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Saturday 10 December 2016

Home is where the money is - if you're lucky to own one

Karl Deeter

Published 17/07/2016 | 02:30

A recent Harvard study showed that even through a boom and bust period, home-ownership still creates positive wealth.
A recent Harvard study showed that even through a boom and bust period, home-ownership still creates positive wealth.

Last week, I wrote about the issue of parents being pushed to dig deeper into their pockets to help their children buy a home because of changes to mortgage rules. I also covered how the rules weren't behind the slowdown in prices, nor have they stopped them from rising.

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This week, we are going to consider a sad fact - sad because society shouldn't ideally be centred on this - but it is nonetheless true: if you don't want to be wealthy just don't buy a home.

Ireland has a broad societal model of 'buy a home, get debt-free, and then retire on a low income' which works because you have no debts. For better or worse, state pensions and retirement provision are not geared towards paying rent in old age. The assumption is you have a house and don't owe anything on it.

Generation rent will learn the hard way that there are several brutal facts they cannot change:

The first is that they'll work more years of their lives to retire later (retirement age has already risen to 68 for the current cohort of under-50s).

Secondly, when they do come to retire, it will be on less money than is possible today, as the state pension is becoming less and less affordable for the nation.

The third is that, by not owning a home, they'll miss out on the world's greatest wealth-creating vehicle.

This fact is never discussed when talking about mortgage rules. It isn't part of prices, and wealth is rarely spoken of by the talking-head commentariat - but it's very real to the people who accumulate it, or who miss out on it.

Take any nation where home ownership is not possible. You will be looking at a poor nation.

Much of what makes refugees dirt poor is that they lose their assets when they leave their place of origin - and much of that wealth was tied up in their homes. It's an unfortunate immutable fact that homes and wealth are so intertwined.

So when you stop people from being able to take the risk of buying a home, you hold them back. The wealth effect takes years to manifest - but it will be a crisis of the future as several megatrends collide.

In the USA studies have shown that the difference in wealth between black and white Americans is more about home-ownership than college education (a very counter-intuitive fact, as we are brow-beaten into believing education is the only way to become upwardly mobile).

A recent Harvard study showed that even through a boom and bust period, home-ownership still creates positive wealth. In fact, when viewed through the lens of what home-ownership can achieve, it's remarkable that anybody thinks renting forever makes sense.

That said, it's usually not financial advisers making such claims.

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