How housing stories create fire

Just over a month ago I published an article about the sale of my apartment. I have had a couple of clients and readers comment that I must have done well from the sale.

Well here I am to pour water over the fire generated by the popular opinion of housing. The housing market is so hot because of all these stories we tell ourselves. These stories all add gas to the fire, making the housing market even hotter.

I made $100,000 in 10 years sounds pretty exciting doesn’t it? But it doesn’t tell the whole story. Be careful what you hear and read and make sure it is ALL the facts, and not just the sound bites.

I bought the apartment for $420,000 in 2008, and sold it for $520,000 in 2018. Woohoo $100,000 profit!

That is how most people think about it, but this couldn’t be more wrong.

Costs of home ownership

There are many costs to home ownership, and below are the costs I incurred over that 10-year period:

Mortgage interest $171,000

Furnishings $20,000

Body corp fees $30,000

Rates $16,000

Repairs and maintenance $20,000

Cost of not using $60,000 deposit in savings $20,000

Sales costs $16,000

Total 10 year cost of home ownership $293,000

These are costs that added no value to the property. They are the costs for the privilege of owning the apartment. This takes my juicy looking $100,000 profit to a $193,000 loss!

And that was in a red hot property market. Imagine if the housing market had been a lot more tepid.

Can you see how the narrative we tell ourselves of how we actually make large profits are fueling an overheated housing market, when the reality is far from the stories we hear.

My saving grace, that not all homeowners have, was a tenant in the other room. The rent I received over the 10 year period was $175,000.

So my 10 year loss was $18,000, even after a $100,000 property price increase and $175,000 in rental income!

I would have been better off leaving my money in the bank. And I wouldn’t have had the headache of having to manage tenants. Lower risk, better returns, and more time available.

I’ve said it once and I’ll say it again. Your own house is not an investment. It is a huge cash drain. My apartment was half my house and half rental, and still didn’t even make a profit after 10 years.

Housing is not the dream we are sold. Don’t be in such a hurry to rush in to your first house. Especially with todays inflated prices.

Take your time. Run the numbers. And make sure that you are buying for the long term. Moving every 7 years, as per the national average, will not end well financially. You would be better off renting. Only buy if you intend to live somewhere for longer than 10 years or else you too could lose a substantial amount of money.

The way mortgages are structured are high interest payments up front, as well as one off purchase and sales costs, are much better if they can be spread over long periods.

My ten year ownership was not long enough to profit from home ownership, yet it was still longer than the national average. This means there are probably thousands of people thinking they are making money when they haven’t.

I was lucky the apartment actually increased in price by $100,000 and I was able to rent out a spare room or the loss could have been much, much more. Capital gains is far from guaranteed.

They say renting is dead money. It seems owning a house is a lot of dead money too. Where are those stories?

I bought into the housing hype and didn’t even run the numbers. I was told a house is the best thing you can do with your money so went in blindly. This is not the way to do it.

Long term, your own house can be a great asset. But think long term asset, not short term investment.

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