Home is where the heart is. So went the adage. It has always been drilled into our brain that growing up and buying a home was the smartest financial move ever. In fact, buying a home was and is considered as a very good investment opportunity. Sounds too good to be true, right? Or is it?
Let us look at the pros and cons of home ownership.
- Yale economist and Nobel Prize winner Robert Shiller debates about the feasibility of accepting home buying as an investment. He says, that the returns are just too small and that the premise of real estate appreciation does not always stand true. Calculated over the past 100 years, home prices have grown at a measly rate of 0.3%, after adjusted for inflation. Stocks and bonds have given, over the same period, an annual return of 6.5%. This difference is just big to ignore.
- Home buying should be kept as just that. An asset to protect you and your family against the vagaries of nature. As an investment vehicle, it simply does not stand up to the other instruments available in the market. What blunder most do is to make up more than 75% of their investment based on the price of their home. There is an inherent risk because of the lack of diversification.
- Owning a home is an absolute matter of pride. And beyond that, a recognition of all the hard work you have put in to buy that property. It is also a sign of prosperity.
- Owning a home is an excellent tax saver.
- The question of equity comes into play. Rent paid is gone forever. It never builds up your financial equity. However, with a mortgage payment, equity is built over a period in time.
- Owning home lets you beat inflation, even though by a very small percentage. According to Prof. Karl Case, long-term housing did have its moment when it went a wee bit ahead of inflation. Now, if you are young and thinking 30 to 40 years ahead, it is a very valuable insurance against inflation. Not a mean task at all.
- Contradicting to what I had said in point 1, the house is a risk capital. Again, as mentioned earlier, a home should never be viewed as a way to get rich, because it simply does not work that way. However, equity in a home can always be linked to your portfolio.
Home owning does have its fair share of pros and cons. It totally depends on the individual and his or hers financial situations. But as the line goes, “Home sweet home”.