- Our principal home is often viewed as “our best investment ever"
- While this might be true in some instances, there are other considerations when looking at the return from a home purchase
- Some of the advantages of home ownership aren’t available to equity investors, but there are good lessons in the behavioral difference in the discipline in paying for a home and investing in the market over time
With the markets hitting all-time highs, (and the real-estate market at correspondingly historical highs), I wanted to discuss something I hear all the time : “My house was the best investment I’ve ever made”. For most home-owners, on an absolute amount of appreciation, this is undoubtedly the case. But of course there are caveats to this.
The main take-away from the graph below is that over time, the equity markets historically have outperformed the housing market on a compounded return basis:
That’s not to say that most people aren’t correct when they say their principal home was their best purchase: Consider all these aspects:
- How many other quality “holdings” do most individuals hold for decades, without selling? (FUN FACT: I have clients who inherited Canadian bank stocks , with a cost base of less than $10 dollars from the 1980’s, and haven’t sold and have received dividends for decades, with an over 1,000% price appreciation excluding those dividends: (Hi John and Ann!). Owning a home is essentially forced savings, with no option other than to pay down the mortgage, and live in.
- A principal residence, owners don’t generally view as an investment, even though it’s an asset that generally grows over time. We don’t however go into the driveway every day and see for instance a big sign that tells us what the house is worth on that day, and whether it’s up or down.
- When we buy stocks, we have to pay the full price immediately, vs a home, where we put down generally a percentage, and pay it down over many years. As a side note, I believe this is the single greatest advantage in owning a home: the “leverage” which is permitted, which compounds over time (albeit at a lesser rate than the stock market). Imagine if as individuals we were able to take $200,000 of our investments and “buy” a $1MM stock portfolio. Then over the next 25 years, we would be able to pay it back by depositing a few thousand dollars a month. Financial institutions don’t allow individuals to have this kind of leverage on their stocks: but they do allow us to do this for a home.
- When we compare the price we paid for our home at one point in time, vs when it’s sold years later, we don’t really consider the costs imbedded in maintaining that home: property taxes, heat, hydro, maintenance, repairs, renovations, furniture, realtor commissions, interest on the mortgage etc., which is tens of thousands of dollars a year or more (or hundreds of thousands of dollars by the time we sell). In the investment world, one could consider these “management expense fees”, which are considerable (and far more than the fees associated with managing money, here with me at RBC DS!).
- Besides the leverage that we are allowed when paying for our home, the other great benefit of a home vs. equities, is besides in tax-free saving vehicles like the registered products we all know: TFSA, RRSP, RESP etc. where eventually we have to pay taxes, a principal residence in Canada is sold tax free. The returns on stocks (or homes), don’t reflect the different tax treatments.
So yes, in all likelihood ones principal residence is the asset that they will make the most money on. But there are investment behavior reasons, as well as all the structural reason cited above for this: rarely does someone sell their home based on short-term headlines or in a panic and go to “cash” because they can’t generally. We all need a place to live, and the costs are prohibitive, and can’t be sold at the push of a button (or a call to me to sell!).
All of this to see be mindful of the similarities in the reasons why our houses go up over time, as well as the market. That’s not to say we ought to hold onto every stock for dear life, and not make trades and allocations based different factors, or buy a bigger house, or downsize, or moves as required: Buying and holding Nortel forever as an example is a poor investment choice, just as most of us buy more than one home in our life as our circumstances warrant.
Alas, as a prediction this week, I don’t foresee a time where financial institutions allow individual investors to put some money down and control a large sum of stocks (well margin I suppose, but then there is possible margin calls!), with an agreement that they have to pay a monthly amount: In fact, I’m going to bring this up with the head honchos at my time: I doubt I will get far.