I’m guessing the majority of people out there think a house is an asset, but some, particularly in financial circles, just don’t agree.
This week we take a look at both sides of the argument, starting with the naysayers.
The No Camp
The argument in the no camp comes down to a simple fact, houses cost money, and assets should make not cost money.
But don’t houses go up in value?
To which the naysayers would say, ‘not always’. In a lot of areas in the UK for example, house prices still haven’t fully recovered from the financial crisis bubble bursting over a decade ago.
In fact, people who bought at the peak could have lost a lot of money buying a house, clearly transforming their purchase into liability rather than an asset.
And even if over time house prices do go up, you’d only ever realize this money if you downsized and most people just don’t.
Generally people spend their lives paying for a home they never get to own. Rather than pay off their mortgage they keep upsizing to bigger better properties. Whenever you upsize to a bigger property you need to get your wallet out.
There’s taxes to pay, buying costs, decorating costs, mortgage interest and maintenance costs which people conveniently ignore when talking about any increase in value.
Lovers of stocks and shares will point out that houses don’t go up half as much as people think they do and even more important is the fact that all this money spent on houses could have been better invested elsewhere.
The chart below was put together from data in the Credit Suisse Global Investments Returns Yearbook 2018. It shows the annualized returns above inflation for different assets over 117 years.
It’s worth pointing out that the numbers are real returns, which means inflation has been subtracted.
In the UK inflation has historically averaged about 5% which means the nominal returns would have been about 5% greater. That said as everything you’d need to buy would have increased by the same amount, it’s better to remove this.
A lot of people in the UK might be surprised to see that UK housing has increased annually by only 1.8%. Not bad, compared to global housing (1.3%) or US housing (0.3%), but it doesn’t compare very well with stocks. US (6.5%), UK (5.5%) and Global (5.2%) have blown housing out of the water.
So from a financial standpoint your money would be best put to use in the stock market where the returns are much higher.
Or put another way, you are effectively losing money by choosing a house over stocks.
£100,000 compounding annually at 1.8% will leave you with just over £170,000 after 30 years. Sounds good! But £100,000 compounding at 5.5% will leave you with a smidgeon short of half a million.
Historically, sticking your money in a stocks instead of houses would have almost tripled your money.
The Yes Camp
On the other side of the coin, there are plenty of people that argue unequivocally that a house is most definitely an asset. I think it comes down to your definition of what an asset actually is.
Generally people’s definition of assets tends to fit one of three descriptions:
- Something useful
- Something of value
- Something that makes money
And it’s worth tackling these one at a time.
Something useful – To my mind a house is definitely something useful. Of course, different folks use their houses in different ways, but at the very least it’s a roof over your head, a place to store your stuff and a place to eat.
Something of value – Even if your house was to go down in monetary value, that doesn’t necessarily mean it’s not valuable in other ways. It’s got the uses listed above for a start. But even from a monetary standpoint, most people’s houses still have considerable value even if the price has decreased since the time of purchase.
Something that makes money – Though house prices don’t tend to rise as fast or as far as stocks, they do tend to rise, particularly in the UK. Providing the buying costs, mortgage interest, decorating costs, taxes and maintenance costs don’t cost more than any increase in value, a house will probably make some money over time.
Not to mention the fact that most people tend to buy a house with borrowed money, which when prices go up magnifies gains.
For example, if you have £100 and it goes up 1.8% you make £1.80, but if you borrow £300 from the bank so you’re getting 1.8% on £400 you’ll make £7.20.
Borrowing money has turned your 1.8% return into a 7.2% return, which on the face of it, is a whole lot better than 1.8% and even a bit higher than what you’d get for stocks historically. (But be aware that this works in reverse too i.e. losses can be magnified in just the same way.)
And finally it’s my guess that proponents on both sides of the argument would agree without doubt that a house becomes an asset when you let it out and it becomes a rental property.
The Bottom Line
There are plenty of reasonable arguments for and a few reasonable arguments against the idea of a house as an asset.
Nobody could argue that a property steadily increasing in value over time, generating a good rental income isn’t an asset.
Alternatively, it would be much easier to argue that a property that was bought at the peak of the bubble in 2007, is currently valued far below its purchase price, and which costs a fortune to maintain is more of a liability than an asset.
In the end it comes down to your definition of an asset. If you think an asset means something useful, or something of value, you’re bound to think a house is an asset.
However, if you think as some do, that an asset is something that makes money, then some houses are assets and some aren’t.