This has been a long time "no-brainer" argument and even books written for this idea -- your house is the best investment of your live.
BRETT ARENDS of Wall Street Journal dare to challenge the common wisdom (it's actually been preached by some people to the mass)
Some even went as far as suggesting, only, most American home owners can be millionaires. Well, mind you being a millionaire means you can afford a home, it's the cause of owning a home, not the result of home ownership (that's right, owning a home won't make ordinary people become millionaire).
However, why such ideas are so popular? I call them political correctness - they showed some "simple data" that demonstrates 20000 dollar 30 years ago became more than 10 fold.
However, this is deceiving, you know, if you bought government bond 30 years ago, you probably can get 8% interest rate, and you know what, 20000 dollar with 8% interest rate annually is 201253.14 dollar.
In the past 30 years, the average return on your money, probably is higher than 8% in average.
Not only the return is far from extraordinary, but also it was achieved mainly because of government's (and financial industry's) ignorance.
The housing price is not a one way train as some people implied. The housing price is affected by various factors and most of those factors have been supporting house price to move up. However, as most of those factors are actually drying up, the forces behind past 3 decades housing value appreciation is not there to push the housing price any higher in the long run.
So what caused the housing price to go up "like crazy" in the past 30 years?
1) mortgage (and then the low interest rate).
As we all know, nowadays very few people buy their house with 100% cash. Borrowed money is a key in affording a house. The widely available credit was propelling housing price up in two ways, a) the demand was driven up because lots of people can afford a house with loan than those who can buy up front; b) for those who could bought a house without (or with little) loan, they can afford a more expensive house with (bigger) loan.
So, the progress (or the missteps) of the mortgage industry has helped housing price most. One interesting things is when demand increases, the price goes up and it does not mean the quality of life will increase - people will compete in throwing money just to maintain a relatively OK life.
2) The government's "making houses more affordable move". This has been a long term theme in western world - government tried to make houses more affordable by providing tools to help people to afford a more expensive house. However, such move by the western governments is different than in the east - where (many are socialism) government simply build houses and give out to people they see in need (so that separates the subsidised market from the help-yourself market).
This "making housing more affordable" while helped a little number of people in the short term, actually did nothing but created bubble - why? Because it encouraged people who otherwise need help to find dueling, to participate in the housing market and when it happens, demand goes up again. And while more people being able to afford more, the market adjusts itself so the price actually goes higher, so that again people will live close (if not beyond) to their means.
And since most of the tools designed to "help" people to afford homes are credit related, when credit crisis hit, those people who bought home with maximum credit available to them became hardest hit - they either loose their homes, or had to go through the hardship by degrading their quality of life.
3) the myth of buying home is the best investment.
Really? a home is first and foremost a place for your family to live your life.
The added "investment" value - which indeed was explored by many people in the past 30 years - adds unwarranted demand. Those people with money to spare where the ones who benefited most during this period. While people reckless enough to borrow more than they should have benefited too. However, as we said, this investment value not only in no way is superior than average other investment vehicle, but also has been artificially bumped up due to various reasons (politician wanted vote, banks wanted your interest payment).
I'm not saying that they won't invent more ways to trick your money out of your pocket, but each new invention they come out with, there are less impact they can push the housing market higher as they wish - when income growth does not match housing price growth, at one point, people simply can't afford a house no matter how hard governments and banks try to "help" them. We are not far from that point.
Housing market has grown out of proportion in our economy (as many argued, it's not that housing market grew really fast, it that real economy grew too slowly). This unpropitious partly helped fuel the notion that house is the ultimate investment. The key is most of the driving force behind the housing market boom in the past 30 years have exhausted and proved to be bubble building. The chances that there will be new drivers as powerful as the past ones is slim.
The most powerful at work now is "moral hazard" the American (and other governments in the world) tried hard to shore up. By saving those people "in need" to keep their house, the market participants are thinking "what a hack, I can play the market, and if I fail, the government will bail me out". This "if I win, the profit is mine, if I lost, the lose is the government's" mentality is the only key driver that helping the housing market in the near future.
Other than this single hope, I see no reason why the housing market can beat the long term inflation in the next 30 years.
Happy buying your house(s).
