Thursday, April 26, 2007

The home as a retirement asset (1)

There have been several articles written about whether or not your home is an asset or a liability. As an example: Lazy Man and Money has a good article on the subject (the comments also make a good read). As follow on questions, even some of those who advocate that it is an asset claim that it should not be taken into consideration in determining net worth or when planning for retirement.

My view is that not only is your home an asset but it also should be taken into account in net worth calculations and for the purposes of retirement planning. I will address each of these three points in separate posts.

Your home is an asset

Your home is an asset. Unless it is being used as a dumping ground for toxic waste, it has value and that value can be realised. Realisation can be achieved through one of three means:

1. sale (including a partial sale of land if it is situated on a section large enough to sub-divide);

2. as security for the raising for finance (and for most of us a loan secured against an owner occupied home will be the cheapest finance available);

3. generating rental income (either by renting out spare rooms or by moving out and then treating it as an investment property).

Your home is not a liability

The arguments for claiming that your home is a liability are typically based on the liability associated with a mortgage or negative cash flows (mortgage payments, rates etc) or claims that a home is a bad investment. Taking each of these points in turn:

A. the fact that most people will borrow money and secure the debt against the home does not turn the asset (your home) into a liability. The asset (home) and liability (debt) are two separate things. If the claim was valid, it would also follow that any asset which is purchased using debt finance is a liability, which simply cannot be true. Consider an investment property or the purchase of shares on margin as examples;

B, the fact that your home generates negative cash flow does not make it a liability. Many assets produce negative cash flows either during the early stages of their economic lives or until such time as they are realised. As examples, consider a property development, an oil and gas lease, a forestry plantation and a wine collection;

C. the fact that it may be a bad investment (a very debatable point) does not turn an asset into a liability. Almost all investments have the potential to produce either undesirably low or negative returns. If this happens it just means that the asset is a poor one for investment purposes. It does not make the asset a liability. Consider a share that depreciates in value or a negatively geared investment property as examples.

In summary, I see no basis for claiming that a home is a liability. Next up: whether your home should be included in your calculation of net worth.

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