How to get value out of your home - live in it
Many people look at the price of the flat or house they live in and consider it part of their assets. Regardless of how much it’s worth, however, you still need a place to live. Rather than looking at your flat as an asset to use to pay for retirement, it may be better simply to see it as your home and invest in other assets to ensure a secure future.
HOME CAN BE A LIABILITY
It has indeed become increasingly common here to view a home as an asset. Earlier this year, for instance, National Development Minister Lawrence Wong said that public Housing and Development Board (HDB) flats provide a “good store of asset value” – so long as you plan ahead and make prudent housing decisions. People can monetise that asset for retirement, he said, by selling their flat and “right-sizing” to a smaller flat.
The challenges with viewing your home as an asset, though, include the cost of maintaining it, uncertain property prices and finding another place to live if you actually sell it.
As investment adviser Robert Kiyosaki explained, “Your house is not an asset. It’s a liability. Very simply, an asset is something that puts money in your pocket. A liability is something that takes money out of your pocket.”
Bestselling author Tony Robbins told broadcaster CNBC that “one of the weakest performers (is) your own personal real estate, because it doesn’t provide much income. You can have your own home, so there’s a psychological, emotional benefit.”
A key reason that homes are liabilities is that they cost money. Whereas other assets can grow in value and provide income through interest or dividends, homeowners incur costs in paying for taxes and maintenance.
Moreover, the value of the property may increase relatively little, even if the price seems to go up. Over the past 20 years, according to the HDB, the price of an average flat has increased by about 51 per cent. However, inflation over the same period totalled about 36 per cent. A net gain of 15 per cent over two decades is itself small. Moreover, homeowners would have had to pay for taxes and maintenance for two decades.
The net result may be that homeowners may actually fall behind rather than come out ahead.
Individuals who invested in a mix of real estate investment trusts (Reits), on the other hand, would have earned about 10 per cent per year on their asset over the past five years.
Admittedly, a homeowner who bought at the bottom of the market and sold at the peak might have done better. Yet it’s hard to time a purchase or sale so precisely, especially when you’re talking about your home.
HOMEOWNERS MAY NOT DOWNSIZE
It is also important to realise that the way to get some cash from the value of your home is to sell it and buy something smaller or move to another location. Realistically, though, many people are attached to their home and current neighbourhood so would prefer to “age in place” rather than to move.
Research last year by philanthropic organisation Lien Foundation and insurer NTUC Income, for instance, found that 78 per cent of survey respondents preferred to stay in their own home, independently or with their spouse, during their silver years. Rather than moving into a smaller flat in a new neighbourhood, then, many seniors may decide to stay put and not sell.
The situation is similar in other markets. In the United States, for instance, research firm Nielsen found that nearly two-thirds of baby-boomers have no plans to move and will simply “age in place” because being close to their communities and families is important to them. The Productivity Commission in Australia similarly found that 83 percent of people aged 60 years or older prefer to stay in their home so they can remain in the local community.
Another alternative for retirement income, renting out a room to a tenant, can also be unattractive after years of living independently.
OTHER ASSETS FOR RETIREMENT INCOME
Rather than counting on your home as an asset to pay for your retirement, it can be better to see your home simply as the place you live in. And instead of banking on your home to fund your retirement, it is better to invest in actual assets to ensure a good retirement income.
Individuals who want to own property, for instance, can purchase shares in Reits. While they’re unlikely to continue to enjoy double-digit returns, Reits offer an investment in a diversified set of properties with a relatively high return and the potential for an increase in value. Investors don’t need to pay for taxes or maintenance, either.
Investors could also select more traditional investments in shares or bonds through a combination of direct investments or exchange traded funds.
It’s a tremendous accomplishment that more than 90 per cent of residents here own their home. Rather than considering your home as an asset, however, it can be better to view it as a place where you can grow old and pass your years in retirement, unless you face an unexpected difficulty. And instead of selling your home to fund retirement, it can be preferable to use your central provident fund and other investments to provide a stable income for the longer term.