Why Real Estate is a Consumer Item, Not an Investment

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We keep saying: housing is not an investment; it’s a consumer item. Here comes an old friend with new evidence:

“The idea that housing doesn’t go down turns on its head when you actually calculate in the real-world costs of interest, taxes, insurance, etc. For instance, before those costs are counted, it looks like 16 out of the 17 top real estate markets in the 1990s were in the black. Once you add them in, however, it turns out that not one of the top property markets went up. They were all negative.

“In the 2000s, up to May 2007, you get something similar…three markets that, in unrealistic terms supposedly shot up 18%, 33%, and 36% during that period, are all actually net losers…down 10.5%, 13.4%, and 28.2%. As in negative. The gains were phantom stats from the fantasy world of no-cost property ownership.

“Running through the rest of the list, the other major markets did still make money. But instead of the astounding triple-digit gains property owners love to point to as proof that this bubble was the real deal, you find out that only two of the markets – net of costs – actually crossed the 100%-gain mark (instead of 10 markets). And annualised, only two markets were even a little above 10% gains in property values.

“Not bad, but not a miracle by any stretch.

“Two more of those top markets just barely squeaked past the annualised 8.5% gains in the S&P 500 for the same period. All the rest of the top 17 markets looked at in this article did worse than the S&P. During what was supposed to be the biggest property boom of all time.

“Again, this isn’t to say there wasn’t a bubble. Just that it truly was an event completely devoid of sanity.”

Bill Bonner
The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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13 Comments on "Why Real Estate is a Consumer Item, Not an Investment"

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J
Guest

try telling this to people in Perth and I will see where your argument stands then.

Andrew
Guest

Renting a home is clearly going to give you a negative return too… so what do you recommend?

Li
Guest

Renting will give a negative return, yes, but so will eating. The point is not to avoid buying a house, rather than it is to not class its purchase as an investment.

arandomperson
Guest

Hi, Sorry to be a bore but I am curious to the source or reference for those figures?

Pete
Guest
I think the editors of this newsletter might need to consider how their information relates to their reader base. Not all the readers own their own home already and a huge investment portfolio. See, as a potential home-buyer myself, I am always on the lookout for any information that may help me make a financial decision: To buy or not to buy? There is so much conflicting information. Some say “buy a house, then your rent isn’t wasted, and the house/land price will appreciate over time” Others suggest (and this is the way i lean) “don’t buy a house, don’t… Read more »
Coffee Addict
Guest
Pete I bought one of those Canberra townhouses in the late 80’s as s first home and when interest rates hit 18.5% I was down to a cash balance of about $10 in the pocket at one stage. The Canberra market tends to stagnate for years, occasionally decline and occasionally jump. Prices there took a big jump in 1985. By 1990 they hadn’t gone much further. There was a slight gain in the value of my property between 1990 (av. value about $130K) and 1994 (av. value about $145K)I recall but this was followed by a sharp downward correction about… Read more »
Pete
Guest

Thanks CA :-)

Gab
Guest

I am also curious to the source or reference for those figures?

unbiased
Guest

Recently on Sunrise, there was a report mentioned by Kochy and the real cost of owning a home.

It suggested real (net) gains in property in line with inflation.

http://www.ibisworld.com.au/sunrise/homeownershipleasing.pdf

Either way, look at the real costs.

Gab
Guest

Thanks

Pete
Guest
Thanks for the comments. unbiased: That is an interesting link, however I do not think I agree with the estimates of $18K p/a of home maintenance. Perhaps that estimate is high due to the renovations people make on investment properties to attempt to increase their value. I would expect that figure to be more realistic at $5K p/a for a non-investment property. Unfortunately the article (Ibisworld article) bases a lot of its argument on that high maintenance figure, and also the idea of purely living off dividends from shares at retirement, therefore not paying CGT on selling the shares. I… Read more »
unbiased
Guest
Pete, the article was just showing the average amount of time people spend on their houses maintaining it(and even discounted it 70%). Really, it was just to get people to have a look at the hidden costs that aren’t normally taken into account when someone buys a house and sells it (and then sprout off about how it grew in value from $250k to $600k, which is obviously a gross figure. It also states a real return from owner occupied housing of 3.7% pa over 25 years. Which pales in comparison to the real return from other asset classes. Really,… Read more »
Pete
Guest

unbiased: Yes, I agree it was a decent article, the first I had ever seen to go to the full extent of making those calculations. I have tried doing such calculations myself to a lesser extent.

I personally don’t like the idea of following the mortgage crowd, just because its a done thing. Most people I know that are busily getting mortgages are not financially intelligent.

I stand corrected about the 18K…I did read the part you mentioned, yet I didn’t pay it much attention given that I certainly won’t be working two jobs.
House maintenance sucks.

Thanks again for posting the article :-)

wpDiscuz
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