All eggs in one property basket?

“Owning a home is a keystone of wealth.. both financial affluence and emotional security.”— Suze Orman

Good old bricks and mortar a stable tangible asset which people can utilise as an investment for their retirement. Unfortunately, too many people rely on their home as their primary savings strategy and that can be a mistake.

Of course, a home can mean many things to you, most of them good and it could well embody all your material hopes and dreams. For many people their house is in fact their biggest asset and the price they could ask for it today is almost certainly much higher than what they paid for it back whenever.

Well, one would hope it is worth more, currently in Dublin the housing market is such that you only sell if you have to. It was reported that a house bought for €500,000 ten years ago would be lucky to fetch €300,000 today. Not a great return over those 10 years. That indeed is one of the problems of having all your eggs in one basket.

The pain in Spain 

Many Brits who bought homes in Spain have been severely hit, one example taken from the http://www.thisismoney.co.uk website highlighted a couple who bought their home in Spain in 2004. They bought it in 2004 for £500,000 and its value increased to £725,000 by 2007. However, after a bereavement the property was put up for sale just as the crisis hit and of course nobody was buying, this year the house was still on the market for under £270,000.

Real-estate investments can suffer serious and sometimes prolonged downturns which could seriously hurt someone who is nearing retirement.

Real-estate investments can suffer serious and sometimes prolonged downturns which could seriously hurt someone who is nearing retirement. There have been housing market downturns all over the world these past years and if history is anything to go by it could take anywhere from 10 to 20 years for some of these markets to bounce back.

If you had bought a house in Los Angeles in 1990 you would have had to wait a decade before your home’s value returned to what you paid for it. It is not only the turbulent housing market that can influence your return.

Many people underestimate how much money it costs to run a home. You have general maintenance, contents insurance, and property insurance and of course any improvements or alterations you make to the property itself. These all have to be factored in when you look at your overall return.

Rent or own?

Of course we all have to live somewhere and it must be better the renting surely? Well yes and no. The problem is the average mortgage in the UK and the USA is seven years. People tend to up the size of the property and re-mortgage thus extending the payment periods and exposing themselves to the greater livelihood of real-estate fluctuations. Now I could discuss the benefits here of interest only mortgages but as far as I am aware they are not available here in the Czech Republic.

However, it is often argued that over the long term the home owner will do better than the renter as at least the home owner has a tangible asset and when it comes to sell the home owner could indeed be sitting pretty. This is in comparison to a renter who after paying his/her rent places the rest of his savings into an equity based investment vehicle for the same amount of time as the mortgage. This scenario is of course dependent on what stage of the market cycle the property is purchased and likewise the stage of the equity market. In England home ownership dropped to 67.9% in 2010, the lowest since 1991.

Of course, it must be mentioned that so many people are looking at a future of not being home owners. In Germany, for example, there is a home ownership rate of 42%, one of the lowest in the industrial world. There, renting is the norm and there are different attitudes to buying. The reasons are many and I will not digress, but if someone wishes to comment I can expand at a later date.

In England home ownership dropped to 67.9% in 2010, the lowest since 1991. Discussions and debates have started there as well revolving around the fact that many young people looking to get on the property market ladder cannot afford the 10%– 20 % down payment.

This has indeed become the norm after the subprime mortgage fiasco in 2007/2008. Will many Britains become life long renters? Only time will tell.

Feathering your nest egg

So, do I not believe in buying property? Not at all, I only advice people to think long and hard about their future, especially if it is bought as their only retirement/nest egg.

Before purchasing a property as an investment I suggest you ask yourself these questions. ...

How long do I intent to stay here? Is this house a fixer-upper and how much money will I need to put into it? Is this my only investment for retirement? Is the currency I am buying in the currency I will be retiring in?  Is this prospective house too big for my needs? If I am a foreigner purchasing the property, is the local infrastructure of the country I am purchasing in stable (as an example the infamous land grab law in Spain several years ago which affected many British expats)?

Don’t forget property is a non-liquid asset and you should allow a timescale for selling. Like any investment the reasons should be discussed before hand and the future yield estimated.

Research is key and those that fail to plan, plan to fail.