Introduction

• Buying a house is widely viewed in the UK as part of achieving ‘the dream’, along with getting married and having children, another tick in the box to show you’ve made it. Society’s drive to put buying a home on a pedestal will undoubtedly make this a controversial blog, but I feel it’s needed as there are too few voices providing a balanced view. Personally, I am definitely not immune to society’s idealisation of home buying and it’s something I’ve wanted for a number of years. However, the more I read and investigate it, the more concerned I’ve become that home ownership isn’t for everyone, and that instead of millennials in their early or mid-twenties diving right in, perhaps it should be something for those slightly later in life, who have more financial stability. At minimum, it should be something people research and understand the potential consequences of more before they get caught up in the fairy-tale that society has created.
• Usually when I write the posts for this site I have worked out what my view is and what I think is the best advice for the majority of others, in this case I hadn’t and I’m still not convinced I have.
• Having said that, my end goal was to come up with a ‘minimum requirements’ checklist, which I would apply before taking the plunge and becoming a homeowner. Before getting to that checklist I’ll cover the following: (1) Bust some of the biggest myths about home buying (2) Detail the key arguments I have for buying a house (3) Detail the key arguments I have for not buying a home (4) Share my ‘minimum requirements’ checklist.
• While society has ingrained into individuals from a very young age that owning a house is on the ‘path to happiness’ and breaking from that view point isn’t easy, I hope that my deep dive and rationale can help restore the balance and ensure millennials are buying a home because it’s the right thing for them, not because society thinks they should.

Myth Busting

• I want to start by clearing away some of the myths that hang around house buying like a bad smell. They are the first things people say when you bring up home-buying in conversation and for that reason it makes it even more important that these wrongs and misunderstandings are corrected:
  • Paying rent is throwing money away – This was one I fully believed for years. The biggest thing people who propose this argument forget is that for the vast majority of people – especially Millennials – most of your monthly mortgage repayment is simply paying off the interest, not increasing your ownership of the house. So instead of paying a landlord £700 a month, you are paying a multinational bank a similar amount with only a small amount making a dent in your actual mortgage.  If you are a younger person buying a home this is very likely to be the case. If you are in this situation, buying a house significantly increases your exposure – you’ve now got a massive bill making machine – but most of your monthly payments are still making someone else rich.
  • A house is an asset – A house only becomes an asset when you sell it and it’s appreciated significantly in value, both MUST happen for your house to be an asset. Up until that point, if you have a mortgage, it is the definition of a liability. This is because you have to pay for the right to be in it (mortgage) and you are liable for any additional costs (maintenance) it incurs, broken pipes, new shower etc. What other ‘asset’ do you have that is the same?  Nothing is a good deal if you have to constantly feed it money in the hope that one day it will be worth significantly more than it is now.
  • Guaranteed to make Money – While over the last few decades house prices have done very well in the UK, with the average price of a house rising from £131,377 in Q1 1991 to £205,937 in Q4 2016 adjusting for inflation, that doesn’t mean they’ll continue to. Savills predicts in 2017 house prices across the UK will see no change, that’s 0% increase, what other investment would you be willing to accept that from? The other factor that a lot of people conveniently forget – and which is admittedly very hard to measure – is the amount of money they have to spend to keep their house in good condition, let alone getting it to a re-sellable position. When you add in that cost, even if the house appreciates in value significantly, your actual return on investment (ROI) isn’t as high.
  • My budget is the maximum mortgage amount the bank is willing to give me – This is almost always wrong. You should be thinking about looking for a house that meets your current and future needs, taking into account all the additional costs that go along with a house: stamp duty, maintenance costs, the amount you are comfortable owing someone else and the interest rate at different mortgage amounts. For most people this amount will be lower than the maximum mortgage, and that isn’t a bad thing.
  • Once I’ve got my deposit and mortgage I’m all set – As alluded to above, it isn’t just your deposit you need to pull together, you also need things such as stamp duty, insurance and inspections. Most experts say this can add up to another 2-5% of the house price, that’s right the house price, not your deposit pot!

Reasons to Buy

• With the key myths taken care of, I want to spend some time looking at the key advantages to owning your own home. Once I started going down the rabbit hole of finding information why not to buy, you can often get caught up in the negativity around house buying and forget some of the awesome reasons to buy, but there are definitively big positives, which I’ll cover now.
  • House prices tend to go up – Just like the stock market, over the long term, average house prices tend to increase, especially in the UK. Earlier I highlighted that the average house price in the UK increased by £75,000, adjusting for inflation since 1991. If your house increases in value you make money at the point of sale. What I see as the biggest advantage with home-buying is that you make money on the money your borrowed from the bank not just your deposit pot. An example will help here, if you brought a house for £130,000 in 1991 with a 10% deposit (£13,000), selling that house in 2016 you could have expected to make £145,000 (amount from selling the house minus the remaining mortgage figure minus your initial deposit). Now if you’d invested that £13,000 in the FTSE All Share (average 6.3% return since 1991) you’d only have ~£63,000. This is why so many baby boomers have such comfortable retirements. House prices have historically gone up and as they do, you make money on the amount you borrowed from the bank. This is a simple example considering I haven’t included interest rate repayments or sunk costs (repairs, insurance etc) but it gives a good indication on why many see purchasing a home as a great investment. I also have assumed that the money you would be spending on your mortgage is the same amount you’d be paying on rent, and perhaps the biggest assumption of all is that you won’t add any addition money after the initial £13,000 in the stock market.
  • Comparatively predictable and stable cost – If you are on a fixed interest rate mortgage, you know what you’ll be paying for the next 20+ years, you definitely don’t get that predictability in the rental market. Even if you are on a varied interest rate mortgage your costs should be more predictable than with renting.
  • It’s your own space – Once purchased the house is your own, and you can do with it what you want. With renting, there is always that constraint and even though your landlord may allow you to change some things, the space ultimately doesn’t belong to you. For some people this feels like a serious limitation.
  • Symbol of moving to the next stage of your life – As I mentioned in the introduction, owning a home is a status purchase in today’s society, and some people enjoy that signalling effect.
  • Additional Safety – With renting there is always the risk that the landlord chooses to sell and you have to move out of the house even though you’d rather stay. If you own your house that decision is up to you. Whilst there are minimum timescales in place to protect renters, the landlord can ultimately make you move out.

Reasons Not to Buy

• With the positives clearly defined and understood I’ll move onto the reasons why buying isn’t necessarily best for everyone, and almost certainly not best for those in their early to mid-twenties:
  • It’s a huge amount of money – The UK’s average house price in 2016 was £205,937, rising to £484,716 in London, which is a significant amount of money. If you want to be slightly risk averse and have a 20% deposit that is £41,000. Not many people have that amount of money lying around, and that’s before saving the additional 2-5% of the house price for other costs. You can put down less than a 20% deposit but that is riskier and will incur higher monthly mortgage repayments.
  • Inhibits achieving a balanced portfolio – Buying a house – for most people – means they can not achieve a balanced portfolio. If people do have enough money for a deposit on a house it is likely that it will be ALL of their savings, meaning they are probably removing money from a balanced portfolio across stocks, funds and savings to put all their eggs in one basket.
  • Considerable time commitment – Buying and owning a house is a massive time commitment. That isn’t necessarily a bad thing, some people will, and do, enjoy that, but it is something to be aware of as it’ll stop you spending time on other things.
  • A house is highly illiquid – The more illiquid something is the harder it is to sell it quickly, and a house is one of the most illiquid of all. This isn’t a bad thing until you need money quickly, either due to an accident, loss of job or a whole host of other reasons. Rightmove estimates that the average ‘time to sell’ in the UK from May 2015 – May 2016 was 66 days. That’s a long time compared to getting money out of a cash machine or transferring it between accounts.
  • A house is highly immobile – This sounds rather obvious, but is an important point to make. Buying a house makes you more immobile as a result of the house not being able to move. It can restrict the jobs you can apply for and the opportunities you can take. With the rise of automation and artificial intelligence, and their impact on the jobs market, this could become more of an issue in the future as it becomes harder and more difficult to find jobs that your skillset matches.
  • No guarantee you’ll make money – Whilst over the long run, historically, houses have been a good investment that doesn’t mean that buying one is guaranteed to make you money. There are many reasons for this, remember, the housing market fluctuates, therefore if you need to sell in a hurry, especially after holding the property for a short period, you might sell for less than you brought it for. Even if you do make money on the sale price, you’ve got to remember your sunk costs when purchasing and selling the house. Remember regardless of what the house is worth now your mortgage doesn’t change, if your mortgage is higher than the price of your house you are in negative equity, this is something we saw a lot of in the 2007-8 Financial Crisis.
  • Mortgage Repayments can be more than Rent – If a key driver for buying a house is to reduce the monthly amount you spend on having a roof over your head, make sure you do your research first. Ensure you compare the average rent price in the area you are looking to buy and compare with the mortgage repayment terms you are being offered. Your mortgage repayment figure plus things like house insurance etc could end up costing more the cost of renting in that area.

My Minimum Checklist

• Based on everything I have read and understood on the pros and cons of purchasing a home, the most important of which are detailed above, I’ve come up with a set of ‘minimum requirements’ for myself.
• This is the list of things I have concluded must be in place for me to consider purchasing a house. These are just the criteria of me personally, based on my current position and my risk profile and will change for different people. If you wish to use these yourself please do, although I’d suggest personalising them to your own situation.
  • 20% deposit + 5% of house price saved for additional fees.
  • No more than 30% of my take home monthly pay required to meet monthly mortgage repayments.
  • Mortgage repayments must be below rent price for similar house.
  • I must be too willing to/expect to live there for at least 5 years, preferably 7 years. There are always unknown things that occur, but I don’t see the point in buying a home if I know I’ll only be there for 2 years.
  • The house must hit at least 90% of ‘must haves’ on my list. Obviously, the perfect house doesn’t exist, but I don’t want to feel forced to settle. This list will vary, not just between people, but within my own life. The things I might want from a house at 28 might be very different to what I’d want at 35.
  • Be able to maintain a balanced portfolio across different types of investment. Whilst I will definitely have to reduce the amount I hold in some of these investments in the short term, I don’t want to feel exposed by having all my eggs in one basket.

Conclusion

• The idea of buying a house at some point has been something I’ve been consciously thinking about for the last couple of years, but it wasn’t until I sat down to compose this piece that I really understood the key aspects and the most important factors/considerations for me personally.
• Therefore, even if you disagree with my perspective on the points above and/or my checklist, I’d still recommend doing a similar exercise with your perspective before jumping in to buy a house.
• Finally, don’t let societies norms or expectations force you into something you aren’t ready for (either mentally or financially). Buying a house – and getting onto the property ladder – is one of the biggest decisions you’ll make in your life, make sure when/if you make it, its own your terms.

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