Don't build a house of cards
"Whatever it takes to get on the ladder," said the daughter of a friend.
She meant the property ladder, of course, and was saying that she would do everything necessary to get her foot into her own door. With the current boom in property prices in some places, I fear that there are others taking the "whatever it takes" slogan literally.
There are some things for which I would do "whatever it takes"; but home ownership is not one of them. I think home ownership is important but not so important that other stuff is completely subsumed by it and that people become blinded to cost and risk. Some people, in their single-minded drive to get onto the housing ladder, may be prepared to do so at any cost - in fact, without even stopping to consider what the costs may be. In doing this, they are failing to think about whether they really ought to buy a house and whether they are, in fact, paying too much in several different ways.
Home ownership is a good thing for most people - no doubt about that. From a financial point of view it provides an asset which will probably grow in value and a hedge against a major increase in housing costs (which are likely to be one of you greatest costs over the course of your life). The mortgage also provides a savings discipline: we grow our wealth by repaying the debt as our bankers insist.
Ownership can be good from a lifestyle point of view: it is a place to truly call "home" (is there any other word more loaded with feeling and emotion?) You can do with it as you want (within reason) with the security that no one can throw you out (except, maybe, the bank).
Nevertheless, although there are good advantages of home ownership, I do not think that it should be bought at any price. "Whatever it takes" is a good slogan but the boom in house prices is giving rise to anecdotes of people taking this literally - and putting a lot at stake. Sticking your neck out for home ownership often means greater debt and other obligations. These may extend not just to a mortgagee but also to family and friends. Tales are told of people hitting up family and friends for a loan or a guarantee and finding other ways to bridge the deposit gap. These constitute a neck stuck out too far and liable for chopping: becoming obligated by borrowing from family and friends is often not a good idea; paying a 1 per cent interest-rate premium for being over 80 per cent LVR at the bank is expensive; high gearing rates are risky.
Is home ownership really worth these things? From a strict financial point of view, I doubt that home ownership is much better than renting and investing. I have seen a few studies over the years and it is a difficult calculation with many assumptions of future values. My conclusion is that there is likely to be little (if any) difference between renting and owning provided you have the discipline to invest.
Housing is not a one-way bet: in some areas, house prices have boomed but that is not the constant state of affairs. You are supposed to buy in gloom to sell in boom. Buying now seems the precise opposite of that: this is a time for patience rather than doing whatever it takes to get into a house.
On top of the state of some markets, interest rates are rising. Doing whatever it takes based on historically low interest rates does not seem a great idea.
All of these financial risks are one thing, but I am also concerned that the rush to buy has a lifestyle cost: it often seems that people are working ever longer hours to buy a house that they will have no time to enjoy.
"Whatever it takes" (with all of its determination) is a good attitude for some things in business and in money. However, home ownership is a big investment decision which needs careful financial and lifestyle consideration. House prices can and do fall; interest rates do rise; family and friends who have lent money can get grumpy.
You can have a good life and be wealthy without owning a house: you need the discipline to save to grow your wealth, but with high house prices and rising interest rates, ownership is anything but a no-brainer.
Martin Hawes is an Authorised Financial Adviser and a disclosure statement is available on request and free of charge, or can be found at www.martinhawes.com. This article is of a general nature and is not personalised financial advice.
Sunday Star Times