The Three Worst Reasons to Buy a House

I just came across an excellent article, “The Three Worst Reasons to Buy a Home.” It is actually a summary of “this MSN Money article.”

(1) Real estate is better than the stock market. While the real estate market has been red hot in the past few years, with a national average increase of 50% over the past five years, and prices in some markets doubling during that same timeframe, it’s important to keep in mind that past performance is no guarantee of future results. Major real estate recessions are a very real possibility, and it can often take a long time to recover. Moreover, real estate appreciation over the past 40 years has only topped inflation by 1%, as compared to 7% for the stock market. Over the long run, the law of averages has a funny habit of evening things out, so look before you leap.

The MSN article provides further information about past market declines:

Ask homeowners in Boston, Dallas, Houston, Anchorage and Southern California — all of which suffered major real estate recessions in the past 20 years. After dropping more than 20% in the 1990s, Los Angeles home prices took almost 10 years to regain their peak, says real estate expert John Karevoll, an analyst with DataQuick Information Systems.

Two articles at the van-housing blog: here and here show that Vancouver has had drops as well. This should all be no surprise to most people. Yet 3 weeks ago one of my in-laws claimed that “real estate is the best investment ever.” Just last week someone (a recent condo buyer) said to me “you think it’s going to go down?” with complete disbelief. And this week someone else told me they didn’t think prices were going to fall but that they might “level-off.”

The final nail-in-the-coffin for the “real estate is better than the stock market” argument comes from the MSN article: “In the past 40 years, the average appreciation for homes has exceeded the inflation rate by only a percentage point or so. Compare that to stocks, which have bested inflation by 7 percentage points in the same period.”

(2) Rent is the equivalent of throwing your money away. Renting is often cheaper than owning, especially in overpriced markets. Also, you’re not really throwing your money away when you write a check to your landlord — you’re exchanging cash for a place to live, and you’re buying flexibility, freedom, and a lack of homeowner headaches.

The Wealthy Barber provides some excellent commentary against the “rent is throwing your money away” argument:

Paying rent is no more throwing your money away than is buying food or clothing. You need shelter. It’s one of the three basic necessities of life. Renting is one way to acquire that shelter, and in some cases, it’s a very intelligent way.

The last reason to not buy a house, is one that applies to those in the US:

(3) The tax deduction makes it all worthwhile. While it’s true that your mortgage will get you a tax break, it’s not like you’re going to end up profiting. Deductions such as this are like giving someone a dollar for the privilege of receiving 35 cents (or less) in return. While this helps to offset the cost of ownership, it’s by no means a justification for buying a house. Moreover, the other costs associated with home ownership (e.g., insurance, repairs, maintenance, etc.) aren’t typically tax deductible. On top of all this, recent legislation seeks to place a cap on the mortgage tax deduction, meaning that the tax benefits of buying a home may shrink substantially.

Canadians have no mortgage-interest deduction. So this is irrelevant. Not without doing something crazy like The Smith Manoeuvre. One less reason to buy a house for the wrong reasons!