A Bigger House Isn’t a Retirement Plan
Maybe it’s time to say goodbye to the property ladder and see a house as a home, says Martin Hawes. Buying ever-bigger places may not be the best use of your money.
19 January 2022
It seems to me that people no longer buy their first home – instead, apparently, they get themselves ‘on the property ladder’.
This seems a weird idea: it assumes that people are going to climb up this ladder as they buy a home, with the idea of selling it so that they can move up another rung on the ladder.
This then repeats for perhaps 40 years.
Buying a house has become a financial strategy, rather than a place to call home.
According to this strategy, we need to spend our lives buying and selling houses, rather than just living in them. These houses that we buy and sell seem to be a substitute for just owning somewhere to live while you build a business or a savings plan or invest.
This used to be called the ‘Bigger House Plan’. Here’s how it worked:
1. You bought a house and worked to pay down the mortgage.
2. When the mortgage went down to a lower level, you’d sell the house and buy a new, more expensive house, courtesy of a new and larger mortgage.
3. Paying down this new mortgage would become the focus for a few years.
4. Then, when that mortgage was down to a lower level, you’d sell that house and buy another, more expensive house (complete with a bigger mortgage).
5. You’d repeat this formula many times until retirement came.
At this time, the family would probably own quite a lot of house, but not much else. And so, the family would downsize the house, freeing up some capital to live on in retirement.
It’s quite true that this plan does have its appeal – living in a nicer house may give you greater satisfaction and even greater happiness.
However, from a financial point of view, regardless of whether you call it ‘climbing the property ladder’ or the ‘Bigger House Retirement Plan’, I have always had my doubts that it’s a good thing.
There are three main things that are wrong with it.
The costs of moving
The first is cost. To buy and sell multiple houses is expensive: real-estate fees, legal costs, and due diligence costs all add up to a lot of money on each sale and purchase.
These are the out-of-pocket costs, but there are also personal costs. Everyone who’s ever moved house knows that buying and selling houses, and shifting are stressful and take a lot of time, effort, and energy.
If you’re turning over the family home every five to ten years, you’ll just about always be thinking about the next move.
Moreover, I know of very few people who have moved into a house and done nothing to it – nearly everyone makes changes (big and small) or buys a new piece of furniture to suit the new layout.
Add up all these costs for each shift and, over time, you are in for hundreds of thousands of dollars.
The second negative is diversification – or the lack of it.
If you have most (perhaps nearly all) of your wealth tied up in the house, you’re taking a very big bet.
Your retirement relies on a strong housing market that will give solid returns for decades.
Yes, over the last 40 years or so, housing has had reasonable returns and the strategy may have worked out well enough.
But that does not mean the next several decades will be the same, so you’re putting a lot at stake on just one asset class.
The third consequence is missing out. To have all your money in housing, and to spend any spare income paying off mortgages is to miss investing into some significant trends.
The obvious trend that is around at the moment is technology, including automation, robotics, genetics, and biotech.
Over the years there have been other trends that have proved lucrative at times, such as resources, electronics, and commercial property.
To continue to climb a property ladder and pour all your money into one asset class is to miss a lot of other opportunities.
Stay put and get rich
I know plenty of people who stayed put and become very wealthy – Warren Buffett is the obvious most famous example, but this country also had Alan Hubbard, who lived in his modest Timaru house for decades.
A book published about a decade ago called The Millionaire Next Door by Thomas Stanley found that the wealthy often do not live in expensive suburbs but instead live in relatively modest houses, maybe right next door to you. By staying put, they saved money and kept their focus on creating wealth.
If you want to get off struggle street, you should forget about a ladder to who-knows-where.
You should buy a house that you’re happy to live in, and then stay there. By doing so, you’ll get off the treadmill that we call a mortgage and stop paying a small fortune in interest, real-estate fees, lawyers’ fees, and home decorating.
If you stay put, you just might enjoy life free of worrying about the next shift, and become wealthy in the process.
The information contained in this article is general in nature and is not intended to be personalised financial advice. Before making any financial decisions, you should consult
a professional financial adviser. Nothing in this publication is, or should be taken as, an offer, invitation or recommendation to buy, sell or retain a regulated financial product. Martin
Hawes’ disclosure document can be found at www.martinhawes.com
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