Why your house is not an asset
How changing your mindset on this can help you become wealthy
Hello fellow Protagonists,
In this post I want to question the view that the house we live in is an asset.
If asked, most people would say their biggest asset is their house. Whilst it is true that our house will probably be the most expensive thing we own (or more likely partially own), adapting our perception of what an asset is will help us to realise if our financial focus requires changing.
First we need to recognise what we think an asset is.
For many of us our house has appeared under the asset column when we are working out our net worth. Our net worth is when we add up the monetary value of everything we own and deduct anything we still owe. It can be an eye-opening experience for people to work out their net worth and I highly recommend it to all who do not currently track theirs. Our house will usually play a big part in this exercise if we end up with a nice positive figure.
But has this placed an over-reliance on our house as a perceived asset?
In a recent post about an introduction to assets, I used a definition of an asset from Robert Kiyosaki, which was:
"An asset puts money into our pockets"
An asset creates a stream of income to feed into your main river. The opposite would be a liability, which takes money out of our pockets.
So the question is if our house puts money into our pockets or not? For the vast majority of people it doesn't, and here's why.
Most of us are paying off a mortgage
A lot of us, including myself, still owe money on our house through a mortgage. In May 2019 there were around 10.94 million mortgages in the UK and the average amount left to pay was £135,831.
Mortgage rates are currently at some of the lowest levels we have ever seen in the UK. We are still paying some form of interest on our mortgages and the interest will increase again in the future, it is just hard for us to predict when that would be. It is something out of our control.
Mortgages clearly take money out of our pocket.
The longer the life of the mortgage the more we end up paying due to the negative side of compound interest. In 2019 there was a 5.7% increase in the number of people re-mortgaging for additional costs, usually extending the life of the mortgage. This means that nationally the amount being taken out of our pockets is increasing.
Renovations rarely increase the value of our house as much as they cost
Spending £10k on a new kitchen will rarely see the value of your house rise by £10k. Unless we do the work ourselves, most of us will know from experience that the labour costs of house renovations can sometimes be just as costly as the materials. There is also a chance we have payed for the renovation on a loan with its own additional interest rate.
I think when people come to sell their house many forget the overall costs of the renovations they made whilst living there. Those who are fortunate with the skills and connections to renovate a worn down house they bought at a mass discount may benefit nicely from this. Is this the case for the majority of us though?
Houses are expensive to run
Here we can add in all the additional costs of running our house:
Gas and electric
Repairs (may or may not be covered in the insurance)
Just to cover these costs alone my house would have to appreciate by at least £350 a month on average.
When you do sell your house there are fees!
Stamp duty is a monster in my humble opinion. You may get this removed when buying your first house but move on to your second house, like I did in July 2019 and we are talking potential thousands. Add in estate agent fees, solicitor fees and moving charges and we get to realise first-hand why some people just stay where they are. It's fine though, as many companies will allow you to add charges to your mortgage and pay even more over time. How nice of them...
Your house will probably appreciate with time and so will everyone else's
So your house may have doubled in value from just staying there for some time but I am going to have a solid guess that your neighbours house has done the same. House appreciation does change depending on where you live in the UK and you may decide to move area when you do go on to buy another house. Many of us will stay in the same area, especially if we don't plan on changing jobs. I am just saying that your house will not be the only one to increase in value.
Take inflation into account
Housing has its own market but everything is affected by national levels of inflation; over the last 12 months the average level of inflation was 1.5%. £100 in 2019 would now have the purchasing power of £98.50 in 2020, if all other aspects remained the same (which they rarely do).
If you opened a 25 year mortgage back in 1995 and had paid it off at the start of this year, you would have experienced inflation rates as low as 0.2% or as high as 4.8% in a given month.
When we moved house in July 2019 we did sell our house for more than we bought it for, 4 years prior. I cannot remember the exact percentage now but after taking inflation into account what looked like a nice sum was more like a 1% profit increase each year.
How to view a house
A house is a liability for the vast majority of us. There are great benefits to buying a house on an emotional level such as feelings of security, especially if you own the house fully. A house is also a place where you can express your style, creativity and personality as opposed to lots of rented houses.
When you do pay off your mortgage this could greatly reduce your cost of living and the need to earn as much, or it provides opportunities and freedom to use the disposable income somewhere else. A house is usually a key aspect when passing down your wealth in your inheritance.
We could view owning a house like a strange kind of savings account. Yes we have a lot of money leaving our pockets in charges, bills and taxes but we do still have some value left at the end of it, for some this could be hundreds of thousands. Any value left over is better than if we were to otherwise spend it all.
When does a house become an asset?
I can think of a handful of situations where a house becomes an asset:
Rent a house out and make a profit
Renting rooms in your house so that other people cover the mortgage and bills (AKA house hacking)
Purchasing a house with the sole intention to renovate and sell
Having the right skills and contacts to buy a house (or land) at a great price and increase the value with minimum cost
Having the right house at the right time, like stories of those who have lived in London all their lives and now own a house worth £1M. I am not sure most saw that coming.
My intention is not to put people off buying a house, like I said I have a house with a mortgage myself. It is about knowing what we are purchasing and what we are classing this as. We are living through a time where many people are renting and I hope that this is of some comfort that owning the house you live in is not essential to building assets and wealth. There are other ways.
Put it this way, if buying your house was the true secret to wealth then 63% of households would be living the high life with fat bank accounts. Yeah I don't think so either.
If building assets is something you are interested in then take a look at this post as an introduction. I plan on writing a lot more around asset building in the future.
I hope you found this useful. What are your current plans around home ownership?