Is a house really an investment?

Having a mortgage-free house can make a big difference to how easy it is to live on your savings or pension once you retire. Photo / 123RF

By Susan Edmunds of RNZ

Homeownership is something that a lot of people aspire to.

While it often requires a lot of money, can it really be considered an investment?

Here are some of the arguments for and against.

It doesn’t provide an income

Property investor and 20 Rental Properties in One Year author Graeme Fowler said someone’s own home should not be considered an investment because they would always need somewhere to live.

“Whether it be renting or owning. If you own your own home right now and it does increase say 30 per cent in value over the next five to 10 years, when you go to buy another home, other homes you want to buy will also have increased by a similar amount. So this does not make it an investment.”

He said an investment was something that someone else paid you to own.

“Your own home, you are paying for it, so that is not an investment.

“Examples of ‘investments’ are residential rental or commercial property. You put down a small deposit - and if you have good equity, possibly zero deposit - and the tenant then pays off the mortgage. This of course only works on principal and interest loans, not interest-only loans. Your own business can also be an investment.

“Your own car is generally not an investment, however if you were to use it as a taxi or an Uber, then it would be an investment. The same goes with fridges, washing machines, TVs etc. I used to own a Mr Rental franchise and we rented these items plus many others to customers. This then made them become ‘investment’ items.”

An investment asset should put money into your bank account but a liability would take money out, he said.

But Westpac chief economist Kelly Eckhold said a house would deliver a return in the form of somewhere to live.

“You get housing services over the lifetime you own a house.

“You’re not paying rent, you otherwise would have to pay to have somewhere to live.”

At the beginning, the cost of ownership could be higher than renting but as time went on, that usually reversed.

And while the full rent amount is a cost to the tenant, a portion of a mortgage payment also goes to paying down the loan principal, which boosts the owner’s equity.

Using the equity

A house was a large, leverageable asset for a lot of people, Auckland Property Investors Association general manager Sarina Gibbon said.

Once a homeowner built up equity, it was usually possible to borrow against it to fund other investments or purchases.

“It makes sense to account for the accumulated equity as a possible springboard to financial wellbeing.

“On the other hand, I am a big believer that a home is a home. It should be a sanctuary to which you return each day for comfort and to recharge. And you should set your nest however you want.

“I think a home has leverage potential that can’t be ignored by most Kiwi households, but I would hate to see anyone take that too far and forgo reasonable comfort purely for the sake of maximising their wealth.”

A solid base in retirement

Having a paid-off, mortgage-free house can make a big difference to how easy it is to live on your savings or pension once you retire.

The accommodation supplement is sometimes available to retirees who are struggling with accommodation costs, but Grey Power has previously said rent could take up the bulk of a pension payment.

Researchers from Massey University have looked at housing among retirees and found that most were well-housed and happy in their homes.

But when there were poor housing conditions, there was an association with poor mental health, lower quality of life and increased falls.

The option to downsize

Some people plan to fund their retirements by selling their houses and buying somewhere smaller, or in a cheaper area.

CoreLogic chief property economist Kelvin Davidson said he suspected the reality was sometimes different than the theory.

“You might have planned to downsize, but then get to retirement and actually find you still like your bigger house and location.

“That said, we are seeing it still happen. Of all ‘movers’, we reckon about 21 per cent lately have been downsizers, which is above the average of 19 per cent.

“Lots of equity created post-Covid is probably helping, as well as the development boom that has simply created more smaller dwellings. There’ll just be a natural long-run tendency for more downsizing too, because of the ageing population.”

Value increases not guaranteed

As seen in recent years, prices can’t be guaranteed to go up.

While it’s very likely prices will be higher after a lifetime of homeownership, it is possible that price rises in future won’t be as large as in the past - and the market could be soft when you want to sell.

- RNZ