Sorry, New Zealand – owning your own home is not an 'investment'

We revere home ownership in this country for valid reasons, but it's not always the most reliable route to financial security. Frances Cook dispels the myth of 'home as investment'.

After years of working in the personal finance space, there’s one thing I have to say that upsets people more than most other topics: your home is not an investment asset.

This isn’t me saying that owning your own home is a bad idea. But an investment? No. Let me explain.

An investment should make money for you. That’s what qualifies it as an asset – you get some sort of cash in the hand.

But, as long as you’re living in it, your own home doesn’t earn you any money.

Ideally, you pay off the mortgage, and then you don’t have to pay anything for a place to live. Which, sure, is a big saved cost. But there are still plenty of other costs that you’re locked in to paying for the benefit of living in that home. Insurance, rates, maintenance, to name a few.

So to recap, your home doesn’t earn money for you, meaning it doesn’t qualify as an asset. Instead, it’s costing you money, which puts it into the category of liability. Financially speaking, at least.

Another harsh fact: in the long years you spend labouring to pay that home off, it could even drag you backwards.

Look at the people who bought at the peak of the housing market in 2021, who then faced steep increases in interest rates. That took many people’s mortgage payments to the edge of what they could afford to pay.

The only thing worse than not being able to buy your own home is buying one, finding out you can no longer afford the repayments, and then losing some or all of your original deposit through a forced sale.

Really, until the house is paid off, it’s your bank’s property.

Which leaves homeowners in a riskier spot than many want to admit.

Paying off a mortgage early is something of a national dream, but sinking all your money into a home also means you’re not able to put that money elsewhere.

Financial planner Nick Carr from Your Money Blueprint says he actually regrets paying off his mortgage early, as he could have invested some of that money in shares at an earlier time.

“Everything’s obviously easier in hindsight, but during that time, sharemarket returns were 11-12% on average,” he says.

“Mortgage rates at that time averaged 5.5%, so once you take out fees and taxes from the investing, that was about a 5% gap between paying off the mortgage and investing.

“It was a missed opportunity, for sure.”

As he says, hindsight is a wonderful thing. But planning to spread your money across more than one saving for your future, such as a little extra on the mortgage as well as a little extra into something like shares, can help you avoid such regrets at a later date.

Now before you start drafting the hate mail, I’m certainly not against home ownership. It can still be a good financial decision to buy your own place.

Housing is one of the biggest non-negotiable expenses, so a paid-off mortgage is a huge chunk of fixed expenses gone.

It can also provide lifestyle benefits that are important, including a sense of stability, the ability to make choices about how you want to decorate, and even whether you’ll have a pet.

But treating it as an investment, when it’s not, can financially hamstring you. So it’s still important to understand what it does and doesn’t achieve for you.

You’ll need true investments in retirement, if you want to be financially comfortable.

Want to switch the heating on in winter? That’ll take cold, hard cash. Want to make dinner, perhaps even push the boat out with a piece of salmon as the centrepiece? That’ll take money. Want to take the grandkids out to the movies, for the 43rd sequel to Moana? You’re going to need cash, once again.

I know what you’re thinking: “But my home is appreciating in value as we speak, and when I eventually retire and downsize I’ll live in cheaper home and have a heap of cash left over.”

That is true in theory – and property markets can skyrocket (though the last few years are a poor example of that). But “downsizing” doesn’t take place as often as we expect. A house that’s the same quality as your family home, just smaller, can be hard to find. Selling and buying and moving are all expensive and time consuming. Many who move into a cheaper home to free up some cash do so reluctantly and would probably prefer if that cash flow came from a separate investment and allowed them to stay in their house.

This is why knowing what’s an investment, and what’s not, is so important.

It gives you the opportunity to make plans to get some of that all important cash flowing into your account, as well as enjoying the home you’ve paid off.

The easiest way is probably by boosting your KiwiSaver. It’s a solid investment, with strong regulations, and means you invest into shares and property under the supervision of professionals.

Come retirement time, you’ll have a tidy nest egg that can keep earning for you, and keep the heating on.

If you have the motivation to continue investing outside of KiwiSaver, then more power to you.

Shares, investment property (that you don’t live in), or even your own business, can all be solid investments that help you keep the cashflow healthy.

But your own home can’t do that.