Don’t Aspire to Buy and Live in Your Own Home

There is much talk of a housing affordability crisis in Australia. Average house prices in Melbourne and Sydney are reaching $600,000 or even more.

However, for young people looking to buy a house, my recommendation is that you do not buy.

Instead, go to your parents and negotiate with them an arrangement whereby you pay, say, $300 per month to live with them. Depending on how nice your parents are, they may even allow you to live with them for free.

If this is not an option, try to arrange to share a house with other people.

If you do buy a house, consider ways you can offset the burden of a big mortgage, such as renting out spare rooms.

I know a friend who, after purchasing a house, decided to renovate the garage so it was liveable. He lived in his garage and rented out the rest of the house. The rent was pretty much able to cover the mortgage repayments, which meant he was able to pay off the mortgage in about six years.

I have lived with my parents for the past five years and have been able to save up about $60k per year. After five years that adds up to about $300k, but rather than invest in property, I prefer to invest in shares, index funds, and managed funds. Nevertheless, shares have gone up in value in the last five or six years, and my net worth has increased at a rate of about $100k per year, which gives a net worth of about $500k now.

It doesn’t matter whether you invest in shares or property. Both are good investments. However, I believe shares are better because they usually make more money and because you generally pay less tax (although this depends on which country you live in).

To sum up, try to live with your parents. If you rent, try to rent with others. If you buy, rent out the rooms. Any of these three strategies frees up money to allow you to invest. You’re not really investing much if so much of what you earn goes towards paying interest, which is the situation most people have when they take out a massive mortgage to buy their dream home. It is true that rent money is dead money, but interest is also dead money.

The main benefit of real estate as an investment is the ability to borrow money to invest. If you are able to borrow more money, you have more assets exposed to the market, which means returns are higher. However, this can be achieved via index funds or shares simply by getting a margin loan (i.e. borrowing to invest) and/or investing in internally leveraged ETFs (i.e. investing in a fund that borrows to invest).

Note that just because you can use debt to make more money, it doesn’t mean you should. Borrowing to invest can be profitable, but there are many assumptions you are making about interest rates and returns. With leveraged ETFs, fund managers usually use dividends to pay off their own debt, which means the investment produces very little income. Furthermore, when you borrow to invest, you usually need to make regular monthly repayments. These regular monthly repayments diminish the value you get from any passive income you may receive from dividends or rent. Debt is anti-passive income and therefore anti-freedom. Borrowing money from the bank makes you are slave to the bank.

There is a myth pervasive in Australia and many other countries that renters are second class citizens who must aspire to own a home because owning a home makes money. This is a lie. What matters is how fast your net worth increases. Most people who buy a home have such massive mortgages with huge interest repayments that their net worth increases very slowly because any progress made when the price of the house goes up is quickly lost when they have to pay interest. Their net worth would have grown faster if they had rented a cheap place and socked the saved money into index funds.

It is not just interest. Buying a house is also associated with massive fees to accountants, real estate agents, and lawyers, as well as huge taxes (such as stamp duty in Australia). All these bring down the growth of your net worth, often by more than people expect.

When most people at my work “invest” in property, I never hear them talk about the rate of growth of net worth, rental yields, or variability of prices. They seem more keen to talk about how nice the patio is, whether the kitchen has a granite bench, and whether it has period styling. All this is bling that distracts them from the massive expenses associated with property.

Don’t bother buying a house. They are clunky massive assets that are taxed heavily and usually produce little returns. They tie you to one place and stifle your movements.

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