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HOAX OF HOME OWNERSHIP
A Mathematical Analysis
This is a thread debunking common beliefs we have in homeownership, which are
1. House is a good investment
2. Owning your home means you pay rent to yourself
3. In long term, owning your home is cheaper than renting
A Mathematical Analysis
This is a thread debunking common beliefs we have in homeownership, which are
1. House is a good investment
2. Owning your home means you pay rent to yourself
3. In long term, owning your home is cheaper than renting
1. House is a good investment (WRONG)
People buy their own houses because of this belief. Property is an investment, but not always a good one. A good investment is an investment that gives high return with proportionally low risk.
People buy their own houses because of this belief. Property is an investment, but not always a good one. A good investment is an investment that gives high return with proportionally low risk.
Although housing market is relatively stable, there were instances in the past when the market fell US housing crisis in 2008. Currently, we have overhangs (GLUTs) in high-rise condominiums which impose risk in our housing market. There is risk in housing.
In term of returns, housing is not superior to other investments. Graph below shows comparison between the growth of RM100k invested in housing, gold and KLSE (stocks).
We can see that housing is the most stable, however the growth is relatively close to stocks which had few downturns in 1997 & 2008. Compared to gold, your RM100k investment after 14 years is valued at RM349k as compared to RM183k for housing.
Based on above facts, housing is not the best investment one can made although it is in our custom to have housing as a biggest single investment in our lives.
DISCLAIMER: this doesn’t mean that I promote investing in gold, because historical data doesn’t predict the future. We can’t know for sure if gold will grow as it did in 2000-2011.
2. Owning your home means you pay rent to yourself, not other people (HALF TRUE)
Although there is some truth in this, but that’s not the whole story. Owning your home does not mean that you are just paying yourself, because there is a third party that comes in play, the bank.
Although there is some truth in this, but that’s not the whole story. Owning your home does not mean that you are just paying yourself, because there is a third party that comes in play, the bank.
Homeowning requires financing, thus it requires one to borrow money from bank and pay interest. Because the interest is set per annum, you’ll end up paying so much in interest. Below is an illustration of how much interest is paid for 300k financing at 4.50% annually.
For first year, 4/5 from monthly payment is directed towards paying interest. You do pay rent to yourself (principal on the house), but only 1/5 of the payment. At the end of 30-years, you’ll end up paying staggering RM250k in interest for the RM300k loan on the house.
Also, because the interest rate on the loan is adjustable, it is possible for the cost of financing (interest) to increase depending on the economy. So, this increases the risk of having a house as an investment, while at the same reduces the realized return of owning a house.
While it is true you do pay yourself when owning your own home, however a big chunk of the payments does go to the bank.
3. In long term, owning your home is cheaper than renting (DEPENDS)
Many people fail to account additional costs of homeownership like tax and maintenance. Housing is a long-term investment, and a lot of things happen in 30 years.
Many people fail to account additional costs of homeownership like tax and maintenance. Housing is a long-term investment, and a lot of things happen in 30 years.
It is expected that you will need to do some major repairs and upgrades to your house within your ownership specially to preserve the house value. This is one of many ‘hidden’ costs we fail to realize (or we’re just lying to ourselves by being too optimistic).
Besides, homeowning is a waste of space. Many would buy a house bigger than they currently use to anticipate future changes. For example, a single guy would buy a house that is big enough to accommodate his future wife & kids, even he doesn’t really need 3 bedrooms living alone.
Compared to a guy who rents, he would rent only the space he needs, like a small 1-bedroom apartment or even just a room in a shared house. When he’s getting married, he can simply move to a bigger house that accommodates a couple. He didn’t waste money on unused space.
Another downside of homeowning is mobility cost. Imagine if you bought a house in JB and live there. Suddenly, you get a far better job opportunity in KL. Now you have a problem. The job pays good, but you can’t just leave your house in JB. It is a complicated situation.
If you had just rented, it is easier to decide. You can just end the lease, pay some small penalty and move to KL for the big bucks. You are more mobile when you are renting. This is valuable, especially for young adults who are still in the dawn of their careers.
CONCLUSION
In summary, we need to reevaluate whether owning a house is in our best interest. Many do it because it& #39;s what people do. Coupled with cost of financing, maintenance, unused space, and mobility cost, it does not seem like a wise decision, especially for youths.
In summary, we need to reevaluate whether owning a house is in our best interest. Many do it because it& #39;s what people do. Coupled with cost of financing, maintenance, unused space, and mobility cost, it does not seem like a wise decision, especially for youths.
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Have you known any person who is forced to commute long miles everyday because the house they bought is far from their workplace? Share the stories!
