Buying a House Should not be Considered an Investment

The father of modern economics placed housing in the same category as clothing and furniture - useful consumer goods that do not generate wealth. For the homeowner, a house is a "part of his expense, and not of his revenue." The euphoria around home ownership crowds out some of the unpleasant truths about real estate: mainly, that long-term returns are often modest at best. Some studies have found that stock indexes actually outperform housing. More worrying is that real estate prices can and do fall - and they can take a long time to recover.

These days, home ownership is widely heralded as the ultimate financial achievement and one of the surest forms of wealth creation available. Homeowners aren't throwing away money on rent, the common thinking goes, but instead putting it toward an asset that can only appreciate in value. Indeed, home prices have more or less climbed steadily for decades. at least two generations have grown up with the same abiding principles when it comes to real estate: save for a down payment, buy a house, and work hard to pay off the mortgage.

Canadians are clearly more than willing to take major financial risks to buy a home. What's ironic is that real estate price gains can be somewhat of an illusion when inflation is taken into account. "People get fooled by nominal numbers," Milevsky says. Long-term returns in real terms are less than spectacular.

Nowhere is that mentality more prevalent than in the current market, where housing has soared to record highs. Existing home sales fell 40%, and prices 12% from their peaks in late 2007 during the turmoil of the recession. But the average home price in January roared back to $328,537, according to the Canadian Real Estate Association, a jump of nearly 20% from the year before. Ultra-low interest rates are providing an unprecedented opportunity for young Canadians to buy their first homes. At the same time, there is a shortage of houses on the market, fuelling intense competition and bidding wars. "Some people don't even balk at paying thirty, forty, fifty thousand dollars over asking now," says Evan Sage, a real estate agent in Toronto. Many factors motivate people to buy property, but one nearly universal reason is for the economic benefits. "Every single decade, prices have gone up," says Sage. "The one consistent thing is real estate."

Viewed purely as an investment, an owner-occupied home has more than a few undesirable traits. a few of the drawbacks buyers tend to overlook. For instance, a house can't be divided up and sold, like a stock portfolio, and it is highly correlated to the job market. Also, a house is undiversified; instead, its future is tied to a single neighbourhood.

This blind devotion to investing in a house as being a very, very good idea might not make sense when all is said and done. "It's like a stock portfolio that consists of one stock. "If I could buy a house where the bedroom is in Toronto, the kitchen is in Vancouver, and another bedroom is in South America, then that's a diversified house."

But the dream of home ownership is so deeply ingrained, and the belief that real estate is the ticket to wealth so strong, that Canadians are increasingly willing to put their economic well-being on the line for the sake of four walls and a roof. This fact is reflected in the growing levels of debt. The average household in Canada now owes $96,100, according to a study released in February by the Vanier Institute of the Family, an increase of 5.7% over the past year. The same report found that mortgage debt is at a record high.

Canada has not been immune to severe price corrections in the past, and we could be on the verge of another one now. With interest rates set to rise and curb affordability, and with economists speculating about a bubble, staking one's entire financial future on a home is not necessarily a wise bet. In fact, a house just might be one of the most overrated investments around.

Homeowners can easily argue that while the returns are modest, at least they are building wealth rather than paying rent to a landlord. Leverage can also make a huge difference on returns for homeowners if they choose to sell. In crude terms, assume a 20% down payment on a $500,000 house that is sold a few years later for $550,000. After paying back the mortgage, the seller is left with a $50,000 profit, or a return of 50% on the initial down payment. As far as investments go, that is an eye-popping return. But leverage is damaging when prices fall. A homeowner can end up with outstanding mortgage payments worth more than the house.

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<!DOCTYPE HTML PUBLIC '-//W3C//DTD HTML 4.01 Transitional//EN' 'http://www.w3.org/TR/html4/loose.dtd'><html><head><title>Articles Back Link | Buying a House Should not be Considered an Investment</title></head><body><h3>Buying a House Should not be Considered an Investment</h3><br><br> By: Molly Wider<br><br><p><p>The father of modern economics placed housing in the same category as clothing and furniture - useful consumer goods that do not generate wealth. For the homeowner, a house is a "part of his expense, and not of his revenue." The euphoria around home ownership crowds out some of the unpleasant truths about real estate: mainly, that long-term returns are often modest at best. Some studies have found that stock indexes actually outperform housing. More worrying is that real estate prices can and do fall - and they can take a long time to recover.</P><p>These days, home ownership is widely heralded as the ultimate financial achievement and one of the surest forms of wealth creation available. Homeowners aren't throwing away money on rent, the common thinking goes, but instead putting it toward an asset that can only appreciate in value. Indeed, home prices have more or less climbed steadily for decades. at least two generations have grown up with the same abiding principles when it comes to real estate: save for a down payment, buy a house, and work hard to pay off the mortgage.</P><p>Canadians are clearly more than willing to take major financial risks to buy a home. What's ironic is that real estate price gains can be somewhat of an illusion when inflation is taken into account. "People get fooled by nominal numbers," Milevsky says. Long-term returns in real terms are less than spectacular.</P><p>Nowhere is that mentality more prevalent than in the current market, where housing has soared to record highs. Existing home sales fell 40%, and prices 12% from their peaks in late 2007 during the turmoil of the recession. But the average home price in January roared back to $328,537, according to the Canadian Real Estate Association, a jump of nearly 20% from the year before. Ultra-low interest rates are providing an unprecedented opportunity for young Canadians to buy their first homes. At the same time, there is a shortage of houses on the market, fuelling intense competition and bidding wars. "Some people don't even balk at paying thirty, forty, fifty thousand dollars over asking now," says Evan Sage, a real estate agent in Toronto. Many factors motivate people to buy property, but one nearly universal reason is for the economic benefits. "Every single decade, prices have gone up," says Sage. "The one consistent thing is real estate."</P><p>Viewed purely as an investment, an owner-occupied home has more than a few undesirable traits. a few of the drawbacks buyers tend to overlook. For instance, a house can't be divided up and sold, like a stock portfolio, and it is highly correlated to the job market. Also, a house is undiversified; instead, its future is tied to a single neighbourhood.</P><p>This blind devotion to investing in a house as being a very, very good idea might not make sense when all is said and done. "It's like a stock portfolio that consists of one stock. "If I could buy a house where the bedroom is in Toronto, the kitchen is in Vancouver, and another bedroom is in South America, then that's a diversified house."</P><p>But the dream of home ownership is so deeply ingrained, and the belief that real estate is the ticket to wealth so strong, that Canadians are increasingly willing to put their economic well-being on the line for the sake of four walls and a roof. This fact is reflected in the growing levels of debt. The average household in Canada now owes $96,100, according to a study released in February by the Vanier Institute of the Family, an increase of 5.7% over the past year. The same report found that mortgage debt is at a record high.</P><p>Canada has not been immune to severe price corrections in the past, and we could be on the verge of another one now. With interest rates set to rise and curb affordability, and with economists speculating about a bubble, staking one's entire financial future on a home is not necessarily a wise bet. In fact, a house just might be one of the most overrated investments around.</P><p>Homeowners can easily argue that while the returns are modest, at least they are building wealth rather than paying rent to a landlord. Leverage can also make a huge difference on returns for homeowners if they choose to sell. In crude terms, assume a 20% down payment on a $500,000 house that is sold a few years later for $550,000. After paying back the mortgage, the seller is left with a $50,000 profit, or a return of 50% on the initial down payment. As far as investments go, that is an eye-popping return. But leverage is damaging when prices fall. A homeowner can end up with outstanding mortgage payments worth more than the house.<br></P></p> <br><br> <b>Author Resource:-></b>  <br><br><b>Article From</b> <a href='http://www.articlesbacklink.com/'>Articles Back Link</a><br></body></html>