Last week we dished on how expensive Australian housing has become. We feel like we’ve been hearing that for as long as we can remember and frankly, we’re over it.
We know that housing is unaffordable for most of us, unless we get a massive windfall. Some of us may be able to get help from the parentals if we’re really lucky. Some of you may finally get the payoff from that Nigerian email scam you signed up for in 2011 (fingers crossed). But most of us are stuck wondering what the hell we’re supposed to do.
The thing is, the way most of us think about housing is upside down. ⬇️
Many people view buying housing as an ‘investment’. But a house that you’re buying to live in is actually a consumption good.
Why? An investment is money stored away to be used in the future with the intention of growing your wealth. On the other hand, consumption is the act of using up a resource to bring you usefulness + happiness today. 😃
A house you buy to live in is consumed daily. It’s a personal-use asset that is used for comfort and shelter today and tomorrow, for however long you live in it. Repeat: it’s not an investment.
It’s like buying a car 🚗 . You’re buying current and future transport. You’re buying for the convenience of having that transport. You’re not buying for the expectation that the car will go up in value. The alternative is to use Ubers or public transport 🚌 🚕 🚞 instead, like renting a place. And with the money you don’t have tied up in a car, you can do other things like investing in shares and bonds, or your education.
If you buy a house, it should be because of its intangible benefits. Because you enjoy living in it, because you love the neighbourhood, the village, the schools, and you want to be there for a good while. And of course, this is all if you can afford it without any stress—such as the inevitable case where interest rates rise, or you’re on the hunt for a new job. It shouldn’t be about the price it might—or might not—sell for later.
If you do buy a house that goes up in value, it’s only really useful to you if you then sell and move somewhere cheaper. Otherwise, you’ll be selling and still needing to buy when the rest of the market has gone up too. That’s on top of the many costs involved in transacting.
As Wharton Professor Todd Sinai puts it, if you’re deciding to shell out more to buy a home to live in:
‘You need to make sure the additional space and amenities you’re consuming are worthwhile expenditures on their own merits, not for the theoretical payout they might afford later.’
Seeing home ownership as an investment can cloud your thinking and lead you to make decisions that aren’t in your best interests. It’s the prevailing view, and it’s a clever marketing exercise. The banks (that, by the way, make mind-boggling amounts of money 💰 through the housing market), the mortgage brokers, the real estate agents, various pundits in the press … they all have vested interests in encouraging us to keep piling in, because demand pushes prices up 🔺, then more of us take out bigger mortgages, the lenders make heftier fees, and the cycle continues. Until it can’t.
If you can reframe your mindset and ignore them, it will make it easier to understand whether buying a home makes sense for you.
If it’s because it will bring you usefulness and happiness to be the owner of a home who can drill holes in the wall and dig holes in the yard, then absolutely do it.
✔️ But if you think you can rent somewhere nicer, or just as nice, and put away the extra cash you save into a longer-term investment (not a consumption good!) like shares and bonds, then you should feel free and empowered to do that. 💪
Stay posted for more in our property series next week!