Let’s use this time machine I just invented to go back to 1984. No, silly, not the book. The year. Hop in, I promise it’ll only be a little weird.

TIME MACHINE NOISES BLOOP BEEP BEBOOP

Now that we’re back in 1984, what are you going to do first? Accidentally kiss your mother because that happens every time a TV show goes back in time? Accurately predict the winners of major sporting events, cleaning out Vegas? Or maybe you’ll just want to sit back and enjoy a New Coke. Or maybe–

HOLY CRAP LOOK WHAT YOU LOOK LIKE.

80s-Guy

Apparently that’s what happens when you go back in time. Turn down that damn boom box. No, not because I care about your hearing. The music is terrible.

I know what I’m going to do, now that I’m back in the 80s and typing this on a piece of technology that doesn’t exist yet. I’m going to take exactly $76,214, and use it to buy the average Canadian house. I’m going to hold onto that house for exactly 30 years, where it will be worth $416.584. That’s so awesome. Hell, if I did it twice, I could practically be a millionaire.

What are you going to do? Take your $76,214 and invest it in the S&P 500? What? That’s so stupid. At least buy some Microsoft when it IPOs or something. There’s no way you’ll beat the performance of me buying a house. I make almost 5 times my money, and I know that I’ll hold throughout the biggest housing bubble in history.

Let’s do the calculations. Fine, but I’ll win. I know that houses beat the stock market. Everyone talks about how good the investment has been, so that means it’s gotta be true.

Okay, so we know the S&P 500 has returned 11.4% annually since 1984, thanks to this handy calculator from Don’t Quit Your Day Job. This includes reinvested dividends. So if we were to invest $76,214 in the S&P 500 exactly 30 years ago, we’d end up with…

$1.94 million. Give or take a few bucks. 

North America has been practically brainwashed into thinking that real estate is a terrific investment.

There are a few reasons for this. There are a lot of people who only invest in one large asset in their lifetime, their house. Sure, they might have some cash in mutual funds or other products, but they’re not usually well understood, and are usually an afterthought.

Since stocks aren’t well understood, people don’t realize the potential returns. People look at market downturns and panic, thinking that years where the market is down 30% are the norm. Even when real estate has a crummy year, it usually doesn’t swing as far down as stocks.

And the big one is something called subjective value. Basically, we value property we own at a premium simply because we own it. Little Timmy wet himself in that corner, and this is where little Susie beat up little Timmy. We still make fun of little Timmy for being beat up by a girl. Ah, the memories.

Memories are fine, but they also cause people to inflate the value of their house. Besides, many folks fail to consider that, unless they manage to sell the place themselves, their house is immediately worth 5% less than they think. What, do you think the Realtor is going to work for free?

This isn’t to say you shouldn’t own a house. There are many advantages to buying over renting. Like:

  • You can choose paint colors, or to even put a urinal in your bathroom.
  • Your mortgage payment usually gets cheaper over time, because inflation. Rent payments tend to go up over time.
  • No worrying about a landlord kicking you out after a lease is up, or taking his sweet time replacing some broken something.
  • After 15-30 years, you have the security of knowing the place is paid for

You notice how those reasons for owning are more emotional in nature, and not so number-y? That’s because buying a house has a lot to do with the emotional part of our brain and not so much to do with the logical side. When you step into a place and fall in love with the pretty countertops, I wouldn’t necessarily call that a decision based in logic. That right there proves your house isn’t an investment.

Even the folks who are anti-home ownership tend to have an emotional reaction to buying. Renters who like renting have an emotional response to the issue just like home buyers do. Renters either want to buy, or, increasingly, have no interest in doing so. Renters like the freedom of being able to pick up everything and leave town in a month. Renters like knowing repairs will be taken care of. And especially in major Canadian cities, renting is cheaper than buying.

But that’s okay. Buying a house is supposed to be an emotional experience. After all, you’re going to spend every day there. You want to get something you like. I’d argue that a full 90% of us have more house than we need, and could easily downsize (or not buy so much house in the first place), but I realize I’m fighting a losing battle here. Fine, buy your stupid too big house. See if I care.

This is exactly why your house isn’t an investment. Because when it comes down to it, buying is an emotional decision. Emotions have a place when choosing investments, but you’re not going to do very well if you let the feels dominate your decision making process.

Your house is an asset. You can borrow against it, and generally it’ll grow at a rate that is pretty much the same as inflation, maybe a little more. That makes it a good store of value, like a less crazy version of holding precious metals. But your house isn’t an investment. Houses are just too tied to emotion to really be an investment. If you want to invest in real estate, do it through a rental property or a REIT. Not through your principal residence.

Tell everyone, yo!