Should your home be considered an investment diversification?

[Protocol]

I was taught in school that an asset is something that can generate money

A house is an asset that provides housing services

Housing services are warmth, shelter, etc., that are beneficial to the occupier.

So if you live in your own house, you are both a landlord and a tenant, and the house provides you with a non-cash income/benefit, which we can call housing services.


By the way, it's interesting to note that until 1969, this imputed non-cash income from home ownership was taxable.

 

[Duke of Marmalade]

The vast majority of home owners should not be investing in another property.

Well your consistent.

 

[DazedInPontoon]

While I agree with the overall sentiment of your comment...

Your home may rise in value but you still have to live in it.

Technically you don't. You have to live somewhere, but not strictly in the house you currently own. And yes prices rising equally around you may mean it's a wash because any gain you make from selling is lost when you buy something similar in the same market.

But you don't strictly need to do either of those things, if you downsize, or move to a market where prices have not increased proportionally, or rent somewhere cheap, then you made a tangible investment gain from your home (and it was CGT-free).

Having said all of that I hate property as a direct active investment, and I'll likely never own a property purely for investment purposes. But I do consider my own home as part of my net worth and as Brendan nicely phrased it - I don't compartmentalise.

 

[jim]

Your home is an asset.

Whether you want to include it in your net worth calc is another matter.

But its an asset. Can be liquidated if needs.

Dont think you can liquidate your legs...

 

[MrEarl]

Hello,

I don't see a person's home as a capital investment - albeit, if they rent a room, it may be deemed a partial investment (giving a very modest return on the capital tied up in the house).

Granted, someone might downsize and release equity, but they sacrafice part of their quality of life, by doing so - they don't have as much space, or don't get to live in the same location etc. post downsizing.

Everyone needs to live somewhere - they either rent, or they buy. So, a home isn't a capital investment, its a living expense, imho.

 

[Duke of Marmalade]

Whether it is or is not an asset is a semantic debate not germane to my diversification point. @Brendan Burgess has stated it in its starkest terms - folk with their own home should in general not invest in property. He sees it as a portfolio investment no different from shares. @DazedInPontoon has pointed out that it is too extreme to regard it as completely illiquid but now that I have posted I see that @MrEarl has rebutted that one very neatly.
This is a personal choice. I have from time to time considered property investment, say in REITS; it just doesn't cross my mind that taken together with my castle I would be way over exposed to real estate. As it happens I never did invest in property despite being very tempted by staff terms on Belfry 3 (I think it was). Dodged a bullet there.

 

[DazedInPontoon]

Granted, someone might downsize and release equity, but they sacrafice part of their quality of life, by doing so - they don't have as much space, or don't get to live in the same location etc. post downsizing.

Again, I disagree, selling a multi-million euro home in a good city location where the primary value was proximity to high paying jobs and using that equity to retire to a much cheaper country with better weather and the sea on your door step is not necessarily making a sacrifice to quality of life. It really depends on how tied you are to your current location, and why.

 

[Mayo1969]

I knew I'd seen the OP on the other thread I was involved in regarding diversification of investments and was wondering where it went.

I think the idea of regarding a house, specifically a PPR as an asset, was a huge contributory factor to the housing bubble burst in this country and our obsession with home ownership as somehow representing a display of wealth and success/achievement. Far too many buyers looked at their house as an investment which would accumulate wealth for them, rather than a home to live in, as a necessity and an alternative to paying rent with no return except shelter (and perhaps the opportunity cost of a mortgage!). Accordingly they used their house as leverage for further borrowing for everything to home improvement to trading up, but also and more harmfully for the new car or holiday or even extra spending money. Hence, when the bottom fell out of the market and loads of people found themselves in negative equity (sometimes for amounts far beyond what their house was ever realistically worth) , they were also left bemoaning the debt they'd rose on their property for that long forgotten holiday or the car that had depreciated by 75%, which they would still have to continue paying for the the next 10-15 years.

I guess it very much a matter of ones personal opinion but, from my perspective, whilst it is nice to have my own home worth €300k with a mortgage paid off and yep the prospect is there in the future that I could theoritically sell my children's inheritance out from under them, to to purchase something probably much grander in another sunnier location where I could live more cheaply. But I don't tend to regard it as such as part of my total wealth, but rather a bonus to be offloaded if all other funding streams for my future life prove inadequate. I think it would be irresponsible and delusional to factor it in to your future income stream as part of your retirement plans, unless you specifically plan to cash it in by downsizing or borrowing against it (and as we know all to well there are no guarantees regarding property values into the future) or whatever as part of your whole retirement income strategy (I still recall that irritating advert voiced by Mick Lally prior to the boom, coming back into vogue again now, of yer 60+ y/o man headed to the bank with his wheelbarrow of bricks, to leverage the equity in his PPR to fund his retirement and associated bucket list!)

I suppose, since house/property ownership is such an emotive and symbolic subject in this country and has been before independence, it also begs the question, if we are to regard our PPR as an asset, should we also regard our families as assets, as an investment in your kids future education and welfare (and maybe a nest egg) is hopefully going to pay dividends down the road when it comes time for hopefully one or more of them to look after you or support you financially if necessary in your old age?

 

[Dr Strangelove]

In theory amassing wealth in a PPR can be used to trade down at a future point. Especially as there is no CGT.

But I know precisely one person who actually traded down in old age and that was to free up about €800k of equity.

So for most people PPR is not in practice an investment asset.

 

[Brendan Burgess]

But I know precisely one person who actually traded down in old age and that was to free up about €800k of equity.

But you know others who were free to do so and choose not to do so because they did not need to.

And you probably know others who took out a life loan.

I haven't sold my shares in CRH. Does that mean that they are not an investment?

 

[Brendan Burgess]

Accordingly they used their house as leverage for further borrowing for everything to home improvement to trading up, but also and more harmfully for the new car or holiday or even extra spending money.

None of this analysis changes the fact that your home is an asset and should be considered as part of your overall portfolio.

The fact that many people went mad because the value of their home had risen, doesn't mean it's not an asset. All it means is that people should not borrow to invest.

 

[Brendan Burgess]

I think it would be irresponsible and delusional to factor it in to your future income stream as part of your retirement plans, unless you specifically plan to cash it in by downsizing or borrowing against it (and as we know all to well there are no guarantees regarding property values into the future)

Well if you don't own your own home into retirement, then you must factor in the cost of rent payments in retirement. If you do own your own home, you can factor that into calculating how much you will need in retirement.

 

[Brendan Burgess]

if we are to regard our PPR as an asset, should we also regard our families as assets

No, you should not regard your family as a financial asset. There is no comparison in the two things.

But when you die, you better make sure that your Executor declares your former home as an asset and not exclude it from the return on the grounds that it was your home, so it was not an asset.

 

[Mayo1969]

I was adding a somewhat sarcastic tone to the discussion with my reference to family Brendan considering the ruthlessly materialistic/value driven approach some people were taking to the necessity of providing for a roof over your head. Perhaps family are not an asset persae but definitely an investment that you hope will pay dividends down the road, especially if it comes to the point that your are dependent on them to look after you (not necessarily financially). I was once told that having kids to look after me in my old age was one of the best investments I would make in my life!
Perhaps my perspective is coloured by the fact that I'm currently acting as the main carer for both my elderly parents who are hugely dependent on me for everything from basic care need to administration and financial matters. No amount of wealth or financial compensation can guarantee that this level of personal care will be forthcoming (If one is not going to do it for compassionate reasons then a financial incentive is hardly going to make a whole lot of difference)

 

[Brendan Burgess]

I was once told that having kids to look after me in my old age was one of the best investments I would make in my life!

I would have thought that the financial cost of rearing kids would far outweigh the financial savings from having them look after you in later life.

There may be other reasons for having children, but I doubt if finance is one of them.

 

[Itchy]

Mary has a €500k home with a €300k mortgage and a pension fund with €500k invested in equities.
She inherits €300k
She should pay down her mortgage with that.

However, a lot of people compartmentalise their home and mortgage - and look at their other investments completely separately.
If Mary does this, she has €500k in equities so she diversifies by buying an RIP for €300k.

She thinks she is reducing risk, but she is increasing her risk compared to simply paying off her mortgage.

I find this "balance sheet" approach to wealth overly rigid and lacking nuance i.e. Netting off Assets and Liabilities as proxy for security.

The most valuable financial asset you have (when you have limited capital) is your ability to generate a income. Your day to day security is really, can you generate more income than your expenses each day, on average. Rather than the value of assets and liabilities rising/falling in value. Cashflow is the name of the game. Diverse and secure sources of cashflow is real financial security i.e. being able to meet all your outgoings in a variety of economic conditions, such as if you loose your job.

And when looking at cashflows, the fungibility of assets is important. I can sell part of a paper asset, but can only sell a whole unit of a hard asset.

If I have a salary, say I use it to pay mortgage and non-mortgage expenses. If I pay off my mortgage, it eliminates only part of my expenses and that capital is gone (from a utility point of view). Loosing my job - I still need to meet my non-mortgage expenses. If I have mortgage and non-mortgage expenses and loose my job, but invest the available capital, I still have a large financial asset from which I can cover my outgoings. The difference between the two positions is the duration with which each position can be sustained before ruin occurs. The longer I can sustain the position, the greater the probability I can recover (therefore the greater the security).

With this way of thinking, obviously, discipline and financial literacy are important while also balancing ones approach. The extreme position is paying off a mortgage completely, removing someone's recourse to a property, which is great. Its not as clear cut as paying off 10,20k at a time i.e. reducing your mortgage expenses by €50/100 per month. If you lose your job - you're still in the position of trying to cover €1900 per month rather than €2000, but if you retain the €20k, you can sustain yourself for 10 months.

 

[Mayo1969]

I would have thought that the financial cost of rearing kids would far outweigh the financial savings from having them look after you in later life.

There may be other reasons for having children, but I doubt if finance is one of them.

I guess in the harsh ruthless world of investment and finance there is little room for sentimentality right enough!! Silly me to try to bring humanity into the consideration!

 

[Brendan Burgess]

@Itchy

You are right which is why the Money Makeover format asks about income and expenditure.

But most of us can't diversify our salary. You have an employer and you get a salary from them. If they close, you lose your salary.

I always advise people to sell their shares in their employer as soon as it's tax efficient to do so to diversify their wealth.

The fundamental question which this thread is discussing is whether you should consider your home part of your total wealth when assessing if your wealth is adequately diversified.

 

[Duke of Marmalade]

Fred and Wilma are in similar circumstances, Gen Z paying rent. Investments? you must be joking.
Fred's aunt has just left him a very nice little home, just what he needs. Should he sell and diversify?
Wilma's uncle has just left her a nice little holding in REITs, about the same value as Fred's home. Should Wilma sell her REITS and diversify?
Point I am labouring is that seeing your home as part of an investment portfolio no different than a holding in REITs just ain't natural.

 

[Setforlife]

a lot of people (a large majority?) pass on the family home as the main asset of their estate. If nothing else it’s the bulk of the value of most people’s estate. With property prices in Ireland, it’s also a large part of people’s wealth if considered an asset. Ignoring it and then ‘diversifying’ the rest of yoru assets across property and equities and bonds, say 30, 50, 20 might seem reasonable in that vacuum.

However it would likely leave someone actually 70-80% in property, probably leveraged on a mortgage and in a pretty risky state of affairs. So you would think the sensible thing to do for anyone is to consider it an asset when making diversity of investment decisions as they are risk based. Not ‘what is the real nature of an “asset”’ theoretical arguments.