To be precise, we do not consider our home a productive asset as it is does not generate passive income like an investment property. Since it is meant for personal consumption and we will always need a roof over our heads, we treat it like a lifestyle expense.
Despite being the most expensive city in the world according to the Economist Intelligence Unit (2022 report), Singapore has one of the highest homeownership rates in the world at around 90%. Property is practically a national obsession and many Singaporeans consider their primary residence their biggest asset.
As an asset class, real estate offers both income and capital appreciation. It is also a hedge against inflation. But is one’s own home really an asset? Let’s explore:
- Our Home is an Unproductive Asset
- Our Home has Many Limitations
- Dangers of Buying Too Much Home
- A Different Mindset about Housing
1. Our Home is an Unproductive Asset
Like many in the FIRE community (FIRE stands for Financial Independence Retire Early), I do not hold mainstream views on homeownership. My views can be traced back to 2003 when Mr Wow passed me a copy of ‘Rich Dad, Poor Dad’ by Robert Kiyosaki. I know the book is somewhat controversial. Many people have questioned its validity, specifically if there was really a rich dad. Personally, I think they’re missing the point. Even if the book is a work of fiction, it doesn’t make it less motivational or thought-provoking. The fact is ‘Rich Dad, Poor Dad’ has radically changed the way many of us think about money and wealth creation.
Like many in the FIRE community, I do not hold mainstream views on homeownership.
Kiyosaki’s views are highly contentious, to put it mildly. He definitely pissed a lot of people off when he asserted that one’s home is not an asset, but a liability.
Here’s his argument in a nutshell: An asset is something that puts money in one’s pocket, but a home is taking money out of the pocket. The bigger the home, the higher the expenses, and that’s the reason why many households are deep in debt. The long-held belief that one’s home is an investment and that a pay raise means one can purchase a bigger home have resulted in today’s debt-ridden society. Unlike the rich who accumulate assets, the middle class buys liabilities mistaken for assets.
I can hear many people screaming bloody murder! ‘This Robert Kiyosaki doesn’t know what he is talking about! Does he even understand accounting principles?!’
Yes, in financial accounting, a home is considered an asset as it has economic value and can be converted into cash. HOWEVER, if you borrow instead of paying outright, you have liabilities and a mortgage is a huge liability on your balance sheet. So in this sense, Kiyosaki isn’t wrong, especially since the vast majority of people have to take out a mortgage to purchase a home these days. Until you’ve paid off your mortgage, your home is really the bank’s asset and it can initiate a foreclosure on your home if you fail to meet your mortgage obligations.
A mortgage is a huge liability on your balance sheet.
It is also a fact that renting out your entire property for passive income is not an option if you live in it. Thus, instead of producing income, your home is incurring expenses in the form of as taxes, insurance, utilities, maintenance fees and so on. Kiyosaki is not wrong to say that the bigger your home, the more expenses you will have.
The mortgage, coupled with the expenses of owning a home, means that you will have to keep working (likely for decades) to ensure a roof over your head. Your work might be so hectic that you neither have the time nor the energy to think about investing. Even if you hate your job, quitting is not an option if you don’t have other sources of income. Sure, you can sell your home but where are you going to stay then?
All things considered, I think Kiyosaki makes a lot of sense. He definitely does not mince words and that’s one of the reasons why I like his book. When it comes to money matters, I very much prefer people to be direct and leave me to draw my own conclusions. But not everyone is like me. ‘Liability’ is a strong word and I personally do not know anyone who associates it with positivity. Maybe his message would reach even more people if it had been framed differently.
I won’t go so far as to call the home I share with Mr Wow a liability. For one thing, it is fully paid, so we don’t have a mortgage. As we stay in a small home, our expenses are also low. Nevertheless, it is still an unproductive asset that does not generate any passive income like an investment property.
2. Our Home Has Many Limitations
The notion of a home being an unproductive asset or even a liability is a complete paradigm shift from conventional thinking. Instead of seeing it as the ultimate investment, you begin to recognise its limitations.
To begin with, a home comes at great expense. Apart from the purchase price, there are other transaction costs such as stamp duties and legal fees. On top of that, you will probably spend a significant sum of money on renovation and furnishings. By the time the place is all done up, your entire cash reserve might be wiped out, so you can’t invest in anything else. And let’s not forget the long-term costs like maintenance and repair, which are often not factored in. The spending doesn’t stop.
The potential high return from real estate comes from leverage (i.e. using other people’s money) and that’s a key reason why many people perceive a home as a good investment. It’s very tempting to borrow up to the hilt to buy a home. Using other people’s money, one can purchase a bigger, more expensive property and enjoy the space while it appreciates in value, then make a profit by downsizing to a smaller, more affordable one when he or she is old. That’s actually a very risky move.
It’s very tempting to borrow up to the hilt to buy a home.
First, a dip into history will tell you that home prices do not always go up. There’s no such thing as guaranteed capital appreciation. It’s a fallacy, so don’t bank on it. Second, buying too much home often results in lack of diversification. If your home makes up the majority of your financial portfolio, you’re taking too much concentrated risk. You might lose your job. Your mortgage repayments might increase due to interest rate hikes. I can think of so many frightful scenarios that could possibly leave you in financial straits, or worse yet, homeless.
It’s very easy to say ‘I will sell and downsize if I need the money.’ Assuming that the market is favourable and you can potentially make a profit, you should keep in mind that real estate is illiquid and cannot be quickly converted to cash. Even during good times, it takes months to sell and complete the transaction. Imagine bad times. So if you urgently need money, I hope for your sake that you have other liquid assets that you can count on.
Real estate is illiquid and cannot be quickly converted to cash. Even during good times, it takes months to sell and complete the transaction. Imagine bad times.
It’s Stuck at One Location
A major benefit of investing in equities is diversification. You can spread your risk by buying different stocks in different markets. This way, any downturn in a single sector or country will not cause your entire portfolio to tank.
Conversely, when you buy a property, you’re essentially betting on one geographical location. The local economy must stay strong for your home to increase in value. If the area in which your home is situated becomes depressed (e.g. Detroit, no offence), you’re pretty much stuck. You can forget about selling your home at a good price if there are hardly any buyers. And what about new developments that affect your home price like a towering condominium right in front of your estate? Imagine the glorious sea view being replaced by the view of concrete. It’s not only an eyesore, but also a significant hindrance if you want to sell your home in future. The fact is your home is stationary and you have no control over what happens around it.
When you buy a property, you’re essentially betting on one geographical location. The local economy must stay strong for your home to increase in value.
3. Dangers of Buying Too Much Home
Don’t get me wrong. I’m not saying don’t buy a house. I’m a proud homeowner myself. I’m saying don’t put all your eggs in one basket. If your home is your biggest ‘asset’ simply because it’s your only ‘asset’, you do not have good financial health. I’m saying don’t overstretch yourself and buy more house than you can afford. If most of your wealth is tied up in your home — an unproductive asset that drains your bank account every month — you have little or no means of building a profitable portfolio that comprises a range of investments. You’re basically forgoing the opportunity to realise positive cash flow from other income-generating assets.
Perhaps most troubling is the complacency that many homeowners have. They seem to think that their home will definitely appreciate in value and have no desire to broaden their horizons and learn how to invest for a better future. They tell you that stocks, ETFs, REITs and bonds are risky because they lack knowledge and understanding. I hear this from clueless people all the time. This relaxed attitude is costing them valuable investment experience and jeopardising their financial future. And they wonder why they can’t get out of the rat race.
4. A Different Mindset About Housing
Mr Wow and I downsized to our current abode in 2018 and became debt free. Many people thought it was a bad idea and some even advised us to do the exact opposite: upgrade to a condominium or landed property. Clearly, we have a different mindset from them.
► We believe housing is a lifestyle choice. Most people find it hard to comprehend this, but downsizing actually feels like an upgrade to us. We love living in our small home, which looks like a well-appointed hotel suite (not bragging). It’s designed to suit our lifestyle and every bit of space is well-utilised.
► We do not consider our home an investment. All investments involve some degree of risk and our home is not for risk-taking. Even if the global economy is in a state of chaos, we will always have a roof over our heads.
► We consider our home a consumption item, a lifestyle expense. Although our ongoing housing cost is very low, it’s still money out of our pockets.
► We prefer to direct our money towards productive assets that give us regular passive income and potential capital growth. The only ‘dividend’ our home pays is the living space we get to enjoy.
► We do not want to be house-poor. We bought our home because it’s cheaper than renting a place in the long run. We own it outright and we can do whatever we like here.
► We might live abroad for a year or two in the near future and we do not want to rent out our home. We plan to leave it vacant so that we will always have a place to come back to as and when we want. We also don’t like the idea of strangers doing funny business in our home or, even worse, trash the place. If we had bought a very expensive home, it would be too wasteful to leave it untenanted, especially if we still have a mortgage.
► We do not rule out the possibility of buying an investment property for passive income if prices tumble in future. To quote Baron Rothschild, ‘The time to buy is when there’s blood in the streets.’ We will, of course, spend time to research and do our due diligence. We are in no hurry.
To sum up, buying a property for own stay is a major financial decision, but many people do not spend enough time thinking about it. I hope this article have made some interesting points for you to mull over. If you’re a diehard property fan, you will most likely disagree with me. It’s fine. Each of us has an established set of attitudes and money values, and you don’t have to embrace mine. Still, it’s always good to keep an open mind and consider different perspectives instead of dismissing them out of hand. That’s how we learn and improve. We are but work in progress.
If you’re a diehard property fan, you will most likely disagree with me. It’s fine. Each of us has an established set of attitudes and money values, and you don’t have to embrace mine.
May your home be filled with love and laughter always.
Do you currently have a home loan? Ever thought of paying off your mortgage early? Before making a decision, it’s always good to consider the pros and cons. Read my article to learn more.