Home ownership - most New Zealander’s aspire to it. And in New Zealand there is no doubt that home ownership is seen as a wise investment and historically residential property has tended to repay that faith for most.
And it is nice to have something that one can call their own. The hours spent on maintenance and gardening somehow seem worthwhile when it’s your piece of dirt.
Will home ownership be a good investment in the future. There are certainly those who argue that rent is a better option and that surplus funds can be invested more profitably elsewhere.
Time will tell if they are right. Personally I would rather own my own home (even if my investment returns do suffer across the years). But at the same time I recognise the dangers that exist in having one’s capital tied up in an illiquid, non income producing, personal asset.
There are three specific issues to consider.
The first of these is the initial purchase decision. Picture if you will a young couple in rental accommodation paying $415 per week. They believe that money paid in rent is wasted money and that they need to own their own house. This is a common line of thought.
Yet the end result can be that the interest payments to the bank (the new landlord) are
in fact higher than the rent that was being paid previously. If that is the case the young couple will have their progress towards building a solid equity in a home, say five years down the track, slowed. Lower rental payments would have been better than the higher interest payments.
A second issue that arises is whether to use surplus cash to pay off the mortgage or whether to invest it.
Logically the mortgage should be paid off. Any investment income earned will be subject to tax, meaning that the return earned needs to be that much higher to offset the cost of the mortgage.
Human nature suggests, however, that at least some of the surplus cash should go into investment on the basis that as people pay off their mortgage they tend to trade up to the next level of house or build an extension and the cycle of mortgage payments continues.
Investing for retirement can get left out along the way to the longer term detriment of the investor.
The third house decision relates to retirement. A mortgage free house becomes both an asset and a liability. It is a liability in the sense that the capital is tied up. It won’t feed you or provide a world trip.
Downgrading your accommodation to free up cash would be a difficult choice.
Home ownership is fine, but separate plans to build a retirement fund are necessary.
