October 21, 2018

Is a House a Good Investment?

You may already know that I'm still renting (and that's actually a good thing for me right now). However today I pose the question “Is a House a Good Investment”.  There are many reasons why home ownership hasn't happened for me yet, with one possibly surprising reason being: I can't be bothered looking after a house (I know! Shocking!!)

Don't get me wrong, I'd really love to fuss over my own garden (yet I don't, I pay someone to do this), and I DO love a bit of DIY. But my husband, thus far, hasn't shown much of an interest in all the things that go hand in hand with home ownership.  He's getting there. But it won't be fun if we're not a team when we buy a house.

Rent money is dead money

In New Zealand, renters are often looked down upon. “Rent money is dead money”, people say.

Don't worry, I'm not about to get on my high horse and start debating that.  It's probably true for many people, but likewise, mortgages can be just as bad in the wrong hands too.

Now that I'm wiser, I want my money working for me, so while I'm busy throwing my money away on rent, I've  recently started investing in *index funds, in the stock market.  I've gotten pretty good returns but I also understand that there are ups and downs in the market – but it generally trends up. I'm in it for the long term so this doesn't worry me.

*If you're new to investing, The Happy Saver has a most excellent post that explains the different types of shares here.

Related: Mamas, you can afford to start investing today

Index funds – a booty call investment?

Index funds are pretty easy to invest in, and they don't have a lot of costs associated with them. It feels like quite a ‘no strings attached' kind of relationship to me.

Housing on the other hand, sounds like the opposite – with all the associated effort and costs.

Yet it's no secret that we New Zealanders love our housing, and we've experienced a huge increase in the cost of housing over the last wee while. On paper, the value of many homes have increased – and I had this view that people who ‘bought before the boom', should be in a really good position now. 

But is this necessarily true?

I got to thinking… considering all the associated costs and effort, is a house a good investment?

The Personal Finance Community answers

I reached out to my friends in the personal finance community, and asked the question:

How does home ownership compare to index funds, in terms of investing? Is home ownership the best investment?

And Nick Carr of Your Money Blueprint was kind enough to answer.

In this guest post by Nick Carr, he uses 25 years of real, historical data to compare the returns of a theoretical investment in the stock market, vs. the purchase of a freehold house (in New Zealand).

Which do you think will get better returns? The house? Or the stock market?

Over to you Nick!

Is a House a Good Investment_ The Leveraged Mama. Blog.Save

Is a House a Good Investment? – Guest post by Nick Carr

Home ownership in New Zealand is the dream. We’re raised in a society that praises home ownership and degrades renting. We’re told that buying a home is the best investment we can make.

Today, we’re going to test this popular theory out. How good of an investment is home ownership and is it a better investment than the stock market?

About the data collected

I’ve collected data for both housing returns and index funds for the last 25 years (1994 to 2018).

Housing returns data

I’ve gathered the returns for Auckland, Hamilton, Wellington, Christchurch and nationwide. The returns are based on the annual median house price in July. Median is a much more accurate reflection of house prices, than the average.

Stock index funds data

For the stock index funds, our theoretical investor is responsibly diversified, and has split their investments into thirds: between the NZX50 fund, the Vanguard S&P 500 fund, and the Vanguard Worldwide fund.

Associated costs

Additional costs have been added to the totals, to reflect the costs of investing and owning a home.

  • Costs of Investing: 0.5%.
  • Costs of Housing: 2%.

Let me explain how I came up with these numbers.

The assumptions

The cost of housing varies for everyone. Rates and insurance vary by region and house size. Maintenance varies depending on the size and age of your house, and how well you keep on top of maintenance.

In other words, there is no single number. For the purposes of this exercise, in order to compare housing and stocks, I had to come up with a number.

  • 1.5% annual housing costs (not including mortgage interest) is made up of rates, insurance and maintenance costs. I felt these percentages are an accurate reflection of the majority of situations. For example, if your house is worth $800,000, your annual maintenance, house insurance and rates costs in this comparison is calculated as $12,000. (If you want a more specific number for your situation then that will need to be applied.)
  • The cost of index funds were much more easily calculated. Index funds can easily be found for 0.5% or less. We will stick with 0.5% in this analysis.
  • $144,000 was invested in 1993 in both scenarios. Either as a house deposit, or as a stock investment.
  • The house was paid for in full in 1993. No mortgage interest cost.
  • We are assuming the stock investor stayed in the market through all the ups and downs and didn’t try to time the market. For the sake of good returns, it is important not to let our bad behaviours get in the way.
  • Finally, there were a few periods for the index funds that are unaccounted for. For all three index funds, we don’t have full 2018 data yet. Also, the Vanguard worldwide fund didn’t start until 1995 so there is also no data here for 1994 and 1995. I have assumed a rate of return of 0% for the periods without data which will not have a large influence on the overall result, and is much lower than the average index fund returns.

With a fully paid house, with no mortgage interest, surely housing will come out on top, right?

The housing data

*This data is best viewed on a tablet or desktop, but you can get the information from the summary also.

  • Auckland
  • Hamilton
  • Wellington
  • Christchurch
  • National Average
Auckland % change Return after costs House value after costs
Jul-93 $144,000 $144,000
Jul-94 $175,000 21.5% 20.0% $172,840
Jul-95 $185,000 5.7% 4.2% $180,124
Jul-96 $224,000 21.1% 19.6% $215,394
Jul-97 $240,000 7.1% 5.6% $227,549
Jul-98 $230,000 -4.2% -5.7% $214,654
Jul-99 $240,000 4.3% 2.8% $220,767
Jul-00 $235,000 -2.1% -3.6% $212,856
Jul-01 $240,000 2.1% 0.6% $214,192
Jul-02 $260,000 8.3% 6.8% $228,829
Jul-03 $300,050 15.4% 13.9% $260,645
Jul-04 $340,000 13.3% 11.8% $291,439
Jul-05 $369,000 8.5% 7.0% $311,925
Jul-06 $401,000 8.7% 7.2% $334,296
Jul-07 $448,000 11.7% 10.2% $368,464
Jul-08 $420,000 -6.3% -7.8% $339,908
Jul-09 $456,000 8.6% 7.1% $363,944
Jul-10 $450,000 -1.3% -2.8% $353,696
Jul-11 $467,000 3.8% 2.3% $361,753
Jul-12 $505,000 8.1% 6.6% $385,763
Jul-13 $557,000 10.3% 8.8% $419,698
Jul-14 $620,000 11.3% 9.8% $460,873
Jul-15 $755,000 21.8% 20.3% $554,311
Jul-16 $840,500 11.3% 9.8% $608,770
Jul-17 $836,000 -0.5% -2.0% $596,379
Jul-18 $835,000 -0.1% -1.6% $586,720
AVERAGE 7.5% 6.0%
Hamilton % change Return after costs House value after costs
Jul-93 $103,000 $103,000
Jul-94 $117,000 13.6% 12.1% $115,455
Jul-95 $123,000 5.1% 3.6% $119,644
Jul-96 $130,000 5.7% 4.2% $124,658
Jul-97 $148,000 13.8% 12.3% $140,049
Jul-98 $147,000 -0.7% -2.2% $137,002
Jul-99 $152,000 3.4% 1.9% $139,607
Jul-00 $155,000 2.0% 0.5% $140,268
Jul-01 $160,000 3.2% 1.7% $142,689
Jul-02 $165,000 3.1% 1.6% $145,007
Jul-03 $169,000 2.4% 0.9% $146,348
Jul-04 $195,000 15.4% 13.9% $166,667
Jul-05 $250,000 28.2% 26.7% $211,176
Jul-06 $287,000 14.8% 13.3% $239,263
Jul-07 $326,000 13.6% 12.1% $268,187
Jul-08 $312,000 -4.3% -5.8% $252,647
Jul-09 $322,000 3.2% 1.7% $256,955
Jul-10 $318,000 -1.2% -2.7% $249,908
Jul-11 $305,000 -4.1% -5.6% $235,943
Jul-12 $299,000 -2.0% -3.5% $227,763
Jul-13 $310,000 3.7% 2.2% $232,725
Jul-14 $317,500 2.4% 0.9% $234,865
Jul-15 $349,000 9.9% 8.4% $254,644
Jul-16 $445,000 27.5% 26.0% $320,869
Jul-17 $490,000 10.1% 8.6% $348,504
Jul-18 $513,000 4.7% 3.2% $359,634
AVERAGE 6.9% 5.4%
Wellington % change Return after costs House value after costs
Jul-93 $128,500 $128,500
Jul-94 $135,000 5.1% 3.6% $133,073
Jul-95 $130,000 -3.7% -5.2% $126,148
Jul-96 $139,000 6.9% 5.4% $132,989
Jul-97 $155,000 11.5% 10.0% $146,302
Jul-98 $160,000 3.2% 1.7% $148,827
Jul-99 $177,000 10.6% 9.1% $162,407
Jul-00 $181,500 2.5% 1.0% $164,100
Jul-01 $190,000 4.7% 3.2% $169,324
Jul-02 $202,500 6.6% 5.1% $177,924
Jul-03 $235,000 16.0% 14.5% $203,811
Jul-04 $265,000 12.8% 11.3% $226,772
Jul-05 $300,000 13.2% 11.7% $253,321
Jul-06 $330,000 10.0% 8.5% $274,854
Jul-07 $375,000 13.6% 12.1% $308,211
Jul-08 $371,000 -1.1% -2.6% $300,300
Jul-09 $368,500 -0.7% -2.2% $293,772
Jul-10 $385,000 4.5% 3.0% $302,520
Jul-11 $360,000 -6.5% -8.0% $278,338
Jul-12 $367,000 1.9% 0.4% $279,575
Jul-13 $390,000 6.3% 4.8% $292,902
Jul-14 $378,500 -2.9% -4.4% $279,872
Jul-15 $395,000 4.4% 2.9% $287,874
Jul-16 $447,000 13.2% 11.7% $321,453
Jul-17 $495,000 10.7% 9.2% $351,150
Jul-18 $545,000 10.1% 8.6% $381,352
AVERAGE 6.1% 4.6%
Christchurch % change Return after costs House value after costs
Jul-93 $107,000 $107,000
Jul-94 $118,000 10.3% 8.8% $116,395
Jul-95 $126,000 6.8% 5.3% $122,540
Jul-96 $132,000 4.8% 3.3% $126,537
Jul-97 $143,500 8.7% 7.2% $135,663
Jul-98 $146,000 1.7% 0.2% $135,992
Jul-99 $148,100 1.4% -0.1% $135,908
Jul-00 $144,000 -2.8% -4.3% $130,107
Jul-01 $138,000 -4.2% -5.7% $122,734
Jul-02 $144,700 4.9% 3.4% $126,852
Jul-03 $172,000 18.9% 17.4% $148,882
Jul-04 $220,000 27.9% 26.4% $188,197
Jul-05 $256,000 16.4% 14.9% $216,170
Jul-06 $275,000 7.4% 5.9% $228,972
Jul-07 $315,000 14.5% 13.0% $258,842
Jul-08 $300,000 -4.8% -6.3% $242,634
Jul-09 $298,000 -0.7% -2.2% $237,376
Jul-10 $315,000 5.7% 4.2% $247,357
Jul-11 $318,000 1.0% -0.5% $246,003
Jul-12 $340,000 6.9% 5.4% $259,332
Jul-13 $362,500 6.6% 5.1% $272,604
Jul-14 $407,000 12.3% 10.8% $301,979
Jul-15 $419,000 2.9% 1.4% $306,353
Jul-16 $430,000 2.6% 1.1% $309,800
Jul-17 $420,000 -2.3% -3.8% $297,949
Jul-18 $428,500 2.0% 0.5% $299,509
AVERAGE 6.0% 4.5%
National % change Return after costs House value after costs
Jul-93 $115,000 $115,000
Jul-94 $129,000 12.2% 10.7% $127,275
Jul-95 $138,000 7.0% 5.5% $134,246
Jul-96 $147,000 6.5% 5.0% $140,987
Jul-97 $162,000 10.2% 8.7% $153,259
Jul-98 $165,000 1.9% 0.4% $153,798
Jul-99 $168,000 1.8% 0.3% $154,287
Jul-00 $170,000 1.2% -0.3% $153,810
Jul-01 $170,000 0.0% -1.5% $151,503
Jul-02 $185,000 8.8% 7.3% $162,598
Jul-03 $211,500 14.3% 12.8% $183,450
Jul-04 $248,000 17.3% 15.8% $212,357
Jul-05 $283,000 14.1% 12.6% $239,142
Jul-06 $315,000 11.3% 9.8% $262,595
Jul-07 $345,000 9.5% 8.0% $283,666
Jul-08 $340,000 -1.4% -2.9% $275,300
Jul-09 $340,000 0.0% -1.5% $271,170
Jul-10 $352,000 3.5% 2.0% $276,673
Jul-11 $345,000 -2.0% -3.5% $267,021
Jul-12 $363,000 5.2% 3.7% $276,947
Jul-13 $385,000 6.1% 4.6% $289,578
Jul-14 $416,000 8.1% 6.6% $308,551
Jul-15 $464,000 11.5% 10.0% $339,524
Jul-16 $500,000 7.8% 6.3% $360,774
Jul-17 $518,000 3.6% 2.1% $368,350
Jul-18 $550,000 6.2% 4.7% $385,580
AVERAGE 6.6% 5.1%

Summary of housing data

A median valued $144,000 house in 1993 would be worth between $428,500 (Christchurch) or $835,000 (Auckland) 25 years later, depending on where you live. Note, this is before costs. All houses carry costs and we must consider these when thinking of the results. When comparing housing vs stock investing we need to look at the cash in the hand we end up with.

After consideration of costs, the returns from housing decrease to a range of $299,509 (Christchurch) to $586,720 (Auckland). In Auckland, that is almost a $250,000 decrease to what we thought our house return was before we considered costs.

The after cost returns floated between 4.5% to 6.5% depending on the region. But, this is not the end of the deductions. To realise the benefits of the house value, we must sell. If we go with the national average, our returns after a 3% sales commission will decrease from 5.1% to 6%.

Best case scenario

These results are really a best case return scenario and pretty rare. The 1.5% annual housing cost used in the example is on the low side, and we paid for our house in full. We have no mortgage interest cost. This is not reality for most. So, what are the returns on a median priced national house with a median sized deposit and mortgage? A $115,000 house in 1993 with a 20% deposit on a 30-year term would have incurred interest costs of $75,814 at a 4.5% interest rate.

That 1993 house is now worth $374,000 after the insurance, rates, maintenance, and sales costs are considered. Subtract another $75,814 for the average mortgage and the house is now worth $298,000. This is a far cry from $550,000. It would be a big mistake of you not to consider the costs.

Returns have now gone from 5% per annum to 4.1%, assuming a median sized mortgage for a 1993 priced house. 4% is better than you would get from a bank (after costs), but not by much.

We move around

Finally, most people don’t live in the same house for 25 years. The national average length of stay is 7 years. In 25 years, that is 3 times house buying costs (LIM, builders report, lawyers, moving etc) and 3 times house selling costs (Agent fees, staging, moving, etc). Not only that, but if you have a mortgage, the first 7 years are typically mostly interest only payments. There is not a big increase in house equity in this timeframe. These factors can make these 4% returns much less. Especially if each 7-year period you are buying UP the ladder, your costs become more significant.

For all the extra risk it isn’t a great return.

What if a gang moves in to the neighbourhood? Or motivated sellers sell their house cheap bringing down the value of your house? Maybe you experience huge insurance increases because of where you live.

Because of these factors, the monetary returns of owning a home are no comparison to long term stock investing. Yes, a house offers some nice diversification to your portfolio, but it should not be considered an investment that you can rely on to make you rich.

Houses are a huge drain on cash

I don’t see a house as an investment in terms of financial returns. I do however, see it as an investment for you and your family for emotional returns.

A place for you to share experiences. A place for you to feel safe. A place for you to make your own. We all need a place to live, and long term owning a house generally beats renting.

These are much better reasons to buy a house. Not for financial reasons, because there are much better investments than your own house as we will get into now.

Nick Carr - Guest blogger on The Leveraged Mama.Nick Carr - Guest blogger on The Leveraged Mama.Nick Carr - Guest blogger on The Leveraged Mama.

Nick Carr

Your Money Blue Print

The stock investment data

  • S&P 500
  • Vanguard
  • NZX50

S & P 500 (American based fund)

Returns Return after costs Stock value after costs
1993 $48,000 $48,000
1994 $48,634 1.3% 0.8% $48,394
1995 $66,910 37.6% 37.1% $66,338
1996 $82,273 23.0% 22.5% $81,237
1997 $109,719 33.4% 32.9% $107,932
1998 $141,076 28.6% 28.1% $138,239
1999 $170,759 21.0% 20.5% $166,634
2000 $155,220 -9.1% -9.6% $150,637
2001 $136,764 -11.9% -12.4% $131,973
2002 $106,539 -22.1% -22.6% $102,147
2003 $137,095 28.7% 28.2% $130,932
2004 $152,011 10.9% 10.4% $144,523
2005 $159,474 4.9% 4.4% $150,896
2006 $184,656 15.8% 15.3% $173,968
2007 $194,793 5.5% 5.0% $182,649
2008 $122,720 -37.0% -37.5% $114,156
2009 $155,191 26.5% 26.0% $143,791
2010 $178,563 15.1% 14.6% $164,727
2011 $182,331 2.1% 1.6% $167,379
2012 $211,504 16.0% 15.5% $193,323
2013 $280,010 32.4% 31.9% $254,973
2014 $318,343 13.7% 13.2% $288,604
2015 $322,736 1.4% 0.9% $291,144
2016 $361,335 12.0% 11.5% $324,509
2017 $440,215 21.8% 21.3% $393,727
2018 $440,215 0.0% -0.5% $391,758
AVERAGE 10.9% 10.4%

Vanguard worldwide fund

Returns Return after costs Stock value after costs
1993 $48,000 $48,000
1994 $48,000 0.0% -0.5% $47,760
1995 $48,000 0.0% -0.5% $47,521
1996 $55,483 15.6% 15.1% $54,692
1997 $59,317 6.9% 6.4% $58,198
1998 $64,887 9.4% 8.9% $63,372
1999 $81,725 26.0% 25.5% $79,500
2000 $81,586 -0.2% -0.7% $78,967
2001 $78,543 -3.7% -4.2% $75,627
2002 $74,137 -5.6% -6.1% $71,006
2003 $107,135 44.5% 44.0% $102,256
2004 $128,658 20.1% 19.6% $122,288
2005 $143,802 11.8% 11.3% $136,070
2006 $177,724 23.6% 23.1% $167,488
2007 $198,465 11.7% 11.2% $186,196
2008 $105,861 -46.7% -47.2% $98,386
2009 $140,774 33.0% 32.5% $130,342
2010 $163,354 16.0% 15.5% $150,597
2011 $148,816 -8.9% -9.4% $136,441
2012 $177,865 19.5% 19.0% $162,392
2013 $227,044 27.7% 27.2% $206,482
2014 $236,830 4.3% 3.8% $214,349
2015 $236,261 -0.2% -0.7% $212,762
2016 $251,784 6.6% 6.1% $225,677
2017 $321,729 27.8% 27.3% $287,242
2018 $321,729 0.0% -0.5% $285,806
AVERAGE 9.6% 9.1%

NZX50 (NZ based fund)

Returns Return after costs Stock value after costs
1993 $48,000 $48,000
1994 $42,000 -12.5% -13.0% $41,760
1995 $47,166 12.3% 11.8% $46,688
1996 $51,788 9.8% 9.3% $51,030
1997 $50,804 -1.9% -2.4% $49,805
1998 $45,317 -10.8% -11.3% $44,177
1999 $48,399 6.8% 6.3% $46,960
2000 $41,720 -13.8% -14.3% $40,245
2001 $45,058 8.0% 7.5% $43,263
2002 $42,669 -5.3% -5.8% $40,754
2003 $53,764 26.0% 25.5% $51,146
2004 $67,258 25.1% 24.6% $63,728
2005 $73,977 10.0% 9.5% $69,776
2006 $89,010 20.3% 19.8% $83,606
2007 $88,698 -0.4% -0.9% $82,895
2008 $59,605 -32.8% -33.3% $55,291
2009 $70,894 18.9% 18.4% $65,487
2010 $72,624 2.4% 1.9% $66,757
2011 $71,869 -1.0% -1.5% $65,729
2012 $89,247 24.2% 23.7% $81,293
2013 $103,963 16.5% 16.0% $94,292
2014 $122,209 17.6% 17.1% $110,369
2015 $138,805 13.6% 13.1% $124,805
2016 $151,034 8.8% 8.3% $135,177
2017 $184,321 22.0% 21.5% $164,294
2018 $184,321 0.0% -0.5% $163,472
AVERAGE 6.6% 6.1%

Summary of stockmarket data

For this 25-year period, the returns from a portfolio made of stocks, would have been 8.5%. In other words, our $144,000 would now be worth $841,000 after investing costs. This is in comparison to $298,000 we would have from buying a median priced NZ house with a median sized mortgage.

A 4.5% difference in after cost returns has resulted in almost $550,000 extra for the stock investor. Just a small percentage increases over the long term can have a huge impact on our wealth thanks to compound interest . As you can see in the data, the returns from stocks are much more volatile than housing.

How risk affects returns

Our stock investments experienced a low of 46.7% and a high of 44.5%. This is compared to -3.5% and 10.7% for housing. This large difference is known as risk. If we want to experience the potential for greater returns we have to take on more risk. Despite the stock market being arguably riskier than housing, the returns have proved to be worth it.

There are many ways to help decrease the risk of the stock market by following some of these tips.

Final thoughts

Having all our net worth in only our house, or only in the stock market, is a very risky strategy. There is no guarantee that these trends will continue in the next 25 years. This article was just an exercise in seeing what the better investment over the last 25 years has been. It is not a recommendation to go all in to stocks, or all in to housing. I believe there is room for both in any portfolio.

Diversification across many asset classes is vital.

But make no mistake. Historically, your own house is a drain on your cash and barely keeps up with the rate of inflation. Your house is not an investment. It is a place to live, but not much more. If you are thinking you are going to get rich from owning your house, then think again.

The stock market investor was $550,000 better off from a $144,000 investment.

If we extend the time out beyond 25 years, it will get even better for the stock investor thanks to compounding returns.

Don't believe the hype?

There is so much hype in New Zealand around housing. But think about who has an interest in house prices being high. Almost everyone does. Real estate agents, lawyers, builders, home owners, politicians, employers, and councils all want house prices to be high. There are so many vested interests in this industry, it is no wonder we have been led to believe housing is the best way to get rich. The numbers however, suggest a completely different story.

Thanks for reading.

Nick Carr is a 37 year old New Zealander, married with one daughter, full time corporate slave. After a financial U-turn, he has plans to retire before the age of 50 so that his family can focus on spending time on their passions, instead of someone else's. He blogs twice a week over at www.yourmoneyblueprint.co.nz.

Nick Carr - Guest blogger on The Leveraged Mama.Nick Carr - Guest blogger on The Leveraged Mama.Nick Carr - Guest blogger on The Leveraged Mama.

Nick Carr

Your Money Blueprint

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  • Very interesting and well researched post. It always amazes me how expensive houses are in some areas compared to the rural US where we live. I would be concerned about having a significant part of my net worth tied up in any house since neighborhoods and even entire cities can decline over time due to forces outside of your control. Our paid for house represents much less than ten percent of our net worth, so that we could basically walk away from it without suffering any significant loss of assets. That would be very hard to achieve for most people if their house alone was worth nearly one million.

    • That’s such a good point Steve – it’s about risk and diversity isn’t it. Part of the reason I’m building a location independent business is so that I’m free to choose where I live, without buying into a crippling housing market (so long as there’s good internet and surf, we’re good!). Thanks for stopping by.

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