There is a great comment discussion in a recent post about it being an ideal time to purchase your first home. With real estate being a hot issue these days, the discussion evolves to a topic which everyone has a different opinion. That is, if home ownership (principal residence) is considered an investment.
Here’s my take. Owning a home is typically a decent long term bet providing that you purchase at a decent price with affordable payments. Real estate has proven to beat inflation over the long term by a couple percentage points, thus a long term inflation hedge. However, it isn’t a replacement to being invested in the markets over the long term. Equities have returned at least inflation + 4.32% over any 30 year period since 1950 with an average inflation adjusted return of 6%. You can view the long term market data here.
In addition, I think that real estate should be counted towards your total asset allocation. That is an asset allocation consisting of: stocks, bonds, real estate and cash. Renters can get their real estate exposure by investing carefully in REITs or even second mortgages.
So, even though you live in your home, I personally consider your personal residence a long term savings account or even an investment. Even with the maintenance and upgrade costs, they could simply be considered the management expense ratio (MER) of the investment.
When it all comes down to it in the rent vs buy argument, I believe that it boils down to affordability. If you live in Vancouver (or Toronto) where housing prices are sky high (maybe not for long?), then renting is probably the only practical way to live. That way, renting can keep living costs relatively low with hopefully money left over to invest for the long term.
What do you think? Is owning a home (principal residence) an investment?