Fernando MonteiroCapital Gains and Housing Speculation
January 26th 2010 14:26
Housing booms excite people to borrow money and buy houses in the hope of selling them for a higher price in the short term. Yet, our latest housing boom had the impractical effect of denying most young adults the possibility of buying their first house, just because their prices went so high.
There is something pernicious about buying a house with an intention to make a capital gain on sale. As Warren Buffett put it in his latest annual report, houses are to house people and to give them some enjoyment – not to give them capital gains. In the US it was this capital gain greed that led to the subprime mortgage debacle with all its effects on the economy and the financial system.
In Australia house prices have reached so high levels that, I would easily guess, they will fall substantially before we embark on a new housing boom. Besides than this, the Reserve Bank has been increasing interest rates and is expected to continue with that policy, which goes in the same direction of reducing demand for first homes.
If a capital gain is the goal of the investor, why not then sticking to your guns and investing in the stock market, which is the proper place for speculation? The stock market has numerous practical advantages over the housing market. Moreover, in any 10 year period the stock market always outperforms the housing market.
Let’s consider some advantages of share investing as opposed to house investing:
• You can buy shares from something like $500 and you can also make small increments. You cannot buy a house with less than $450,000.
• You can buy shares with your own savings or use some little credit in the form of a margin loan. You must borrow heavily if you want to buy a house, being a mortgage typically 80 to 90 per cent of the house value.
• The costs of buying a lot of shares (brokers’ fees) are around $15. The costs, legal and processing, of buying a house are in the order of the thousands, besides the interest you will pay on the mortgage loan.
• Most shares are extremely liquid and can readily be sold in the stock market. You can recover their value in two to three days. If you have to pay capital gains tax you can do it at the end of the financial year on your tax return. Selling a house is a lot of trouble: you must use the services of a real estate agent, you must allow inspections to the property, you might have to go through an auction and you run the risk of not getting as much money as you think you deserve for it. Moreover, you might have to pay other associated legal costs.
• You can sell parts only of your share portfolio very conveniently, but you cannot sell a part of your house.
• If you receive dividends from companies that earn their income in Australia, you are given franking credits and do not pay income tax on those dividends. If you put your house for rent, you pay income tax on it.
• If your share investment goes sour, all you lose is the value represented by them, no more. If you cannot repay your mortgage, you may lose a lot more and become indebted or get bankrupted.
• If you buy shares you can also indirectly invest in property. Consider commercial property through buying Westfield’s shares. You can also buy other diverse business, but if you invest in your house, you’re stuck with one type of investment only.
Indeed, there are many advantages of investing in the share market over investing in a house. May the investor consider it.
There is something pernicious about buying a house with an intention to make a capital gain on sale. As Warren Buffett put it in his latest annual report, houses are to house people and to give them some enjoyment – not to give them capital gains. In the US it was this capital gain greed that led to the subprime mortgage debacle with all its effects on the economy and the financial system.
In Australia house prices have reached so high levels that, I would easily guess, they will fall substantially before we embark on a new housing boom. Besides than this, the Reserve Bank has been increasing interest rates and is expected to continue with that policy, which goes in the same direction of reducing demand for first homes.
If a capital gain is the goal of the investor, why not then sticking to your guns and investing in the stock market, which is the proper place for speculation? The stock market has numerous practical advantages over the housing market. Moreover, in any 10 year period the stock market always outperforms the housing market.
Let’s consider some advantages of share investing as opposed to house investing:
• You can buy shares from something like $500 and you can also make small increments. You cannot buy a house with less than $450,000.
• You can buy shares with your own savings or use some little credit in the form of a margin loan. You must borrow heavily if you want to buy a house, being a mortgage typically 80 to 90 per cent of the house value.
• The costs of buying a lot of shares (brokers’ fees) are around $15. The costs, legal and processing, of buying a house are in the order of the thousands, besides the interest you will pay on the mortgage loan.
• Most shares are extremely liquid and can readily be sold in the stock market. You can recover their value in two to three days. If you have to pay capital gains tax you can do it at the end of the financial year on your tax return. Selling a house is a lot of trouble: you must use the services of a real estate agent, you must allow inspections to the property, you might have to go through an auction and you run the risk of not getting as much money as you think you deserve for it. Moreover, you might have to pay other associated legal costs.
• You can sell parts only of your share portfolio very conveniently, but you cannot sell a part of your house.
• If you receive dividends from companies that earn their income in Australia, you are given franking credits and do not pay income tax on those dividends. If you put your house for rent, you pay income tax on it.
• If your share investment goes sour, all you lose is the value represented by them, no more. If you cannot repay your mortgage, you may lose a lot more and become indebted or get bankrupted.
• If you buy shares you can also indirectly invest in property. Consider commercial property through buying Westfield’s shares. You can also buy other diverse business, but if you invest in your house, you’re stuck with one type of investment only.
Indeed, there are many advantages of investing in the share market over investing in a house. May the investor consider it.
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