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Is a House a Good Investment?

Updated on December 2, 2011

07/12/11

The question comes across as redundant in 2011 considering the housing crash in the United States, however there are countries still left on this planet who are currently experiencing the peak of what could be described a world wide housing bubble. The citizens of such countries are deluded, believing that "it's different here." My outlook is if a housing bubble pops in the United States, I have no idea why people think it should be any different in places such as Australia and Canada, where they have less people per each square kilometre of land. One economic fundamental is certain, all bubbles pop, because all bubbles are created when the population decides they can't do mathematics. Mathematics can't be cheated.

The first question to ask is does it make sense for a house to exponentially increase in value over the years in and by itself? Would you buy a used car at the same price as a new car? Many home owners looking to sell seem to be asking just that from first time buyers. I would go on to say that in Canada, buying an older home is prohibitively more expensive when we factor in higher maintenance, renovation, and repair costs. Over time, the value of a house should go down, not up.

At this point, my detractors then argue that it's the land that exponentially increases in value. How so? First of all, land in of itself is just dirt that doesn't carry much value. It's the potential in the land that carries value. So we need to ask ourselves what is there in the land that carries enough value, allowing it to increase twice in price over the past 10 years? Has employment gone up? Are jobs appearing in your area? The land obviously isn't increasing in value due to "location, location, location," as your real estate agent touts, if there are no jobs at the location. Has pollution decreased? Is the soil in your land fertile for agriculture? Did you find gold, oil, and or silver on your land? Is there a giant population boom in your geographical area? Please tell me where the fundamentals exist in the land appreciation we've seen today? Simply, there is none.

There's no economic fundamentals that suggests a home bought at retail should be an appreciating asset. It's a consumer product such as an automobile, barbecue, a television set, a computer, a vacation, etc. The only difference is that it's often the most expensive consumer product people have to buy, and the most loosely supplemented by cheap credit. In this sense, housing is uniquely following its own little economy, outside of what is acceptable. If computers had a 30 year payment plan, their costs would go up due to inflation. Same could be said with barbecues. Cars are already starting to go up well above inflation due to car payment plans that simply didn't exist back at the time my grand parents bought their first car. Housing is being infused by cheap credit, but there's a limit, and quite often that ultimate limit is the average life expectancy of the borrower. We're now getting to the point that mortgages are sky rocketing so out of control; that people will no longer be mortgaged to the hilt for their entire life, but for generations upon generations. I don't know about you, but this is certainly not the future that I want. Raising housing prices are akin to feudalism.

So When is a House an Investment?

Simply buying a house and sitting on it isn't an investment. If it were, none of us would have to work. We could simply finance a home at any price, without having to work, and the bank would allow us to do so because the value always increases regardless of what we do. . . I know this may come as a shock to some people, but society has to do something productive to actually generate an economy.

There are a few cases I can think of where a house could be used as an investment. Often this involves doing something productive with the said house, and winning in the margins to generate a profit. In other words, investing properly in a house is no different than any other conventional business.

Here are a few examples:

A) Being a landlord: Buy properties when they're cheap and you suspect jobs may be soon moving into the area. Charge competitive rents that will allow you to make a decent cash flow each month.

B) Being a developer: Obviously if you can produce houses and sell them at retail value; that would be considered an investment.

C) Turning a portion of your home into a farm: If you can turn a portion of your home into a farm and sell the food, as well as save money on food for yourself; that too could be considered an investment.

D) Partitioning your home off to create some sort of business: Such as a convenience store, a bed and breakfast, a Laundromat, etc.

Buying a home at retail doesn't create any wealth, you're not producing anything.

So What Drove Up the Price in Houses in the First Place?

I could sum it up in a few words, "animal behaviour." Human beings literally behaving like animals. I take that back, for that statement is a huge insult to the animals, many of whom actually behave quite majestically.

Greed and fear are the main culprits. The baby boomers saw a 30 year appreciation in real estate assets, all at a huge cost to their own children. They literally cannibalized the youth through this process. Indeed, the unprecedented housing appreciation represented the biggest wealth transfer, from young to old, in human history. Greed is what caused the boomers to drive the prices up, wanting something for nothing. Believe you me, I so wish I could sit comfortably in my chair and wait for the prices to crash, but I've already been waiting 10+ years. I'm not getting any younger.

In hindsight, there wasn't much I could do despite foreseeing the future, because irrationality and animal behaviour ran this market. And seeing that we all need shelter, there wasn't a feasible way I could avoid participating in this irrational market. While greed on the boomers part was the fuel, fear on the part of their children was the pedal. Fear that if you didn't buy now, no matter what the cost, "you would be priced out of the market forever." The banks were only too quick to supply the largest gas tank possible to keep this fear going until it puttered on exhaust fumes.

In conclusion, the boomers didn't win much for but the few who perfectly timed the bubble burst. In the end, most of the boomers ended up back from where they started, effectively erasing their 30+ years of labour history. While their short-sightedness made life in my early 20's hell, as I went scrimmaging trying to find the most basic of shelter, perhaps one day I may have my much needed revenge.

The only true winners from higher housing costs are the government who collects property taxes. It's in everyone's interests to keep housing costs down, not up, same as with every other consumable product.

-Donovan D. Westhaver

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