Why Housing Is A Bad Long-Term Investment But You Should Buy Anyways
Gary Davey, CONTRIBUTOR
Opinions expressed by Auguston Contributors are their own.
Homeownership was once considered a staple of the ‘Canadian Dream’ and a sure sign of financial stability in the Canada. It’s somewhat a sign of prestige. The principal residence accounts for nearly 62% of the median homeowner’s total assets in the Canada and makes up nearly one-third of all assets held by Canadian households. While housing decisions remain as some of the most important decisions facing Canadians, it is not unanimously assumed that homeownership is the best financial course of action.
US Study on Home Ownership
This sentiment is demonstrated in part by our neighbour to the south in the U.S. Census Bureau’s July 29, 2014 Report which noted that homeownership fell to a nineteen year low of 64.7% in the second quarter of 2014. One reason aiding this decline in homeownership, especially at a time when interest rates are so low, is a change in the mindset of Americans. In a 2014 study conducted by the MacArthur Foundation, nearly two-thirds of those surveyed reported that they believe owning a home is less likely to build wealth today than it was twenty or thirty years ago. Furthermore, almost 43% of the respondents did not think that buying a home is a good long-term investment. The study also showed that almost half of those surveyed believed renters are just as likely to achieve financial success as homeowners. While homeownership is a vast and important topic, this article looks at two main aspects highlighted by the recent MacArthur Foundation poll: 1) is renting better than buying and 2) is homeownership a good long-term investment?
Is homeownership a good long-term investment?
Another key point highlighted in the MacArthur Foundation poll was that many Americans no longer see housing as a strong long-term investment. According to research by Yale economist Robert Shiller, one of the foremost experts on housing in the U.S., noted that from 1890 until 1990, the real inflation-corrected prices of homes showed almost no change. This is a surprise to many people, as most people expect to be able to sell their home for a gain in the future. For the first few decades of the 20th Century, housing prices decreased and we saw real decreases again in the 2000s. However, the lesson that housing prices can go down is often lost on people. The good news is that historically housing at least keeps pace with inflation. However, changes in amenities, technological improvements, and variation in style preferences can all have a negative impact on housing prices.
From a pure investment standpoint, the stock market is much more likely to give you higher returns over time than housing is likely to provide. It does help protect money against inflation while savings accounts and CDs at today’s rates are unlikely to accomplish that return. While the house itself might not be a good investment, you must also take into consideration the other benefits that homeownership provides as it is not merely an investment like a stock or bond. For many people it provides a sense of pride, security, and housing services.
Are renters as financially secure as homeowners?
Despite recent attitudes towards the financial equality of renting or buying a home, recent research shows that buying and owning a home is likely a better financial decision than renting. The Brown School’s Center for Social Development at Washington University in St. Louis, Missouri released a report in 2013, Homeownership and Wealth among Low- and Moderate-Income Households, which showed that low and moderate-income homeowners generated a higher net worth than their counterparts who rented during the same time period. While the study did not argue or conclude that homeownership is always the best avenue, it did show that those people with responsible mortgages increased their net worth on average by $20,000 over three years compared to only $15,000 for those who rented. Furthermore, despite many academic arguments and conceptual arguments that renting should increase wealth faster than owning, a review of the existing research by Harvard University’s Joint Center for Housing Studies shows that time and time again, even after controlling for sociological, economic, and other differences, those who buy homes tend to increase their wealth faster than those who rent.
Despite strong evidence supporting the financial benefits of homeownership in generating wealth, homeownership might not always be the best decision for everyone. First, buying a home requires a large upfront payment which can significantly reduce liquid assets for a time period. Second, all mortgages are not created equal. Make sure you understand the fees, rates, and payment schedule of the mortgage before agreeing to take on that burden. Another important issue is rental costs compared to home prices by geographic location. In some areas, like Vancouver Canada, renting might be a better deal than homeownership while in other areas homeownership is a much better financial deal. Like the homes in the development of Auguston – Abbotsford BC.