Is Buying A House Worth It?
Welcome friends to this thread where I want to push your perceptions just a little bit as we explore the allure and absurdity of the modern home ownership equation. I’m not talking investment properties, I’m talking about buying a house to live in. That’s right, the actual Australian / American / An Englishman’s Home is His Castle dream.
The house that you buy to actually LIVE IN is ultimately a consumption decision. And there’s a spectrum of choices in the marketplace. And if your desire is to achieve financial independence so that you can move onto bigger and better things with your life, then buying a house to live in may not be the fastest way to achieve it.
Now stay with me for a second because I know how deeply ingrained owning a house is in the Australian Psyche. Hear me out, because you know, it’s now become a ‘housing crises’.
So what is a house? There must be a version of Maslow’s triangle that can be applied to what it is that a house gives you. Buying a house is usually perceived to provide the purchaser:
- protection from the elements and refuge
- a good financial decision
- sense of certainty and security
- space to entertain and socialise
So lets see how buying a house in the modern era fits within a FIRE perspective (if you are new to FIRE, read our simple explanation of Financial Independence Retire Early first).
There’s an imagination-stifling sea of signals around you reassuring you that home ownership is the best thing you can do for your money and your family. If you were to ask someone wanting to buy a house their reasoning, their answer would probably fall into one of these 3 categories:
- Money
- Family
- Sense of security
We’re going to take a dive into these 3 things to see if they really stack up. First let’s take a look at why a lot of people believe buying a house is the best option from a financial perspective. Lets be clear though that for most people who buy a house, achieving financial independence is not their main motivation for doing so.
Why Boomers Think Buying Houses is Great
Lets take it back, waaay back to when our parents were buying houses in the 1970’s and 1980’s. Forty years ago in 1984, houses were LITERALLY 3.3 TIMES THE AVERAGE ANNUAL INCOME!
So when they bought a house and achieved a measly savings rate of 50% of their annual income (which is less savings than a FIRE devotee should be aiming for), you could pay off the damn thing in 6-7 years! You could even pay it down quickly while enduring the often touted retort of *shockingly high* interest rates, which peaked at 17.5% in the early 1990’s. You could pay it off quickly because a house only cost you 3.3 times what you earned in a year. Lets not forget that those interest rates fell back to around 10% anyway roughly 1.5 years after this peak.
Buying a house to live in during the 1980’s was a no brainer. Heck, buying a fancy house that you could throw cheesy fondue parties in to entertain your friends for a few more dollar-bucks than the cost of an average house would’ve probably seemed like a no brainer too. And with all these cheap houses around, why wouldn’t you buy another as an investment and maybe a holiday house as well? And we all know how it ended up for people who snapped up multiple houses when they were relatively so cheap. Buying a house to live in back then made great financial sense even from a FIRE perspective.
Fast forward a bit and now buying an average priced house is more than 10 times the average yearly income. That’s right, even with interest rates down around 6%, it’s going to take you a LIFETIME of slavery to an ‘average’ job to pay off this damn thing.
This simple fact changes the monetary side of the consideration when deciding if buying a house is a good idea when prioritising FIRE. Believe it or not, there are other alternatives and it’s not just renting. And believe it or not, that person who bought a house in 1984 with hindsight could have actually done a LOT BETTER THINGS WITH THEIR MONEY.
Is Buying a House Good for your Money?
Ok, so lets run a hypothetical situation with Homer who was lucky enough to be born into the lucky country in the post-war generation. He was even more lucky to achieve an average income and bought an average house for 3.3 times his annual salary.
From what I’ve written so far in this post, you’d think Homer had just won the lotto. He paid $64,000 for a house in 1984 and today in 2024 it’s worth $1.1M. Brilliant! That $64,000 has compounded at an annualised rate of 7.15%! Pretty good going! This increase in house value is what we hear a lot of millennials complaining about today; “Houses are so expensive!” Lets also keep in mind that this gain is also on the back of one of the LARGEST AND LONGEST RUNNING PROPERTY BOOMS IN HISTORY.
Let’s now consider an alternative option. Instead of going into debt and buying a house to live in, Homer invested 50% of his income and within 4 years had $64, 000 in cash. But he did not buy a home to live in, he instead left it in a broadly diversified index fund, like one that tracks the ASX200 or the SnP500 (This is not a recommendation to buy these ETFs, only used here as a hypothetical comparison). If Homer had left that $64,000 in the share market it would have kept on compounding annually for the remaining 36 years at 11.25%! That is the actual percentage return for the SnP500 over this time period. Even more brilliant!
So Homer the Home Owner now has an asset worth $1.1M and Homer the share market investor has an asset that is now worth $2.97M. Holey Crap! Almost 3 times as much!
(Use this calculator to perform any other historical return on investments.)
Assumptions for this comparison also include:
Homer the Home Owner
- Never did any expensive renovations, extensions or even basic maintenance on his house over this 40 years (lol)
- Had an interest rate on their loan of 0% (also lol)
- Did not have any associated costs of home ownership eg, stamp duty, insurance, rates etc
Homer the Share Market Investor
- Also did not add any money to their initial outlay
- Understood the profit from his asset wasn’t tax free like a house you live in is and thus managed their affairs in a tax efficient way
So lets see now, out of the 2 main asset classes you can buy (shares vs property) does it REALLY seem like a house to live in is THAT good a financial decision?
Let’s also be clear, this is not a shares vs property debate. I’m not talking about investment properties, I’m talking about buying a house as a form of consumption.
| Homer the Average Home Owner | Homer the Average ETF Owner |
|---|---|
| Borrowed $64k – bought a house | Saved and invested 50% of income for 4 years |
| Did no maintenance ever, had an interest rate of 0% (generous!) | Left it in the share market for the 36 years |
| Still came out with $1.1M | Came out with $3M |
| Compounding return of 7.15% | Compounding return of 11.25% |
Housing is a type of Consumption
The aim of many FIRE devotees is to keep expenses low. So if you are going to optimise your spending, the obvious place to start to get the biggest bang for your buck is the category that takes the largest chunk of your spending. Which is almost always accommodation.
“Ok, so if I don’t buy a house, where am I supposed to live?”
Well this my friends is where your imagination and hustle come into play. The solution for us at the moment is a House Truck that will take us anywhere on unlimited adventures as a family. See the point here is this:
Without the need for a house, you are drastically closer to FIRE
In fact:
If you currently own an average value paid off house, you could simply swap it for a life of unlimited time instead! RIGHT NOW!
Like we did.
All you need to do is work out a solution to accommodation that works for you. We built a solution that provides all the comforts of modern home but also WAY MORE LIFESTYLE THAN A HOUSE EVER DID!
And if you consider just how valuable unlimited time is, you might consider your overly priced accommodation choice as not really giving you very good bang for your buck. Like we thought.
With unlimited time you can choose any of the following and even more! Which one takes your fancy?
- Invest time into your skills. Ultimately your skills and abilities can make you WAY MORE MONEY THAN A LIFETIME IN A REGULAR JOB CAN
- Bootstrap a business
- Actually raise your own children
- Have a sleep cycle that is conducive to health
- Make / eat healthy food
- Exercise everyday
- Travel
- Volunteer
- Read books
- Stare off in the middle distance for as long as you like, thinking about something
- Do things that enhance your self actualisation
- Sleep in when you feel like it
- etc
So lets weigh it up here:
All that stuff listed above (and more) on one hand
vs
a ‘roof over your head’ and lifetime of slavery on the other.
Considering all of these possibilities you could choose do to with your unlimited time, it does not seem to us that owning a house instead is a good trade off.
In fact, like many people with a minimalist persuasion, we realised that the more stuff we owned, the less freedom we actually had.
This is the ‘opportunity cost’ of choosing the most expensive accommodation option on the spectrum. A lifetime short of time, severely reducing your ability to achieve your true potential.
So is buying a house really the best decision for someone chasing FIRE? I don’t think the equation really stakes up in the modern era, especially when many people don’t need to live physically close to their jobs anymore.
We’ve looked at how we viewed the finance side, in the weeks to come we’ll look into the the ‘family’ and ‘sense of security’ aspects to see if those reasons stack up to a little bit of scrutiny.
Chime in the comments with your thoughts!