Homeownership isn’t all that it’s cracked up to be!
Would it be fair to say that buying a home actually is a rite of passage for most people?
However, the conventional wisdom behind that decision is somewhat backward!
In fact, one of the most financially disastrous decisions anyone can make is buying a home!
Have a look at the main three flagrant reasons why one purchases a house:
Worst decision to buy a home #1 – “I’m tired of throwing money away on rent”
As a renter, you’re paying off someone else’s bond.
However, a lot of (younger) home buyers seem to be of the impression that once they buy a house, they actually own it.
The financial institution has given them a loan which they need to repay over 10, 20, 30 years.
In tougher economic times, one ought not to forget an occurrence that becomes quite commonplace: defaulting on loans leads to foreclosures and repossessions!
Sure – you managed to put down 10-20%, but that means that the lender still owns the remaining 80-90%.
And, before you start arguing that paying off a bigger-than-minimum amount per month will result in a similar drop in principal, you may want to check your figures!
During the first five years of your homeownership, more than 2/3 of your loan payment will go to paying off interest!
And it won’t be until you’re halfway through your loan period that more of your monthly payments will go towards paying off principal than interest.
Here’s another interesting statistic: did you know that the median length a homeowner stays in his house is about 7 years?
In other words, you’ve finally managed to get over that huge interest repayment hurdle this first handful of years and statistically, you’re now looking to move again?
You’ve just shifted from paying a landlord to paying a financial institution instead!
Worst decision to buy a home #2 – Real estate is an investment
How many of the younger home buyers are envious of their parents?
After all, they managed to buy their average home with a few R10,000 in the 1970’s.
But, let’s not forget that their salaries were R100-ish as well.
Do you want to calculate the rate of return on their home investment? (mostly tax-free as well)
Let’s save us the pain of going through that exercise.
While it’s great for them to see those types of returns, how much do you think the JSE returned over the same period?
In other words, if they had invested that same amount in the SA stock market, they would have received a multiple of that amount by now!
In reality, how much did our parents actually gain?
Take the elevated levels of SA inflation over those years and in ‘real terms‘ (i.e. nominal growth minus inflation), their supposedly huge gains turn out to be quite realistic again!
Is real estate than to be considered a worse investment than the stock market?
If you had the choice between putting your money into real estate or into the stock market, would it be a tough decision?
And what if you throw in the all the extra monthly costs of owning a house into the mix (i.e. rates, taxes, maintenance, fees, etc), would your decision be any different?
Worst decision to buy a home #3 – “Homeownership is living the dream”
There are a number of ways this type of reasoning could be interpreted.
Yes, it might be true that buying a home for that reason could be ‘living the dream’!
However, one needs to be aware that owning a home doesn’t necessarily mean it’ll make them happier with life!
“No, we can’t go on holiday these next few years as we’re first trying to pay off as much of our bond as we can!”
“Quality of life” ring a bell?
Whilst this article was written with a bit of ‘tongue in cheek’, it hopefully made you realize that buying property isn’t always a slam dunk decision!
There are plenty of studies to be found online that you can consult, but they’ll pretty much all show that the state of happiness is the result of these 4 important ingredients:
- Do you control what you’re doing?
- Are you seeing progress in what you’re doing?
- Have you been connecting with other people?
- Is there purpose and meaning in your life?
Buying a home could definitely help meet those goals!
But what about the “overall price” you are going to pay to get that home?
And, would a 1-year (rental) contract be less of an emotional pressure than a 25-year (bond repayment) contract?
There might be plenty of reasons why homeownership is the way forward, but one needs to remain realistic that there are other options available!