Shares Create Wealth, But Houses Can Destroy It!

Buying your first property is an exciting step to take. It is, of course, the opportunity to make a house a home and put your own stamp on it. For many people, it is also a sign of success – especially for the ‘baby boomers’, for whom owning a home is often a life goal that the previous generation were often unable to achieve.

However, many people view buying a house as more than the opportunity to create a home. Instead, they see it as an investment; an opportunity to make money through doing very little as a result of house price rises that, for people under the age of around 40, have only gone one way in their adult lives (excepting the brief fall during the credit crunch).

The problem with thinking of a main residence as an investment, though, is that it is not technically an asset. Certainly, if it were paid for in full without a mortgage then it would be, but the reality is that the vast majority of homeowners (especially first-time buyers) require a mortgage to get on the property ladder.

As such, they may feel as though they are buying an asset but, in reality, they are buying a part-asset and part-liability. In other words, having bought the house they now need to make interest payments, capital repayments, pay for ongoing maintenance and pay one-off repair bills which (especially on older properties) can be very expensive. And, if the mortgage taken out to buy the house is too large, it could lead to cash flow problems and a lack of saving for retirement, thereby destroying overall wealth in the long run,

Furthermore, house prices will, sadly, not continue to rise at their recent rates. The simple reason is that such a strong rate of growth is unsustainable and, as with anything which falls into that category, it will be not be sustained. And, with interest rates set to begin their long, upward movement, house prices may disappoint in terms of their growth rate a lot sooner than many people realise.

That situation could be exacerbated by the popularity of interest only mortgages, which leaves many homeowners with the same amount outstanding as when they purchased the property. In other words, they may not have fixed the roof while the sun was shining (started to pay off the debt while interest rates were low).

So, while home ownership can be one of the best things in a person’s life because it is the chance to make a house their own, start a family and enjoy the freedom which it brings, seeing it as an investment does not stack up. That’s even more true because the money you use to buy a house will always be tied up in property and will not generate any positive cash flow which could be spent elsewhere.

As a result, buying shares is a much better investment. Not only is it simpler and easier, it is less risky because a wide range of companies can be bought (versus just one house) and, crucially, shares generate positive cash flow in the form of dividends. Over time, a 4% yield can really add up (especially due to the impact of compounding) and the cash can be reinvested or spent elsewhere.

In addition, capital gains on shares can be realised and spent on a car, holiday, more shares or even a house. However, gains made upon the sale of a house will most likely be ploughed into the next property, since a place to live will be needed and, realistically, other properties will have appreciated by a similar amount.

As such, buying a house to have a home can be a great move but, for those individuals seeking to make money from their capital, shares appear to be the best bet.

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