You wouldn’t dare hear it spoken of in Australia, the land of the great white bubble, but a US financial expert recently suggested that “buying a home has to be the most ridiculous thing you could ever do with your money”. The comment was made by James Altucher, managing director of Formula Capital.
Altucher told Yahoo Finance’s Tech Ticker that while he thought housing stocks were a good investment (in the United States), from an individual perspective, he would “never own a home again”.
The criticisms levelled by Altucher also apply in Australia, but are usually ignored by home owners and investors who instead choose to look at the recent decades of house price out-performance compared with wages growth and inflation.
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In the US, which has experienced house price falls of about 30% in the past couple of years (and a possible “double dip” this year), the notion of annual capital gains of 5%-10% is no longer a reality. As a result, the prism upon which people view housing investment is entirely different to that in Australia. For instance, in the US, those considering purchasing houses are more willing to be realistic about all the costs, rather than factoring significant capital gains and valuing housing as a critical status symbol of their personal successes.
First, Altucher noted that housing is a highly illiquid asset. Unlike shares or savings accounts, it can take many months or even years to liquidate property. And usually, when someone uses equity to purchase a property, even if they sell that property, they will often purchase another property, so that equity is simply transferred to another asset. Further, while the property market can continue an irrational boom for years, it can also enter an equally prolonged trough. Should anything go wrong financially, getting the equity out of a property is difficult, and will usually be accompanied by practical difficulties of having to relocate, often at the worst possible time.
Second, purchasing a property leads to far higher “on-going” costs than renting. Regular maintenance is paid for by the owner of the property — broken appliances, rotten carpets, new electrical wiring — is paid for by the owner, not a renter. Not to mention the building itself. While dwellings constructed in Roman times were built to last for centuries, in recent years, houses are built using expensive labour and pre-fabricated components. Homes, like cars, are depreciating assets — while the value of land should increase over time (so long as it was purchased for a reasonable price, in line with economic growth or at least inflation), the value of the structure on the land will decrease.
Third, Altucher pointed out the high entry and exit costs in home purchases. Buying a home will generally cost someone 5%-10% of the purchase price (for things such as stamp duty, legal costs, finance costs and mortgage insurance) — this is a significant amount. Imagine if you had to pay the bank 10% when opening a term deposit — that would be like investing $100,000 in the ANZ Bank and looking at your account balance the next day and only seeing $90,000. Some of these costs are capitalised, so the buyer actually pays interest on them in the years to come. There are also costs in selling a home, which are similar in scope (agent costs, legal fees) and that make buying a property less lucrative than other assets.
Finally, owning a home traps the buyer to remain in the same location. Altucher suggested a major detriment of owning a home is the difficulty in moving to another location. (This is a criticism that wouldn’t even be considered in boom-time Australia, but is relevant in the US, where unemployment in real-terms is upwards of 20% and there are a far larger number of cities). Altucher conspiratorially suggested that “corporations didn’t want their employees to have many job choices. So they encouraged them to own homes. So they can’t move away and get new jobs. Job salaries [are] a function of supply and demand. If you can’t move, then your supply of jobs is low”.
Compare those claims to the reasons provided by housing “experts” in Australia to buy a home. Unproven arguments such as population growth and housing shortages are made, or the tax advantages in purchasing a property (which while relevant, should never be the rationale for purchasing any asset).
Meanwhile, after more than a decade of appreciation, Australian capital cities appear to be giving back some of those gains. RP Data reported prices have fallen in Perth by 3.8% in the past 12 months, while Brisbane prices have dropped by 3.7%. Last month, houses fell across Australia by 1.6% in seasonally adjusted terms.
The situation doesn’t look like turning around, even in booming Melbourne and Sydney, with Melbourne’s auction clearance rate rate slumping to less than 60% (this time last year, the rate was 77.6%). Sydney’s clearance rate is hovering at about 60%, well down from 2010 levels. With almost 3000 auctions scheduled in Melbourne in the next few weeks, even real estate agents are warning of softer prices.