Should a House be a Home, or an Investment?
Posted by admin Wed, 28 Nov 2007 17:29:00 GMT
It is often said that if you are buying a house to live in then you should think of it as a home, not an investment. In other words you should be more focused on finding a house that you like, than what is likely to happen to its value in the future. This is broadly a sensible approach - a house, after all, has to be a place that you are content to live in, and will have a considerable impact on your future happiness and well-being.
There is, however, a danger inherent in the statement. Buying a house is, for most people, the biggest financial decision of their lives, and the impact on their finances should be considered very carefully.
When choosing a house, the most common approach seems to be as follows:
- Go to a few banks and/or building socieities and see how much they will allow you to borrow on your current salary.
- Go to a few estate agents and ask to be shown houses at around that price.
- Pick the nicest you can find and buy it.
The problem in the above approach is that the potential buyer has at no point considered what they can afford. They have simply asked the bank to work out how much they can borrow, and assumed that if the bank is happy to lend that amount, then they can obviously afford to repay it. And the ultimate justification for this approach is that "it's a home, not an investment" - or in other words - the money doesn't matter because the main focus is to find a nice place to live.
For most people who take the above approach, it does them no harm. If they encounter difficulties (redundancy, illness, etc) along the way, and cannot keep up repayments, they can simply refinance their way out of trouble, due to the equity they've built up thanks to the ongoing house price appreciation of the past 15 years. But in a tougher economic environment this is not so easy.
This is why it's important to consider both the financial side of home buying as well as the emotional. Treating a house as a home, not an investment, is a pleasing and refreshing attitude, but it is not an excuse to buy a home that you cannot really afford.
The flip side of this conversation is the proliferation over the past 10 years of the use of housing as a pure investment. The rise in the number of buy-to-let mortgages outstanding is an emphatic demonstration of this. In 2001 there were 185,000, during 2007 that figure rose to 900,000 and beyond (for more detail see Is Housing a Good Choice for a Pension?) Brits have gone crazy for housing as an investment.
Housing as an investment is morally questionable. It is often argued that these new landlords are taking homes away from others who would wish to own them, particularly in the first time buyer market. Buy-to-let investments are usually small flats, which is exactly the type of home a typical first time buyer tends to go for. Many of the 840,000+ empty homes in Britain are held as "investments", forcing would-be owner occupiers to pay a higher price to enter the market. This has a particularly stark effect on the market in popular tourist areas, such as the south west, where many houses have been bought up as holiday homes. There are also thousands of empty newbuild flats up and down the country which are being held empty. This practice of keeping an empty flat and collecting no rental income, but instead banking on continued capital appreciation, is not so much investment as speculation.
Given the problems that have arisen due to people thinking of houses as investments rather than homes, it is rather surprising that the government - which is keen to promote the view that there is a housing shortage - is doing very little to discourage the practice. In fact, second homes currently enjoy a tax break amounting to a 50% discount on council tax, which is a considerable advantage over owner-occupation. Also, any mortgage interest costs incurred in financing an investment property are treated as deductible for income tax purposes, whereas such relief has not been afforded to owner-occupiers since the abolition of MIRAS in the 1990s. Thirdly, the government is also proposing to lower the effective rate of capital gains tax payable on second homes, from the current rate of up to 40%, down to just 18% from April 2008. With all these tax breaks, it's clear the government is intent on avoiding tackling the problem caused by people treating housing as an investment.
In conclusion, there is no clear answer to the question of whether a house should be an investment or a home. It is dangerous when buyers use the argument to absolve themselves of financial responsibility when purchasing a house. On the flip side, the damage done by too many people wanting to "invest" in housing is growing and is not being tackled.
Related articles:
- Is Housing the Best Investment?
- Is Housing a Good Choice for a Pension?
- Is There a Housing Shortage?
Owner occupiers still get 100% tax relief on the benefit they derive from owning a property. If, for example, they were permitted to live in the same property as a perk of their employment, they'd have to pay income tax on it. They used to get double relief, where they paid no tax on the benefit of ownership but still got tax relief on the mortgage interest, and that double relief was quite rightly abolished, but they're still in a much more favourable tax position than landlords. The capital gains tax rate for landlords may be coming down from 40% to 18%, but it remains at 0% for owner occupiers.
A house could be whatever you want, you pay for it, do what you want, rent it? Rent it? Fix it? Whatever! I like homes but I like houses as well. Cheers!