• The Savvy Millennial

Is a house an asset or a liability?

All of us have heard about someone's luck selling their home and gaining hundreds of thousand of dollars in the process. Then, putting a great large down payments on the next property and, therefore, creating perpetual leverage as their next home appreciates and sells for way more than what they bought it for. In many cities like New York, San Francisco, Toronto and Vancouver all this crazy growth happened in the last 20 years. Those who were savvy enough to time the market and purchase a property that has appreciated since, are winning, and the ones who never got into the market…well seems like it's hard to catch up now.

Many of us are used to thinking that buying a house is like buying an asset that holds value and appreciates over time. That might be true if you were lucky enough to get into the market at the right time and ride the appreciation wave. However, by definition, an asset is "property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies". To consider your home an asset, you have to be able to meet debt obligations, maintenance and management costs, and it has to potentially offer cash flow or a good return on your investment in the future.

These days, for many new house buyers, a home is more of a liability than an asset. If you are buying a family home it is an emotional purchase and probably not a rental property if you are planning to live there with your family. You might think about potential rent income down the road, but that's not guaranteed, and in most cases with the costs that you are going to incur, the rental income will not be enough to cover them. Every month you will have to pay for your mortgage, utilities, maintenance, taxes, insurance, and more. You might want to also budget for large expenses like roof, plumbing, furnace repairs etc. Furthermore, by putting a down payment on the property of 5-20% you are simply saving and as Robert Kiyosaki likes to say: "Savers are Losers". Because just by trying to only save, you lose out on the opportunities to multiply your wealth (opportunity cost). Maybe that 5-20% would generate you a higher return elsewhere, instead, it's parked in the house that might not be appreciating as fast as you want it to.

Many people are hoping for appreciation of the home that they are getting and that's almost the same as gambling. You can't predict the market and overextending yourself in the hopes of future gains might not be the best idea. Right now interest rates are low and borrowing is cheap, so many people might think that they are in a good place to afford this new purchase. However, they are often not even thinking about affordability with a potential rate increase. Coupled with low supply of homes for sale on the market, many hungry buyers are still over bidding each other for often ridiculous prices. Helping the potential bubble to grow in size.

According to researchers, median home prices have risen in recent years, growing at four times the rate of household incomes since 1960, while median home prices increased 121% nationwide since that time, median household incomes rose only 29%. This means that some people might never catch up as saving for the down payment is becoming increasingly difficult.

In the past 10 years some of us have seen 300%+ appreciation on homes, so it's understandable that you might be hoping for similar returns. Many parents are also teaching their children that buying a home is a must, but don't really get into the numbers to understand that, for many, it's not affordable and doesn't make sense. Being conservative with your numbers, and budgeting within your means is key. Making sure that you don't overextend yourself, taking into account potential rate increases as well as having enough money for an emergency fund is also key. Keeping all of the above in mind, if you cannot afford a home right now, it's okay. It's not a race and there is no need to try and keep up with the Joneses.

Buying a home is a privilege these days and should be treated as such. It's not always an asset or an investment and housing market will always have bubbles, you just never know which side of the bubble you'll end up in. So budget conservatively, create "worst case" scenarios, evaluate your options and plan accordingly.

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