Is buying an "investment house" a good idea?
The Advocate, Wednesday September 6, 1995
Once upon a time, it was more than just a dream to own a home. Today, it is once more becoming a reality because of the low mortgage rates and the decline in house prices. But, is it a good time to buy a house as an investment? Is it the best thing to do?
I remember people telling me all through the '80s how they would much prefer investing in real estate than mutual funds. After all, it never had a negative year and the house prices were going up so rapidly. Many invested solely in real estate and made handsome profits through the late '80s.
They were 100 percent convinced it was the best and safest investment. I tried to point out some of the dangers - a lack of diversification and not being liquid. They wouldn't listen to me. They already had their minds made up. They wouldn't or couldn't see what was coming. The storm clouds were just over the horizon. They were saying to me, "my mind's made up ... don't confuse me with the facts." They forgot about supply and demand.
By the end of the '80s, most of the boomers had moved through the housing market. It was the huge demand they put on the housing market that drove up the prices unrealistically. Once the demand slowed and the high interest rates hit, the sales virtually dried up. House prices tumbled for the next four years in a row. Something that was unprecedented in the real estate market. Even the renowned Reichmans were not immune.
I saw it coming but felt as if I was the proverbial "voice in the wilderness" talking to people who were on the real estate binge. They wouldn't listen. But, don't get me wrong. I'm not saying it's a bad investment to buy a house to live in and raise a family. For those reasons, it is probably your best investment.
People forgot the basic reason for owning a home. It has always been a place to live in. People forgot that and started treating it as an investment because of the escalation in house prices. The last four years have been a sobering period of time to learn that lesson. I know of some tragic stories. I'm sure you do also.
A friend of mine, Mr. Coby Kobayashi, born in Canada of Japanese ancestry, compiled some statistics that are very revealing. Mr. Kobayashi spent many years as a real estate salesman, but for the last 27 years has been in the mutual fund industry where he still works as a regional manager. I was privileged to work out of his office when I started in 1983. His chart compares the Templeton Growth Fund vs. GICs vs. Average House Prices compared against the annual inflation rate. The results must be seen to be believed. Contact me for a copy.
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