Robert Shiller Destroys The Idea Of Investing In A Home

[Jim2007]

An alternative view to those who claim that a home is an investment:

"So, why was it considered an investment? That was a fad. That was an idea that took hold in the early 2000's. And I don't expect it to come back. Not with the same force. So people might just decide, "Yeah, I'll diversify my portfolio. I'll live in a rental." That is a very sensible thing for many people to do."

"If you think investing in housing is such a great idea, why not invest in cars?" he asked. "Buy a car, mothball it, and sell it in 20 years. Obviously not a good idea because people won't want our cars. It's the same with our houses. So, they're not really an investment vehicle."

You can read the full article on Business Insider...

 

[44brendan]

"If you think investing in housing is such a great idea, why not invest in cars?" he asked. "Buy a car, mothball it, and sell it in 20 years. Obviously not a good idea because people won't want our cars. It's the same with our houses. So, they're not really an investment vehicle."

I'm living in a house built in the late 19th century. I'd have reservations about driving a car built in the same period". I suspect that the above anology is comparing apples with precious stones. Some things wear out quicker than others!

 

[shigllgetcha]

The article kind of mixes up investing in a home and investing in property which have two different objectives. She asks about investing in a home and he kind of answers in terms of investing in property.

-Investing in a home-I want somewhere to live I dont really care about the value at any point.
-Investing in property-I want to make money and I want my house to rise in value so I can make money

We all invest in cars, because we need them to get around and yes they are a bad investment if you want to make money out of them as an investment. But we dont care if you just want to get around and dont need the value to increase. Renting a car wouldnt work out cheaper so investing in one makes more sense

The point about house prices never reaching the same point as the US boom, theyll have to, inflation will eventually do that if its given long enough. It could take 50 years but its inevitable.

 

[Jim2007]

-Investing in property-I want to make money and I want my house to rise in value so I can make money

Yes, but the idea of borrowing money to invest in a property has been well and truly disproven at this stage. The old maxim of not borrowing to invest still stands regardless of the asset class.

The point about house prices never reaching the same point as the US boom, theyll have to, inflation will eventually do that if its given long enough. It could take 50 years but its inevitable.

Not necessarily, first of all there is always the possibility of deflation, but more important is the demographics - they have an ageing population and middle class income is declining...

 

[bacchus]

"If you think investing in housing is such a great idea, why not invest in cars?" he asked. "Buy a car, mothball it, and sell it in 20 years. Obviously not a good idea because people won't want our cars.

The value of classic cars has dramatically increased in the last 7-10years, simply because people invest in them. A 246GT has seen its price jump approx 200k during that period. And AFAIK there is no CGT to be paid .

 

[Brendan Burgess]

A very interesting discussion - I can't access the article for some reason.

I have always argued that people should look at all their assets and liabilities when deciding their investment or financial strategy. Some very well -informed people often respond that I am wrong to include the person's home as part of their portfolio. It is a strange attitude as a home can be converted into cash or can leave you insolvent due to a very high mortgage.

So a person's home should be included in a person's financial planning.

Is a home a good investment?

I have always argued that a person's financial priority should be to own their own home and have a comfortable mortgage. It seems to me that this is still correct, in Ireland, at least. People should not start pensions or get into other forms of inaccessible savings or investments until they own their own home. If you think that house prices are going to fall or if you are not sure where you are going to work and live, that is fine. Build up your savings until you are ready to purchase.

The tax benefits of home ownership in Ireland are quite substantial.

• There is no income tax on the "income" from the investment i.e. the free accommodation
• There is no Capital Gains Tax on any gain on sale of the property
• The value of your home is disregarded for means testing for social welfare benefits
• There are other minor benefits e.g. a tax-free rent a room scheme; you can borrow against it cheaply; you can avoid CAT if you gift it to someone living with you;

Let's say I choose to invest my money in shares and rent my home.

• I will pay up to 54% income tax on the dividends received
• I will pay 33%(?) CGT on any gains
• I will get no tax relief on the rent I pay for my home
• My investments will probably disqualify me from a lot of social welfare benefits

And, of course, there are many non-financial benefits to owning your home

• You have security of tenure - whereas a tenant can be kicked out relatively easily
• This security allows you to put down roots - plan your children's education, etc.
• Home owners tend to be more involved in the community than renters
• You are in control - if you have a problem, you fix it yourself to your standard. You don't have to chase a landlord to fix it.
• You can spend money on decorating or extending it without worrying whether that money will be wasted

There are disadvantages as well

• Borrowing for anything increases risk
• All of your assets are usually in one asset- it's much easier to diversify with shares.
• It's inflexible - if you want to move or if you have to move, it's much more difficult. Of course, you can let your house and rent elsewhere.

Overall, buying your home is a very good idea in Ireland. Even if you are convinced that house prices will fall from their present levels, then wait until you are happy with the price. The returns on equities over the long-term would have to massively exceed the returns on house prices to justify renting.

 

[Bronte]

"If you think investing in housing is such a great idea, why not invest in cars?" he asked. "Buy a car, mothball it, and sell it in 20 years. Obviously not a good idea because people won't want our cars. It's the same with our houses. So, they're not really an investment vehicle."

This bit is where I get lost. Other than very very few people, no one buys a car as an investment so the comparison is false.

When you buy a new car for example you know immediately that it's value has nearly halved when you drive out the forecourt. You buy a car for it's utilitaran use. It's just the same as a washing machine. A house/property is a completely different matter.

Put another way, say you purchased right now 5 houses and another person purchased 5 cars, who would be wealthier in 20 years?

 

[ryaner]

Put another way, say you purchased right now 5 houses and another person purchased 5 cars, who would be wealthier in 20 years?

Depending on the cars, the car buyer could come out much further ahead. And someone buying 5 cars is likely investing, not purchasing for usage.

The point Robert Shiller makes is valid. If you own a house and have to move somewhere suddenly, the house is still a liability until you get a tenant that more than covers your costs. It just is a lower liability than renting in most cases.

 

[Brendan Burgess]

Folks

I think that the comparison should be between buying a house and investing in shares or leaving your money on deposit.

I think that the cars issue is a distraction from a very interesting topic.

Brendan

 

[kennyb3]

• You have security of tenure - whereas a tenant can be kicked out relatively easily

• 
  
  Brendan, good post generally but the above part is thrown around in a very blaise manner regularly. If you have a fixed term lease you are 100% safe unless there is a clause, that has to apply equally to both parties. The problem is people don't understand their rights not that they don't have any.
  
  I went through this recently enough and the returning LL had to buy us out of the remaining lease term.
  
  
  

  Overall buying your home is a very good idea in Ireland.

  
  Is this not very sloppy? Should it not finish 'in Ireland is very tax efficient and may generate a higher return compared to investing in equities/leaving your money on deposit.'
  
  You've just concluded buying a house is a good investment but haven't mentioned the key word price. Obviously I know speculation on prices isn't allowed on this site but surely you should put in some sort of caveat in this regard. It's some going to suggest buying a house without reference to price. Much the way the share price you buy in at is a big key to equity returns.

 

[Bronte]

. If you have a fixed term lease you are 100% safe unless there is a clause, that has to apply equally to both parties. The problem is people don't understand their rights not that they don't have any.

.

As an experienced landlord I don't believe there is any value to leases and I do not consider it is easy to remove tenants that don't want to go even if you as landlord do everything by the book.

In addition to the disincentives to property ownership I'd also add the following:

If tenant's seriously thrash your property you are exceeedingly unlikely to recoup the cost.

 

[anuj21k]

Well cost is something to consider offcourse but real estate will always be real as long as its really real.

 

[kennyb3]

As an experienced landlord I don't believe there is any value to leases

No value how? I'm not following exactly what your trying to say. From a landlords perspective?

 

[Brendan Burgess]

If you have a fixed term lease you are 100% safe unless there is a clause, that has to apply equally to both parties. The problem is people don't understand their rights not that they don't have any.

I went through this recently enough and the returning LL had to buy us out of the remaining lease term.

Landlords can "encourage" people to leave even if they are paying their rent. If they are not paying their rent, they can get eviction orders far more easily than a bank can get a repossession order.

Is this not very sloppy? Should it not finish 'in Ireland is very tax efficient and may generate a higher return compared to investing in equities/leaving your money on deposit.'

You've just concluded buying a house is a good investment but haven't mentioned the key word price. Obviously I know speculation on prices isn't allowed on this site but surely you should put in some sort of caveat in this regard. It's some going to suggest buying a house without reference to price. Much the way the share price you buy in at is a big key to equity returns.

I have covered it.

If you think that house prices are going to fall or if you are not sure where you are going to work and live, that is fine. Build up your savings until you are ready to purchase.

Maybe I need to say it twice as people often quote me completely out of context.

 

[kennyb3]

Landlords can "encourage" people to leave even if they are paying their rent. If they are not paying their rent, they can get eviction orders far more easily than a bank can get a repossession order.

Ah come on now most LL wouldn't resort to dirty tricks and those that do have a lot more to lose - i.e. their place being trashed.

If they serve you an eviction notice and you've a fixed term lease - you just register and a complaint with the PRTB and there is little they can do the interim.

My LL had to 'encourage' me to leave for €4k for the remaining 8 months of my lease.

Again my point is the security of tenure thing is way over played.

I have covered it.

Maybe I need to say it twice as people often quote me completely out of context.

Okay fair enough. I just think a summation/conclusion should also include a caveat.

 

[Brendan Burgess]

Okay fair enough. I just think a summation/conclusion should also include a caveat.

OK, I have edited the final line as follows:

Overall, buying your home is a very good idea in Ireland. Even if you are convinced that house prices will fall from their present levels, then wait until you are happy with the price.

 

[kennyb3]

^^ Thanks

 

[gearoid]

Just a quick comment on pension investing and cash saving while not owning a house.

I have tried where possible to do both. If you are able to save the equivalent to an annual mortgage each year, then I don't see the issue of also contributing to a pension from the excess.

I would feel that if you are over thirty something you may need to start saving for a pension regardless, but at the same time build up cash reserves for a house purchase.

I have saved in the ratio of 65% cash/ 35% pension for the last 15 years or so but I try to save the equivalent of a "virtual" mortgage each month.

 

[Jim2007]

Overall, buying your home is a very good idea in Ireland. Even if you are convinced that house prices will fall from their present levels, then wait until you are happy with the price.

One thing people need to think about is the fact that going forward Euroland budgets and economic policy will converge and in general the other Euroland countries do not support home ownership Irish style - so how that is going to pan out going forward is open...

 

[ryaner]

If they serve you an eviction notice and you've a fixed term lease - you just register and a complaint with the PRTB and there is little they can do the interim.

This applies even after the end of a fixed term lease. The Landlord can't just rock up and kick you out. And the backlog in the PRTB further delays anything happening.