I don’t want to get on the `housing ladder`
I can afford to buy a house, but I don’t want to buy. For some, that is an amazing statement.
I come from a culture (the UK) where `an Englishman’s home` is his castle, and people speak about a `housing ladder`.
China, Singapore and Hong Kong arguably have a bigger cultural obsession with housing.
I am often asked by people I know `why` I don’t want to buy, as if not buying needs justifying.
The main reasons I don’t want to buy is:
- I have looked at the figures inside out — sure, sometimes housing beats stock markets. Some housing markets at certain times will beat stock markets, for example US Housing beat the S&P from 2000–2010 and Australian housing beat the markets for 10 years or so until 1–2 years ago. However, over a lifetime investing (40–50 years) housing has always lagged markets.
- The direct costs are high — that reduces net gains. Take the UK as an example. The costs of buying (stamp duty) is charged at 0–12% upfront. The only way to avoid it is to buy the cheapest houses. There are also the lawyers and other fees. The upfront fees, therefore, can be 5% or higher. Then there is the annual fee for owning (known as council tax) which can cost 1%-2% per year. In comparison, you can get access to markets for 0.03% per year. That isn’t to mention maintenance costs.
- The indirect costs are high — time is money. All those hours spent viewing houses, and renovating the house all add up. Another indirect cost is your lack of flexibility. If you can’t accept a pay rise due to your house and not wanting to relocate, that can be a huge cost.
- The risks are relatively high — but this one depends on the market. If you are buying in a developed country with strong legal systems, the risks aren’t super-high. In most developing countries, the risks are much higher. Remember most countries have confiscated property in the last 40–50 years.
- It is an illiquid asset — if I want to sell land or property, it could take 6 months or longer.
- There is a more efficient way to purchase property — Real Estate Investment Trusts (REITS) have the following advantages.
- They are liquid
- There are `index fund type` REITS which are cheap
- Average performance is higher than direct property
- They can be held within the same structure as stocks and bonds. So you can hold 10% REITS for example, within your overall portfolio. It makes buy, hold and rebalance easier.
It is true there are benefits to buying property. Leverage and the ability to use other peoples money. However, leverage works in the other way — leveraged losses and negative equity. Even with leverage, the only people I have seen beat the average return of the S&P with leverage are professional real estate investors.
It is also true that in some locations, it is cheaper to get a mortgage or buy outright than to rent, but that isn’t the case in that many markets. Not only have academics found that renting is now cheaper in 65% of US cities, but many markets are so expensive that it is almost impossible to make money on housing.
Take Mainland China as an example. I have several clients who are renting in China. Often buying the same house on mortgage would cost double the rent! China is an extreme example with rental yields as low as 1%-2%, but it shows you that getting capital gains on a property isn’t automatically profitable if you would have saved money renting.