Thursday, September 19, 2019

Is Your Home Ownership An Asset, Liability Or Investment?

Buying a home probably ranks as one of the most important milestone in our lives.

After all, it is a huge investment that we have to pay upfront and will have to service for the most part of our working lives.

Hence, it is common for people to think of their home as an investment and humans typically well...do not like to lose out on their investments. No one does.

When the value of their homes drop, their hearts sank together with the times.

This is probably the reason why we see so many older Singaporeans complaining on the lease expiry of their 99 years leasehold HDBs, which may become worthless once the lease expires. After all, they've been servicing it all their lives, and now you are telling them that it is worthless at the end of the lease!



To homeowners, they have a constant worry that they might outlive the leasehold HDB home they "own" and will have no roof over the head. More importantly, they worry about seeing their home as a liability and value of their HDB expires to zero.

This is all playing in the mindset.

The idea that homeowners see their primary residence as an asset or investment comes from the fact that historically the value of their properties rise over time. Think about our elder peers or generations before us that have bought their homes for less than a third of what we are paying today.

Even if not, it is likely that in a limited land supply like Singapore, there is a high likelihood that developers will come in and "buy" out your property before the lease runs out, which is something pretty common these days.

There's also this idea of lease buyback which can be taken into consideration.

This is the reason why property purchase is so popular and you can see the reason why an additional curb of the cooling measures have been put in place.





But here's throwing back the question to you homeowners.

Do you see your home as an asset which depreciates over time, a liability or an investment?

The First Argument: A House must be classified as an Asset. We must follow the Accounting rule!

The accounting rule is pretty rigid and has been around for the longest of time.

When a company purchases a property, they would have to record it as an asset. This asset would then have to be amortized over a period of their useful lives as depreciation.

If the intention is to purchase it for investment and eventually lease out to tenants, it would have to be classified as an investment property distinctively.

It's difficult to argue with the International Standards beyond the stature of this practice.

But Wait! Homeowners don't usually generate Cashflows from the primary residence they stay in!

The idea that when you buy something as an investment, you usually expect to receive some sort of cashflow on that asset, which is something similar in the nature of stocks or fixed deposits.

If the market value of that asset or investment is determined by market forces who decides on what price should that be at any point in time, then it is no different from me picking up a stone on the street and having it valued at $1m myself, assuming I am the only interested party to play this game.

This is why there's always a lot of debates on whether gold or cryptocurrency is classified as an investment or speculation. They do not provide cashflow and their market value depends on how people perceive their usefulness over a period of time.

Homeowners face the same issue.

They live in the space they buy in and it does not generate cashflow returns for them.

You might make a case for cashflow if you have spare rooms to rent out and you derived rental income from it, but what about homeowners who fully utilize the space to themselves.

The Repair, Renovation and Improvement Is a Carrying Cost To You.

You probably have to budget for wear and tear that happens during your stay throughout the years.

If you are lucky, you would only have to spend on minor routine repairs and maintenance, while major repairs such as floor tiling, air con compressors are not uncommon either.

On top of that, you will also need to pay property tax for owner occupied and home insurance, all of which will add up by the time you finished living in the house.

Home Is More Than Just Money! It Is Where The Family Resides And Collect Memories!

The one most probably compelling reason to believe why home ownership is not an investment is because its primary purpose is providing shelter and roof over the top for the family.

Since it is likely that you and your family will need a shelter to live by, you have little control over situation where you needed to sell. Even so, it is likely that you will end up purchasing another in return for a one on one exchange.

The inability to sell the home, even in the most unlikely scenario of a property boom will mean that you are likely to simply sit on the appreciation gain, until one day when you decide to sell it off to another people and realize the gain.

HELOC To Your Rescue!

There is a however one way out if you want to treat your home as an investment.

Home Equity Loan of Credit (HELOC) facility will value the equity portion of your home and entitle you to how much you can borrow depending on your equity. The facility loan is taken under the care of putting the property as collaterals that you put in.

This method works tremendously in the past where people buys house during a property boom period where the value (thus equity) continues to go up and they are able to secure a HELOC to fund another property purchase and the steps repeat itself.

This happens until the cooling measures were introduced, in particular to the additional stamp duty for the second property onwards and the limit to how much they can borrow, that this practice has since slowed down a lot.

I'll talk and explore a bit more on this in my next article series.

Asset or Liability or Investment?

You really have to evaluate on how you define a house vs home and whether you are comfortable moving your family everytime you see an opportunity to do so.

It is definitely not a risk free environment where property purchase is promising good returns based on past historical data.

If you buy your house at a premium, it is still going to bite whether or not you treat it as an asset or liability.

Thanks for reading.


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7 comments:

  1. Thank you for the post! Really enjoyed reading your blog! Would be keen if you could do a post regarding purchasing my first property as an investment asset. The potential ROI if I were to buy a 1 bedder condo and rent it out.

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  2. Hi B,

    I view home ownership as a liability as per my perspective.

    Ben

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