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 [1], 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 [2]) or ignoring the impact of compound interest [3] (clue: it’s enormous) or ignoring the time value [4] 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 [5] 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 [6], 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.
Since by any normal measure it’s abundantly clear that your house is an investment – you go and buy a house [8], 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 [9] 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 [10] – 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 [11], 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 [12]. 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 [13] 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 [14].
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 [15] 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 [16] 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 [17] 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 [18] 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 [19] 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 [20] 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 [21] – 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 [22], 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 [23], and Scrooge McDuck.
While it’d make for an interesting read, it’d also be wrong.
As rich people [24] 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 [25] 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 [26]
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 [27] (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 [28] 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 [29]:
- a house
Our property-disowning, home owning democracy
The worst thing about this whole nonsense is it infects social policy [30], too.
We live in a crowded country where we’re invited to feel sorry for wealthy pensioners [31] 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 [32]
We also have situations where old person A doesn’t have to sell his house [33] 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.
- 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. [↩ [38]]