Is your home a terrible investment?

Last updated 05:00 12/03/2014
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HOME SWEET HOME: As the biggest purchase you'll probably ever make, it might pay to give some serious thought to the actual financials.

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A shady character in a cheap suit sidles up to you and starts pitching a ''hot'' investment product.

It has a high entry threshold, so you'll have to leverage yourself to the hilt to buy in, he says.

It'll also tie up most of your wealth for the next 20 years or so, so you'll have pretty much no diversification if it all turns to custard.

Over that time the investment will remain almost completely unproductive, and you'll actually have to keep pouring in up to 10 per cent in extra costs every year.

It could take months if you decide to sell up, and you'll pay commissions and fees of about 5 per cent. 

If you're forced to sell at a bad time, you'll make a huge loss, but if everything goes as planned, you could make a handsome profit.

Anyone in their right mind would walk quickly in the opposite direction.

But for most Kiwis, this exact scenario represents a life-long dream: Home ownership.

There's a lot of emotion behind the decision - it's a roof over your head, a quarter-acre slice of heaven, a place to raise a family.

But as the biggest purchase you'll probably ever make, it might pay to give some serious thought to the actual financials.

Nobel Prize winning economist Robert Shiller told Bloomberg last year that investing in housing was a ''fad''.

He said the idea took hold in the early 2000s, and following the United States' big housing crash, he didn't expect it to come back in a big way.

''So people might just decide, 'Yeah, I'll diversify my portfolio. I'll live in a rental.' That is a very sensible thing for many people to do.''

We haven't suffered the US experience yet and hopefully never will.

Nevertheless, when weighing up whether to buy a house or keep renting, it's important to point out some of the less savoury characteristics.

1. Completely illiquid

It takes weeks, months, and sometimes years to sell a property, and can take equally long to get into the market.

It currently takes a median length of 43 days to sell, according to the Real Estate Institute of New Zealand.

In the slowest markets, like Northland and Hawke's Bay, it takes roughly two months.

And that's the middle number - some houses sell almost immediately, and some can stay on the market for years.

An investment that's hard to turn into cash is riskier because if you lose your job, or need cash in a hurry, you can't access it quickly. 

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Compare the 43-day median to buying or selling stocks in large, blue-chip companies, which generally takes as long as a single phone call.

2. Highly leveraged

Property Investors' Federation president Andrew King says he likes property because it's tangible, reasonably stable, and he can borrow against it.

''That does accelerate your return,'' he says. ''It does add a bit of risk as well.''

To explain leverage simply: ''It's good when prices are going up, and it's bad when they're going down,'' King says.

You wouldn't borrow half a million dollars to buy shares, but doing so to buy a house is considered perfectly normal.

Many people buy their first home with a 20 per cent deposit, which is a leverage ratio of 4:1, or 400 per cent. Buying with a 10 per cent deposit is not unusual, which gives a 9:1 ratio.

In a business, that sort of ratio would be considered cause for serious alarm, but in the housing market, nobody bats an eyelid.

Historically, house prices do tend to go up, depending on which part of the country and time period you're looking at. More on this later.

3. No Diversification

Never put all your eggs in one basket.

That's the advice constantly trotted out by finance gurus, and yet it flies in the face of the constant pressure to throw everything into buying a home.

A house not only ties up almost all your wealth in one single asset, it continues to do so for the better part of 20 to 30 years.

Normally, if a single investment failed, it would only represent a small part of your portfolio.

Your holdings might be split between various types of assets, giving you small exposures to thousands of businesses or properties.

Not so with a house, where your fortunes are tied firmly to one piece of real estate.

4. High transaction costs

NZ Wealth head of adviser services Ben Brinkerhoff says buying or selling shares through an adviser costs as little as 0.2 per cent.

Even if you're going through a full-service broker, you'll pay maybe 1 per cent commission on the trade.

How does a house stack up? 

Real estate consultants RECNZ's research shows real estate fees and commissions in the Auckland region range from roughly 3 to 4 per cent of the first $300,000, and then 2 to 2.5 per cent thereafter, plus GST.

Then there's the admin fee of $500, additional advertising fees, and any touch-ups, renovations or window-dressing that needs to be done.

All up, you could easily expect to pay 5 per cent, which is $20,000 on an average home.

Buying isn't quite as painful, but you still get pinged for the following: Builder's report, loan application fee, connection fees for utilities, registered valuation, legal costs, LIM report, and general house-hunting costs.

5. High ongoing costs

It's hard to think of any other ''investment'' which forces you to constantly contribute more money simply to maintain its value.

Houses are taxed every year in the form of council rates, which are usually several thousand dollars.

Then there is maintenance, repairs, and insurance.

Renters don't have to worry about any of this. Bathroom ceiling falling apart? No worries, call the landlord. Roof sprung a leak? Call the landlord.

Some of these costs get passed on to renters, but not all of them in a competitive rental market.


Put down the pitchfork. Before the lynch-mob assembles, yes, it's true we've only taken a one-sided look at the family home so far.

We've established that it's actually a lot riskier than you might think at first glance, in a true financial sense.

High-risk investments demand high returns in order to make them worthwhile.

So the real question is whether the rewards of home ownership are lucrative enough to offset the extra risk and costs.

If the property market keeps marching upwards, none of the five factors mentioned above matter.

That's a big ''if''. No-one can predict the future with any certainty, but history is at least on the home owners' side.

Next week we'll delve into the returns that housing offers, and crunch the numbers on whether they're high enough to justify buying.

We'll also take a look at some of the non-financial factors which can't be ignored, like security, freedom and the family home as a ''forced savings'' plan.

11-03-14 1558

- Fairfax Media


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