Buying a house is not a good investment
So we saw that buying land was an investment. But buying a house is not. At the very least, people who buy a house are mistaken to think that it is.
And the fault lies with the last ten years of steep increases in house prices. Indeed, people forget to put it into perspective and therefore justify buying real estate as an investment based on the steep rise in prices in recent years. It is therefore appropriate to look at the evolution of property prices in the UK since the 19th century. We notice one thing is that the average price increase is 3.5% per year. If we only take the last 50 years we go up to 5% annual increase.
A yield, must always be compared to inflation
What misleads people about real estate and makes them think it is an investment is that prices have skyrocketed in recent years while inflation has remained low. A cool double kiss effect that makes people have a short memory. If we take the evolution of prices on average over a whole century. We realize that prices are increasing by 3.5% per year. but that the average inflation is it also 3.5% per annum… let us not forget, that it is only for ten years that we live in a world of low inflation.
This was not always the case and in the eyes of history what we are currently experiencing over ten years is therefore an epiphenomenon. In short, therefore, we see that historically and in the long term, owning a house does not pay off. At best it protects against inflation and therefore protects purchasing power. In this, owning a house is certainly a protection, but not an investment. And to look only at the last ten years to say the opposite is a bold bet on the future.
Real estate is like a car
If real estate isn’t an investment. It is still a financial good. Like any financial good, it must be financed and there are costs. From your purchase therefore, you are in unrealized capital loss. But finance charges aren’t the only ones you’ll have to cover over time on a house. It will indeed be necessary to insure it, pay the charges and many other costs. And you’ve barely stepped home. Then year after year additional costs will be added: maintenance. Not to mention taxes … After a quick research, averaging over the purchase of a home, take 5% of its price and that’s the addition of the fixed costs that you will pay each year as a happy owner.
So real estate is like a car. It is not an investment, in the sense that it ultimately does not pay off, even quite the opposite. Buying a house is expensive. If we add all the costs, and we take into account an inflation that remains at 1% over the term of your credit is 20 years on average, it would still be necessary for real estate prices to continue to climb over these 20 years by 6% per year so that this so-called investment does not make you lose money. This is why buying a house is not an investment. It is a good, an asset that allows you to have a roof over your head and protect yourself against potential high inflation. But by no means is it an investment. Or, here’s a risky investment where you bet on a sustained rise in real estate like the past decade has been blinding for most individuals.