern architecture,more like individual museums,i knew if you had to ask the price you couldn’t afford it.

    good thread,housing subject always brings out comment

  • 45 Dave August 16, 2013, 11:47 pm

    Although it is theoretically possible to view your house as an investment most people don’t, and that includes most people who say they do. To clarify a few things, I’m going to offer some definitions:

    * Something you buy with the intention of profiting from an income stream that it generates. whether that income stream is paid out in cash, reinvested, or a mix of both, is an investment.

    * Something you buy with the intention of profiting by selling at a higher price is also considered an investment by many people, although I would call it a speculation. This probably isn’t the place for that argument.

    * Something that you buy with the intention of satisfying needs or wants is a consumer good.

    A house can be any of the above depending on what your intentions were when you bought it, and your intentions are revealed by the factors that influenced your decisions.

    You can argue that homeowners receive an imputed rent, but when you are choosing whether or not to buy a house do you compare the returns available from residential property with those available from other potential investments like shares and only buy a house if it offers the best return? When you are choosing which house to buy do you calculate the imputed rent for each house you look at and buy the one that offers the best return on the capital invested? No? Then you aren’t viewing your house as an investment, even though theoretically you could.

    You can argue that houses are investments because they can be sold for higher prices, but when you are choosing which house to buy do you try to assess the potential for price appreciation of each house you look at and then buy the one that offers the best opportunity to profit from the increase in price even if that means buying in an area other than the one in which you live? No? Then you aren’t viewing your house as an investment/speculation (depending on your definition), even though theoretically you could.

    When you are deciding whether or not to buy a house do you compare the cost of renting with the cost of buying? Yes? Then you are looking for the cheapest way to satisfy your need for housing, which is viewing your house as a consumer good.

    When you are choosing which house to buy do you compare how well each house satisfies your needs/wants to the relative prices of the different houses? Yes? Then you are viewing your house as a consumer good.

    You can make all sorts of theoretical arguments for viewing a house as an investment but most people’s behaviour reveals that they don’t (or possibly that they are confused in their thinking).

  • 46 DonF August 17, 2013, 12:18 am

    @Simon – BEST COMMENT EVER. I’m still laughing.
    On that note: my girlfriend collects designer clothes. The only reason why I’m still sane is that, since she works in fashion, she usually pays 1/10th of the price. And I am deluding myself that she buys with a good margin of safety and will be able to sell them one day – perhaps with a profit even. And they ‘generate an income’ when she wears them to work. Except she intends to keep them forever. Almost like a house then.

    @TI – Great, rational post. As ever.
    Of course it’s an asset. And an investment. And costs money to hold, like most, if not all, other investments. When are you buying yours then…?
    I wish I knew where I’ll be living in ten years time. Or five. To be honest, that’s the reason why I’m not buying now. And if I lived in London or probably anywhere in the UK, I would buy anyway.

  • 47 DonF August 17, 2013, 12:34 am

    @Dave – they may not view it as an investment. The fact remains that it still is one. For all the reasons TI pointed out. Whether or not it’s a good one, whether it was bought after looking at the right factors or even whether it was intentionally bought as an investment or to satisfy a need is irrelevant.

    I think TI (and myself) is just a frustrated member of generation rent. 😉

  • 48 oldthinker August 17, 2013, 12:54 am

    Housing is not my only basic need. Call me weird, but I feel at least as strongly about eating three square meals a day as I do about having a roof over my head. By the logic of the ‘a house is not an asset’ brigade, my final-salary pension, which I have firmly earmarked for paying for food in my old age, should not be considered an asset either.

  • 49 Dave August 17, 2013, 1:08 am

    DonF,

    I’m sorry, but I don’t agree that someone’s intentions when they purchase an asset are irrelevant to whether that asset is an investment or not. I think it is important for people to be clear in their minds whether what they are purchasing is an investment or a consumption good and make their decisions with that in mind. Otherwise people end up justifying poor decisions from a consumption perspective by saying that their house is an investment (I know that my house has twice as many rooms as I need and a much smaller and cheaper house would have met my needs very well, but that’s okay because it is an investment!) when the reality is that if they assessed the purchase properly from an investment perspective they would be forced to conclude that it is also a poor investment.

    I don’t have a problem with houses being an investment as long as it is a good investment. It doesn’t matter whether your house is a good investment or a good purchase from a consumption perspective, either way you have made a good decision. If it is neither then you have made a poor decision, and not being clear on which it is contributes to poor decision making.

  • 50 oldthinker August 17, 2013, 1:39 am

    It looks like there is a degree of terminological confusion involved in this whole discussion. Here are a few definitions from Investopedia:

    Asset:
    A resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit.

    Investment:
    An asset or item that is purchased with the hope that it will generate income or appreciate in the future.

    Income:
    Money that an individual or business receives in exchange for providing a good or service or through investing capital.

    According to these definitions, a privately owned house that is not rented out is usually an asset (the expected benefit being a roof over the owner’s head) but not always an investment (because imputed rent does not appear to fall within the definition of income, and not everybody who buys a house for themselves to live in does this with the hope that it will appreciate).

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