Does It Make Sense To Buy Your Home?

Is the dream of homeownership we've been sold a lie?

The Financial Times recently published an article “Are Younger Americans Rejecting The Homeowning Dream?”, highlighting why many millennials choose not to buy homes, but rather rent. They point out that many millennials prefer to build their asset base in the stock market instead of the housing market. 

“The stock market doesn’t require me to deal with tenants, toilets, and termites. I don’t look at a primary home as an investment.” -  Leandra Peters in the Financial Times 

The fact that renting a property could make more financial sense than buying first dawned on me when my husband and I started looking at buying an apartment in Switzerland. Our current 80sqm apartment would cost about CHF2mil ($2,2mil) to buy and with a 20% deposit required, that would mean CHF400k of equity stuck in the property. When you have worked hard to build up an investment portfolio, you start questioning if it’s worth it to move it over into a property investment.

This is when my obsession with the financial analysis started. My favourite financial YouTuber, Ben Felix, published a video on this and finally, it all made sense. Comparing a mortgage payment to your monthly rent does not compare apples to apples. You need to compare the irrecoverable costs of buying to renting. The irrecoverable costs of buying your primary residence is not only the borrowing cost associated with the mortgage but also the repairs, maintenance, and municipal costs. And more importantly, the opportunity cost of not investing in the stock market.

For example, if you expect your investment portfolio to return 10% in the stock market (longterm average annualized return of the S&P500), then a $400k deposit is expected to return $40k, which in our case, already covers our rent for the year, not to even consider the borrowing cost on the $1,6mil loan needed from the bank to acquire a property worth $2mil. You also need to consider the expected growth of the housing market and a few other things. (The financial model I used is available to paid subscribers - this blog has more information.)

I’ve published two YouTube videos on this, one analyzing the UK (London specifically) and the other the South African market, and came to the same conclusion - you are very likely better off renting and investing in the stock market (in globally diversified low-cost ETFs - if you don’t know what an ETF is read my blog). Homeownership is still something very few people critically question. There is an automatic assumption that buying a house is always better than renting one. And this made me interested in understanding why.

The psychological driver behind owning a house I find fascinating. In my opinion, it comes down to two things: 

1. Owning a house is seen as a sign of success. It’s a tangible asset - so it makes sense. Inviting your family and friends to your house that you’ve worked very hard to buy instills a sense of pride. You can’t invite your friends over to admire your stock portfolio.

2. Paying rent, which has no residual value, is seen as throwing money down the drain and “making your landlord rich”.

Fundamentally, the biggest flaw in this thinking is that people never consider the opportunity cost of owning a house. Yes, most consider the borrowing cost when they take out a mortgage, but no one ever warns you that by buying a house you’re missing out on the returns you could earn in the stock market.

Besides this, there are other costs associated with home ownership that a person renting does not have, which new homeowners tend to underestimate. These include:

• Repairs and maintenance costs

• Levies or Home Owners Association fees

• Rates and taxes

• Insurance, and

• Borrowing costs 

The one thing I find really concerning about buying a house at my age (32) is: allocating more than half of my net worth to one asset. Half of my net worth relies on the housing market in the area where I live, how well the area will perform in the future, the country's economy, the upkeep of infrastructure, roads, and crime in the area, and how attractive local schools are. There is no diversification option here.

And if you have read my articles, you will understand my motivation to diversify. Not only on an industry level. At a country level as well. I prefer to allocate my money into diversified ETFs which exposes me to thousands of companies globally.

I received many comments on the YouTube video that buying makes sense because it forces someone to invest in an asset. Personally, investing discipline is not something I struggle with because I set up monthly debit orders but this remains a fair point.

I won’t rule out never buying my house, but there are some arguments for buying your home:

• Investing in an asset is better than investing in nothing because the alternative might be spending all the money and not accumulating any assets

• In your area, there might not be good properties to rent, and buying remains the only option

• The stock market is volatile but pays off in the long term. If you have no appetite for volatility, the housing market is probably the place for you 

• Not all returns can be measured in monetary terms (a home might provide comfort and pride. This is what I would call a lifestyle asset (not the best in terms of financial returns but it could provide “quality of life” returns). You can do with the space as you please. You might enjoy this. I enjoy calling my landlord to fix the shutters when something is wrong 😅

The arguments against buying:

• I have not seen any country’s housing market that, in the long term, outperformed a globally diversified ETF. I stand to be corrected - so if you find one - please let me know.

• Linking more than half of your net worth to one asset, one country, one area and one currency is risky. This is similar to investing the majority of your net worth into one stock - diversification is key! 

• The property is not liquid. It cannot be sold easily. ETF investments are liquid and you can get access to your money in less than a day. 

• If your investment horizon is more than 20 years, you should get exposure to the stock market to make compounding work for you in the long term.

I hope this article opens your thinking on this topic as much as doing the research and producing the videos did mine! Please share it with someone you think could also learn from it. I would love to get your feedback.