Thinking of buying a home? But, not sure whether it is a worthwhile investment?
Buying a home is a tricky financial decision. And, buying an expensive home (one with a higher value than your current one) can be trickier. It can have a huge impact on your finances. The mortgage, house maintenance cost, and other expenditures have the potential to take a toll on your budget if the decision is not wise. Time and purpose are considered the two most important factors that decide whether or not your decision of buying a home is a good idea.
Usually, whether the prices rise or fall (fall, especially for all the wrong reasons) most financial advisors question home investment. Arguments are based on home expenditures and killing financial freedom.
But, is buying a home a bad investment? What if you seek a home as a long-term investment, prices fail to be affordable for years, or you really need a new home? Let us have a look.
Taking into Account Historical Stats – HDB Housing and Private Properties
Financial history, whether it is the stock or real estate markets, is considered when making investment decisions. Let us take the comparison of a 4-room and 5-room HDB house in 1990 and 2016. Assume that you had the option of buying either a 4-room or a 5-room HDB home back in 1990. The HDB price in 1990 was approximately $60,000 and $75,000 for a 4 and 5 roomer respectively. In 2016, the price rose up to $332,500 and $415,500. Given this scenario, it is obvious that buying a 5 roomer would have proven to be a good choice back then. Even with the recent downfall in prices of real estate, the average prices have considerably risen with an annual growth rate of approx 6.8%. Even if you would have had to take a loan for the property back in 1990, given the lower interest rates then, you would have made a larger profit – summing up as a good investment decision.
Now, you may ask that this was just for HDB housing. What about those who prefer private properties like Condominiums?
Although the property market has cooled down in recent years, buying a condominium then or even in the early 2000s would have proved profitable since the prices have recovered to offer you substantial profit. In fact, in 2010, there was no resale charge imposed on Executive Condominiums. This indicates it’s a good time to buy resale flats. Even if you had taken a loan, the low interest rates would have worked in your favour. Above all, if one is ready to downsize their home, the property investment could be a great option. Considering the appreciating property market during the time, one can sell their existing property at good rates and earn a large profit as a result of downsizing. Considering these historical statistics, buying a property is not really a bad investment decision.
But, why then do financial advisors question home investments? What about the unpredictable nature of these markets? Isn’t taking a loan equal to not entirely owning the property until it is paid-off?
Well, like everything else, home investment also comes with its own pros and cons. The answer to your questions is long term thinking!
Long Term Home Ownership – Good Investment Decision
In this era of instant gratification, everyone thinks of short term returns overlooking the fruits of long-term gains. If a person seeks a home to spend their entire life there, then investing in buying a home definitely wins. How? Let’s explore.
Most people argue that a lifetime of renting is a better option than owning a house as it can offer good financial rewards. This can be true in certain cases. When you buy a home, you not only incur the purchase amount but also various other costs. For example, the loan and the interest amount, property taxes, maintenance, etc. This doubles and triples the price you pay for buying a home. When you rent, you definitely save a few lakhs on the entire deal.
But, this concept still has flaws in it. It only takes into consideration the present property price or market scene and excludes the potential of inflation. Considering two additional factors, here’s what we get –
- The Future Value of Your Property – Let’s say you bought the property and lived in it for almost your entire life. At one point, you decide to move in with your kids. If the property market, including the price of your home, appreciated then you can gain substantial returns. Even if it did not, you may still be able to sell your home at the same price. This definitely beats renting a home for life.
- In the Case of Inflation – It is said that when you buy a home on a long-term, fixed mortgage, you essentially shorten the value of the currency. Considering this, in times of inflation, every year it gets cheaper to live in an owned home. In contradiction to this, living in a rental property, the rents typically increase with inflation. This takes a toll over your price of living. Once again, the buying of a house defeats renting in such a scenario.
Finally, we can answer the question – is buying a home a bad investment – with a No! While we cannot say that the conventional financial advice of not investing in a property is entirely wrong. It is just a matter of short-term and long-term perspectives and individual situations. Plus, most of the times better to be asset rich, instead of cash rich!
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