Tuesday, May 24, 2011

Is a Home an Investment?

There was an interesting article article in WAToday by a research fellow at the Centre for Independent Studies Adam Creighton. He looks at the argument that homes are investments with a very different conclusion than we are used to. 

Buying a house or unit isn't the financial investment Australians believe it to be.
Ask any economist. Buying a house or unit that someone else built is not an investment.
For economists, investment requires sacrifices of consumption today to improve the capacity of the economy in the future. Machinery, new buildings, and university degrees: these are investments.
Australians can swap title deeds at whatever velocity and price they like without bolstering the country's economic capacity one jot.
To the extent buying a house is an ''investment'', it is a gamble on factors the owner-occupier cannot control. House prices are beholden to the rate of land release, interest rates, councillors' tolerance for development, and population growth, for example. At least a small businessman's efforts and skill affect the performance of his investments.
To be sure, housing has been a very successful gamble in recent decades. Since the early 1970s Australian house prices, even accounting for inflation, have surged more than 150 per cent. Average Australian household income, by contrast, has increased about 30 per cent over the same period.
The gamble has not paid off well recently, however. The Real Estate Institute of Victoria reckons median house prices in Melbourne collapsed 6 per cent in the three months to March. Nationally, prices fell almost 2 per cent according to the Australian Bureau of Statistics.
Read the rest of the article here.

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