Do you own a house? Are you wondering about the benefit of buying a house versus renting? Have you turned your mind to the question of investing in a house as compared with investing in shares?
Let’s take a look at this most important decision.
It is a bold statement to make but the one good investment you can make in your lifetime will be the purchase of a house. In the vast majority of cases buying a house will prove to be a profitable investment, not to mention putting a roof over your head.
There are exceptions, of course, as there are exceptions to every rule. But the number of exceptions is so small as not to be significant enough to dissuade you from your house purchase decision.
1.Leverage
The investment in buying a house is loaded in your favour because the bank will allow you to purchase one with a small amount down of your own money. In Ireland in 2021, and for the last few years, you can buy a house with only 20% down.
This was historically a lesser sum but the property market crash in 2008/2009 led to a tightening up in lending in Ireland with stricter lending regulations and policies being put in place by the Central Bank.
Nevertheless, making an investment with only 20% down allows you to ride the wonderful train of leverage.
This means if you buy a house for €200,000 with 20% down and the value of the property increases by 5% per annum your return on your deposit/down payment is 25% per annum.
2.Hedge against inflation
Property has always proved to be an effective hedge against inflation for two reasons:
- Increasing value of property
- Decreasing value of your debt repayments
Increasing value of property-property values tend to increase at a faster rate than the inflation rate; therefore, after 10 years if you have had a property price increase of 6% you would have a property which initially stood you €200,000 worth €358,169.
Let’s see how much of that increase is attributable to inflation.
Inflation rates over the last 10 years in Ireland:
| 2010 | -1.0% |
| 2011 | +2.6% |
| 2012 | +1.7% |
| 2013 | +0.5% |
| 2014 | +0.2% |
| 2015 | -0.3% |
| 2016 | 0.0% |
| 2017 | +0.4% |
| 2018 | +0.5% |
| 2019 | +0.9% |
| 2020 | -0.3% |
| Source: CSO |
Total: 5.2%
Therefore, only 5.2% of the value of your property in ten years time-€10,400-is attributable to inflation.
The real in increase in the value of your property holding would show you with a gain of €147,769 over 10 years.
3.Decreasing debt
Whilst your property investment is increasing in value, and you are enjoying living in it, the debt owed on the property is being reduced by inflation.
For example, a €1,500 mortgage payment in year 1 only has a real value of €1,422 with the aforementioned ten year inflation rate.
4.Selling and moving capital gain tax free
Many people move houses over the course of a lifetime. These occasions can be opportunities to make further astute purchases and ratchet up the power of leverage and trading up.
In Ireland there is no capital gains tax payable on your principal private residence. You could, therefore, generate a number of attractive tax-free gains over the course of a lifetime’s property ownership by selling and reinvesting in your principal private residence.
You could, therefore, have a lifetime of investing/speculation in property without any tax liability. Seven years is a good average for the length of time that a person will own the same house.
Over a 40 year period of buying and selling you will make quite a few sales and purchases and you will pick up some valuable experience in what to look for, what to avoid, and which properties tend to give you the best return and most enjoyment.
Your family and job circumstances will be big factors in how often you move and what type of house is suitable for you.
Conclusion
Buying and owning a house is a no-brainer decision, unless there are some exceptional circumstances or reasons for not doing so. For the vast majority of us, it is a sound decision.