Your primary residence is not an investment but a lifestyle expense.
Could you explain this to me, because I only agree in the following two cases:
1. You have overextended yourself in the house you bought and you can only afford the minimum bond payment, forcing you to pay it off over 20years.
2. You can afford to put in extra into your homeloan but choose to spend that money on other lifestyle stuff?
As I see it, I tell all young guys (early to mid 20s) to get into a property as young as possible! The caveat being, they have to pay it off within 10years as the interest is the killer. If you are renting, you have nothing to show at the end of your stay in that property, you just paid off someone else's property. At least if you sell your property after 10 years, you should get most of your money back, even if you take the capital appreciation and subtract all the costs (interest, rates, levies etc) and made 0% on the property. This is my experience owning property (bought at 550k) for almost 10 years, paid it off in 5, and sold for 700k. If I rented that property I would have paid exactly the same as if I was paying a homeloan, rates, levies and those expenses.
I am going to try and explain why the house you live in is not an investment (my understanding of why not anyway
). All investments essentially come down to two things, capital and income. You "invest" the capital in return for a stream of income. You can also reverse the transaction by selling a stream of income for capital (example ABSA pays dividends to people buying ABSA shares). Sometimes at the beginning of an investment you might not get an income yet, but the expectation is that you will at some point in the future get an income from the capital you invested (growth stocks, more risky since you don't know what the income is going to be). The reason the house you live in is not an investment is because you are
not getting an income from it (the opposite in fact). You could argue that it saves you from paying rent, but I would counter that what you are actually getting is not income, but "utility". For example if you own a toaster, you get the utility of toasting bread, but no income. Just because it saves you from paying a restaurant to toast bread for you, does not mean you are getting an income from your toaster. I think this is what Orca means when he says owning your own house is a "lifestyle expense".
Another thing to remember is that when you buy a "house", you essentially buy two things: The house(bricks, timber, plastic, etc) and the land the house is built on. The house part is very similar to a toaster. It breaks over time and goes out of fashion and needs to either be refurbished, repaired or replaced completely. This part of the "house" is actually losing money constantly. The land part is what keeps its value on average. Depending on location the land value might grow faster or slower than inflation, but on average it stays in line with inflation over the longer term in a growing economy. If the economy tanks, like in Japan, land value plummet as well.
And finally, I think a lot of confusion comes in because people see that their house doubled in price in 10 years, so they say: Wow, houses are amazing investments! But they forget to subtract all the expenses they had over the 10 years like levies, repairs, upgrades, taxes, interest payments, opportunity cost of not moving to where a higher paying job is, estate agent fees, lawyer fees, stamp duty, etc. Oh, and don't forget about inflation, R10 now was only R5.60 10 years back.
Anyway, hope this helps. Houses are not magic bullets to wealth, they are just toasters on a bit of dirt
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