Your House - A Home Or An Investment?
Our attitude to buying property may be changing.
With the current downturn in residential property prices, something strange is happening to our relationship with houses: Commentators and 'experts' are almost unanimous in their view that the house you live in is no longer an investment, but a home.
This is a profound shift in thinking for many people, and I have to suspect that this shift is driven by the pain that we now feel when thinking of houses as investments. The feel-good neuro-chemicals our brains enjoyed during the boom were very reassuring, but now that they've been replaced by stress and feelings of loss we need to find another way of looking at things.
But despite the fall in values and the shift in thinking, the perceived imperative to buy is still there. I was surprised to hear an acquaintance of mine, who was buying a half share in a house along with her sister, say that she "had to buy a house" and this was the only way she could do it. I'm not saying this was a bad idea, but what struck me was the persistence of the notion that this was something she had to do.
While we can argue that people are entitled to proper accommodation, I don't think it follows that we necessarily have to own that accommodation. We consume food, for example, without the assumption that we should own a farm, or own shares in Tesco (LSE: TSCO), but how many people (and governments) believe that if we consume accommodation we should therefore own a house?
In a developed economy, our investment decisions don't have to follow our spending patterns; we can allocate our capital wherever we think best. It has parallels with the division of labour, where we do what we're good at and trade the proceeds, rather than everyone making their own belongings -- if our money is employed more productively elsewhere, we don't need to own everything we use.
I think we need to challenge this simplistic and false dichotomy of "is it a home or is it an investment", and accept the fact that it's both, with all the conflicting emotions and economic arguments that that implies.
A decision to buy will be informed not just by expected financial return (i.e. whether you think your money would be better invested elsewhere), but also by the emotional desire to possess the house you live in and make it your own. And conversely, not just by your emotions but also by rational consideration of what's in your best economic interests.
Owning a home is still the biggest investment most people will make, whether it's appreciating in value or not. We just need need to be clear about we're doing when we buy a home and what our expectations are.
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To finish my answer...[br/][br/]The German market is proof that you can still find enough owners willing to rent out accommodation even with the onerous conditions attached. Make buy-to-let financially attractive, e.g. interest tax deductible, depreciation tax deductible, and people will still rent out properties!
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Regarding McLeodC's post above.... To answer most of the "ifs" above, you only have to look at the German rental market so see why there is only about 45% proportion of owner occupiers in Germany...[br/][br/]- If tenants had guaranteed security of tenure for their lifetime.[br/]* More or less, even if the property is sold (exception, if the owner needs to live in the property)[br/][br/]- if rents were guaranteed not to increase by more than the rate of inflation, [br/]* well, rents can only increase based on very tight conditions, it is possible, but the amount they can go up by at once is limited[br/][br/]- if tenants had the freedom to decorate or otherwise alter their rented homes as they wished, [br/]* yes, but put it back into order when you move out (=white paint everywhere!)[br/][br/]- if tenants were able to recover the cost of any improvements when they eventually gave up the tenancy[br/]* no, but it is usual to rent a bare box (only fittings would be a bathroom, no kitchen, lights etc..), so you leave it that way, or try to sell e.g a kitchen on to the following renter[br/][br/]- if house prices remained stable...[br/]* yes, or gently sinking year on year
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If tenants had guaranteed security of tenure for their lifetime, if their heirs were able to inherit that tenure and pass it on in turn, if rents were guaranteed not to increase by more than the rate of inflation, if tenants had the freedom to decorate or otherwise alter their rented homes as they wished, if tenants were able to recover the cost of any improvements when they eventually gave up the tenancy, if house prices remained stable...if all these 'ifs' came true, of course it would make more sense to rent rather than buy. [br/]But there would be no houses to rent, because no-one would be mad enough to be a landlord under such conditions.
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17 November 2008