Your Dad Told You

Your home is the best investment you will ever make, didn’t he?

I know mine did.

Let’s get this straight, your home is not really an investment at all. It produces no income, and whilst it may appreciate in value, that value can only be realised by selling. It is likely you will be buying again in the same market. Clients will often tell me that they will sell and down-size to realise the value of their “investment” but I have rarely seen it unless the client has moved to another town or city. You see, many of us are prepared to down-size, but not too many are prepared to down-value.

Unlike many other investments, real estate is only valued when it is bought and sold, the true value cannot be measured except at these times. In addition, whilst real estate as an asset class performs well in terms of growth, (particularly in Australian markets like Sydney and Melbourne in recent years), that growth is by no means linear. It is usually characterised by periods of strong upward movement followed by a correction followed by a period of no growth at all until the next rising market. The duration of these periods can be quite lengthy, and cannot be easily predicted.

So when do you decide to buy? Buying a home is an emotional decision more than a financial one, and you need to treat it as such. Whilst there are financial elements to the decision, in the end, whether home-ownership is a goal for you or not is not dependent on the finances.

From my observation, an increasing number of younger people are deciding not to buy a home, very often to the despair of their parents. The great Australian dream of home ownership has been part of our culture for a long time (not forever by the way), and older generations find it difficult to accept that their children may not share the same dream.

In my view, there are a number of reasons for this:

1. Affordability,

Without stating the bleeding obvious, it is more difficult to purchase a home today than it was 30 years ago. Saving for a deposit can seem like an insurmountable task. Recent statistics revealed that the average time needed to save the twenty per cent deposit needed for a house purchase was around 8.5 years, and in Sydney closer to 11 years. It was always difficult to do this, but what a long time frame like this does is to make people question their priorities. Saving hard for ten years to buy a home might mean the difference between being able to start a family or not for example.

2. Mobility,

More than ever, many people are living far away from where they grew up. In addition, the nature of work has changed so that people no longer necessarily work for one employer in one location for extended periods. One of the characteristics of home ownership is that to enjoy the full value, it is usually necessary to own the property for a long time. The costs of acquisition being what they are, there are a number of costs in transacting real estate (stamp duty, legal fees agents costs, loan establishment costs etc.), which need to be recovered over time. With the likelihood that you might move in the next couple of years, ownership of a home where you are living and working at present is less attractive.

3. Technology,

There is no doubt that technology has transformed how we work, and therefore in many cases where we work. In many industries, the work activity is not location specific at all. (As I write this for example, I am on a plane heading for South Africa). Those in professions where technology allows them to work from anywhere have less need to put down roots in one place. I have seen a growing number of global gypsies, who spend their time travelling and working, with little interruption to their careers.

4. Priorities,

Rightly or wrongly (no judgement from me here), for many, due in part to the factors outlined above, purchasing a home is a commitment they are not prepared to make at the expense of other priorities.

So should you buy a home? In my opinion, only if you want to, only if the Australian dream is one which you subscribe to. You should not accept pressure from peers or family to commit to something that is not a goal of your own (for more on this see here). The ownership or otherwise of home (and a mortgage!) is not a measure of your worth as a human being, you are not “wasting your life” if you haven’t got one.

Nonetheless, this does not mean that you are off the hook. In a financial sense, without the imperative of saving for a deposit or paying off a mortgage, it is all too easy to fall in to the habit of spending what you earn. I believe we all need to be working towards “something”. Your priorities might change, and a home become a goal for example, so saving “as if” you were working towards a home deposit is a good strategy. We advocate allocating around 20% of your net income to your “Tomorrow Bucket”, that is towards achieving your goals whatever they might be. This allows you to build a cash buffer for unforeseen events, as well as creating good habits which will stand you in good stead later on in life.

I should also point out that not buying a home does not preclude you from making a real “investment” in real estate. A growing trend is for people to enter the market in an area where they can afford to buy, rather than an area where they want to live. This takes the emotion out of the decision, and the transaction becomes one where the objective assessment of likely outcomes can be made. It is important to treat this type of investment dispassionately. Buying something and spending large amounts turning it into something you would like to live in is a trap that can easily be fallen into.

Your response to your Dad’s statement is entirely up to you. Home ownership is a personal decision. If it is a goal of yours, then you need to put things in motion to achieve it; if it is not then it can often be valuable to treat your finances as if you were. Assessing the viability of your goal is something to be done carefully, and probably with the aid of someone removed from the emotion of the transaction. This is where an adviser comes in.

I would love to be part of your success. If you’re looking to make a move towards “something”, book a time to sit down and have a chat with the team from Innovus Advice about what that is and how you can get there on our Contact Page.

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Posted on October 18, 2017 in Advice, Uncategorized

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