Buying a house is the worst decision I nearly made.

I nearly did it because it is what people expect me to do.

It seems sensible too.

You’re paying for your landlord’s retirement.

Being a landlord is profitable.

They’re obviously profitable at your expense.

Your parents and grandparents tell you their homes are worth 5-10x what they paid.

They’re horrified by your rent.

Their mortgage repayments are a fraction of this.

All of this is true.

If you buy a house you will save hundreds of thousands of pounds over your lifetime, versus doing nothing.

You don’t have to do nothing

If you’re considering buying a house for financial reasons, there are alternatives that are:

  1. More effective AND
  2. Less risky AND
  3. Easier (including more accessible)

I knew there were lifestyle reasons to not buy a house, but I thought the financial gain was worth the sacrifice.

I was not aware of these alternatives.

Researching the alternatives changed my perspective of housing and changed my mind.

It might change yours too

Housing Folklore

When I wanted to buy a house, I missed that I was looking for an investment.

I did not understand that houses are just like any other investment.

There’s a lot of folk-lore and spin surrounding housing in the UK and USA.

People commonly say rent is “throwing away” your money, which they don’t say about other spending.

People talk about about climbing the “property ladder”.

Politicians talk about generations who get “left behind” because they couldn’t get on that first rung.

No one talks about other types of investment “ladders”.

No one points out that it is the lack of general savings and investments (and other systematic factors) that holds back social mobility.

There is nothing specific about houses.

Placing a deposit on a house is an alternative to investing that deposit.

Placing a deposit on a house is the same as investing that deposit.

Placing a deposit on a house is less effective, riskier, harder and restricts your life more than investing that deposit.

It isn’t only home-owners and landlords that grow their wealth.

I think the reason we miss this is that buying a house feels familiar and comfortable.

If I bought a house then wanted to move but keep my investment; becoming a landlord would also feel familiar and comfortable.

Cash and houses. They’re part of normal life.

I didn’t understand that holding cash is an investment (a terrible one at that).

I knew nothing of bonds or REITs.

Stocks are what crazy gung-ho risk takers gamble on with their millions right?

To me, these were intimidating ideas, not accessible to someone like me.

None of my friends or family know much about investing.

Their only investments are their houses and their pensions.

Pensions are black box magic.

Many view them as a special savings account the government tops up.

Houses are long term homes.

They happen to have a side effect of building equity.

I didn’t know that we all* own stocks, bonds and REITs through our pensions already.

A stock is partial ownership of a company. You are entitled to part of their profits.

A bond is ownership of someone else’s debt. You are entitled to full repayment of this loan with interest. You can sell ownership of this loan before it is fully repaid.

A REIT is a Real Estate Investment Trust. Through this trust you have partial ownership of real estate. This is usually commerical property but may include residential property.

When you are younger, your pension will mostly be a diversified set of stocks. These are the best asset for growing your wealth.

As you get older your pension shifts to bonds.

These are less volatile than stocks. They are better at maintaining any existing wealth.

This is important as you approach retirement having added money throughout your career.

Finally your pension shifts to cash so you can withdraw and spend it.

Thanks to Index Funds, we can all benefit from this process without knowing much anything about it.

A normal person with very limited financial knowledge can put their money in an index fund and study after study shows they’ll beat Wall Street traders over a 10+ year period.

I want to show how buying assets in an index fund is more effective, less risky AND easier than buying a house.

Easier

Investing in an index fund (once you know what they are and how to choose one) is as easy as opening a savings account.

For example:

  • Register with Vanguard online
  • Transfer money into your account (current minimum lump sum investment is £500)
  • Invest it into a LifeStrategy fund choosing the balance between stocks and bonds based on how long you will keep your money invested

Investing in a house is famously one of the most stressful and difficult things you will ever do.

Ranked more stressful than having a baby

You need to:

  • Save a large sum of cash (orders of magnitudes larger than £500)
  • Get pre-approved for a mortgage via a mortgage broker
  • Optionally find a real estate agent
  • House hunt
  • Submit an offer & haggle / compete with other bidders
  • Organise professional home inspection and appraisal
  • Final paperwork, pay closing costs, property tax, transaction fees, get insurance…
  • Move house

This process takes months and can be further stalled by:

  • Struggling to find a suitable house
  • Mortgage application rejection
  • Losing out on a bid (including getting Gazumped after your offer was accepted)
  • Bad results from a professional home inspection
  • Sellers pulling out of the deal
  • Broken property chain
  • Down-valuation by lender

Common reasons for mortgage application rejection:

  • You recently changed jobs
  • You’re not registered to vote
  • Administrative errors on your credit file
  • You don’t match the lenders target demographic
  • Your income is too low (counted after tax and deductions even if you could reduce deductions such as your pension contribution)
  • You’re self employed or a contractor
  • You recently applied for a credit card
  • You took a payday loan in the last 6 years
  • Your deposit is too small

Less Risky

Investing in an index fund is less risky than investing in a house.

Diversification

Diversification is the key to managing risk.

“Don’t Put All Your Eggs in One Basket” - A wise grandmother

A house could not be less diverse.

It is in a single country, county/state, city/town, neighbourhood, street…

The value of your house will be affected by anything from global events to something a single neighbour does.

When you buy a house you’re also buying a single type of house (apartment, semi-detached, detached), with a certain style (open-plan, large windows…).

The prices for these will fluctuate based on fashion.

Index funds automatically diversify your investment.

This Global Stocks Index Fund invests in over 6700 companies spanning more than 42 countries.

This Global Bonds Index Fund spreads over 4900 debtors which include governments, companies, agencies etc.

This Global REIT Index Fund invests in many properties in more than 10 countries.

You cannot be any more diversified than that.

Everyone knows it’s risky to buy stocks in a single company.

Everyone ignores that it’s risky to invest in a single house.

Liquidity

Saying an investment is liquid or illiquid is a fancy way of saying it’s easy or hard to turn it into cash.

You need liquidity to deal with unexpected emergencies.

You never know when something bad will happen that requires a lot of cash.

You may be out of a job for a long time.

You may suddenly need to support a dependent.

All your belongings may spontaneously combust and need replaced.

A house is incredibly illiquid.

You cannot turn the money you invested into your house into cash as needed.

To access this money as cash you have to sell your house.

This takes months and involves a massive life upheaval.

More Effective

The stock market has historically grown at a higher rate than house prices.

The trick to take advantage of this is to set up a standing order to invest regularly and ignore scare-mongering financial news stories.

Leave it alone, forget about it, feel no stress and you’re set to go.

Sustaining the returns from a house requires lots of effort and stress.

To simply stop your house from decreasing in value you must carry out repairs, maintenance, redecoration and general home improvements.

This additional investment means that house prices do not reflect the whole story, and the return on investment for home ownership is lower than house prices suggest.

House prices don’t take into account additional costs required for maintenance.

Stock prices don’t take into account additional returns on investment you receive through dividends.

Dividends are your share of the company’s profits.

But what about recessions?

The Great Depression started with the worst stock market crash.

If you were extraordinarily unlucky and invested only at the peak before the crash, your investment would have recovered in 7.5 years.

If your luck was even slightly better, investing before and after the peak (especially during the trough), you would have your money back much much quicker.

That was the worst stock market crash we have ever had.

House prices are also affected by recessions.

The huge decrease in house prices caused the Great Recession of 2007/2008.

People over-valued houses just as they often over value companies, and the bubble burst when they realised the prices had got out of hand.

If you’re willing to keep your money invested in a house for a long time, then you should be willing to do the same with stocks to ride out these bumps.

Lifestyle

So buying a house is one of the most stressful things you can do, it is ridiculously difficult; it is a risky investment; and it performs worse than alternatives.

So why might you buy a house?

For lifestyle reasons:

  • You enjoy DIY, and your landlord prevents you from getting your hands dirty on home projects (it is possible to find landlords who will allow this)
  • You want to live in the same location for a very long period of time, setting down roots, being part of the community, building a sentimental attachment to your home (still possible while renting, but there is a risk the landlord will evict you)
  • You want to live in a specific location / in a specific style of house and cannot find something that meets this criteria on the rental market (a problem I’m currently facing)
  • You have found a house that is undervalued to such a degree it makes up for the financial downsides and lifestyle restrictions (you must know something no one else does or be incredibly lucky)
  • You want a pet, cannot find somewhere to rent that allows pets and are willing to make huge sacrifices to have one (my girlfriend)
  • You have a history of terrible landlords and desperately need to take back control

Buying a house does not make sense if:

  • You don’t want to maintain a house
  • You want the flexibility to move locations, such as to other towns/cities/countries (or away from bad neighbourhoods)
  • You want to adjust the size of your house as needed
  • You want to get upgrades to appliances and decor with limited disruption (assuming moving to a newly refurbished house is less disruption than refurbishing one you live in)
  • You want to (relatively) easily build wealth

Further Reading

The first time I questioned my decision to buy a house was when I read Why your house is a terrible investment by JL Collins.

That article also sparked my interest in learning about investments.

The same author has written a Stock Series of articles, discussing investments (primarily stocks but also bonds and REITs) which was so popular he used it as a basis for his book The Simple Path to Wealth.

JL Collins is popular in the Financial Independence Retire Early (FIRE) movement.

Reading about this led me to discover other interesting figures in the world of personal finance such as Mr Money Moustache.

The leading figures in this community have interesting ideas that challenge the norm.

If you believe buying a house will be a more effective investment, and you’re not put off by the difficulty, the risk and the lifestyle impacts, I would recommend running the numbers.

Renting Is Throwing Money Away … Right? runs through the complicated process of modelling your expected returns vs the alternatives. The conclusion is as with everything, it depends. Namely on: price to rent ratio, time invested, assumptions about inflation, expected costs, how fast rents increase etc. etc.

JL Collins also has a run the numbers with links to many other articles that aim to do the same.

At the time of writing interest rates in the UK are at 0.1%. I assumed this means it is a great time to buy a house, as mortgages could hardly be cheaper.

Ten Reasons It’s A Terrible Time To Buy An Expensive House made me realise that of course it’s not that simple!

The author states that it’s better to buy with a high interest rate.

The theory goes that a low interest rate causes house prices to rise. Prices will fall when interest rates rise, which we assume will happen eventually given how ridiculously low they currently are.

When house prices fall, you lose your equity but not your debt.

Markets aren’t so simple, who knew :man_shrugging:

Disclaimer

I am not a financial advisor. Please assess your own financial situation and carry out your own research / seek professional financial advice as required.

I simply hope to provoke your thoughts :)