Talking about "investment" in housing is guaranteed to provoke a reaction. It's a way of talking about houses that sounds so reminiscent of the bubble mentality. It's yesterday's way of thinking. "A house is not an investment; it's a place to live!" is today's way of thinking.
I decided to write this post after reading the reactions to Matt Nolan's post about investment in housing in New Zealand. And thinking about readers' comments on Garth Turner's blog.
Is housing an investment? Yes, absolutely. But people who say it isn't an investment may be trying to articulate something else: buying a house and living in it is also consumption. Your future savings may go down.
What makes a house an investment good rather than a consumer good? The answer is that houses share a feature with all other investment goods: costs today, and benefits in the future. You buy or build a house today, which is a cost today. And you get a stream of benefits going into the future. That makes it an investment, just like buying or building a new bulldozer, lathe, factory, or road. Or getting an education or training to invest in human capital.
The benefits produced by a house is that it provides somewhere to live. Whether you live in it yourself, or rent it out to someone else, doesn't matter. If this bothers you, just imagine that you are renting the house to yourself. Or count the rent you saved, by not having to pay rent to someone else to live in their house, as the benefit of owning the house in which you live.
(For an individual, buying a house is an investment expenditure, regardless of whether it is a new house or an old house. But for the country as a whole, only newly-built houses count as investment. That's because if I buy an old house, somebody else must have sold that house, so it doesn't change the total stock of houses.)
Buying a house is an investment, because the cost comes now and the benefits come in the future. By the same argument, all consumer durables are investment goods. A stove, a car, or clothes, all have current costs and future benefits. Even a bottle of Scotch, if I buy it now, and drink it next week, is a consumer durable. So my buying a bottle of Scotch is an investment, as long as I don't drink the whole bottle immediately?
I think the bottle of Scotch example brings out what makes people so uneasy about thinking of housing as an investment.
If I buy a $20 bottle of Scotch, planning to drink it next week, I have made an investment, but at the same time I have decided to consume all the benefits of that investment.
Similarly, if I'm currently living in my parents' basement, and decide to buy a house and live in it, my planned future consumption increases too. I will be consuming all the returns to that investment, and my future savings will not increase. That's very different from the case where I rent out the house and continue living in the basement. Or if I buy the apartment I'm currently renting, so I no longer have to pay rent. In those cases my future savings will increase, unless I make a separate decision to spend the rent money on other consumer goods.
If I take my $100,000 accumulated savings and buy a house with no mortgage, move out of my parents' basement to live in it, and keep my consumption of other goods the same, I have decided to consume the returns of my $100,000. I am now saving less of my income than I did when living in the basement. If I used to earn 5% on my money, my money income and saving have both dropped by $5,000.
At the other extreme, if I borrow the full $100,000 at a 5% interest-only mortgage (yes, I know it's risky, but it keeps the math simple), and keep my consumption of other goods the same, my savings will fall by the same $5,000.
When we buy producer durables, we can keep our future consumption and savings decisions separate from the decision to invest in the consumer durable. We can consume the returns, or we can save them.
But when we buy a consumer durable, for our own use, we have already decided to consume the returns from that investment.
Buying a house, or a bigger, more expensive house, is an investment. Here's where you ask if it's a good or a bad investment, compared to other assets. Would the future rental income (including rents you pay yourself), plus or minus capital gains or losses, give you a bigger or smaller return than other assets?
Living in a house, or moving to a bigger, more expensive house, is an increase in future consumption and a decrease in future savings. Here's where you ask whether you can afford that increase in future consumption.
Worthwhile Canadian Initiative 
This is a subject I’ve been getting headaches over for years now. I think the biggest problem is in the word ‘investment’, and how that word is employed. In the United States when we say ‘housing investment’, we mean to say that purchasing a house is like purchasing a stock, and we therefore expect real profit returns as a result (this is how we’ve run into so much trouble). To call housing an ‘investment’ based on the understanding that it is a personal one without commercial benefits is the better spirit of the description. Most (at least in the U.S.) try to view home ownership from both ‘investment’ standards, and that is why our market crashes and our homeless are currently comprised of formerly middle class skilled Americans.
As a world population, we have to exercise extreme caution when defining terms like ‘investment’. Just look at the mess the United States has made of itself, largely over the simple matter of real estate.
A house really is a used car, but is rarely valued by that standard. There is an inherent allure programed into the system which hints at wealth, regardless of condition. It is never the consumers who get rich though. Its the agents and the brokers and the banks because when a person sells their over-valued home for a profit, they buy another overvalued home at a loss. Its a vicious cycle with lots of promise and little carry through.
Price fixing is the standard, and it is unethical. In the U.S. it seems we dream up arbitrary numbers to attach to our houses in hopes that we’ll make a million, but all we accomplish with this ‘investment’ process is the destabilization of a necessity. Making housing less attainable by attempting to capture windfall profits is not good for consumers or countries. All the practice does is concentrate low income populations into impoverished areas, leading to rising criminality, and contribute to homelessness, and restrict the economy proper only to the growth which is permitted with income left over after rental or mortgage payments. A ‘western’ view of ‘investment’ is corrosive and detrimental to society and to economy.
The very wealthy use housing costs to keep the middle and lower classes at arms distance. The middle class use price fixing to the same end, as they see it, but fail as the rich actually have the incomes required to support their expenses while the middle class must depend on what can be borrowed. This creates enormous debts which, as America is demonstrating, are easily accumulated but never paid. The middle class also use housing to attempt to keep the lower class in check, fearing low real estate values will bring crime into their neighborhoods. That practice perpetuates crime rather than reducing it. In essence, U.S. consumers use property value to establish elitism and discriminate, all at the cost of the entire nations economy, and for pursuit of only a few spare dollars.
pointbite: “Producing milk is exactly my point, that’s an investment. Buying a house is like eating the cow.”
No it isn’t. Buying a house is like buying a cow. Living in a house is like drinking the milk. And the nearest analogy to eating the cow would be setting fire to the hose to keep yourself warm.
When you live in a house today, you still have a house that you can live in, rent, sell, or burn tomorrow.
When you drink the milk today, you still have a cow that you can drink the milk from , sell the milk from, sell the cow, or eat the cow, tomorrow.
A.W.: Owning your own home is like owning a stock, except: the dividend is a roof over your head not cash; all earnings are paid out as dividends; so unlike a stock (where some earnings are not paid out as dividends and those retained earnings lead to the stock appreciating) a house will normally only appreciate at the rate of inflation, unless you are skilled or lucky and get a bargain; it costs money to maintain a house.
Yes, a used car is a closer analogy than a stock, except that cars wear out in proportion to miles driven while houses wear out over time.
Or taking the cow as a pet.
Nick, are you seriously equating eating a cow to burning down your house? That’s a bit absurd. When I eat a cow I take a resource that could have produced income and I consume it. When I live in a house I take a resource that could have produced income and I consume it. Sure the house lasts a bit longer than the cow, so maybe it’s more like taking the cow as a pet. “Living in a house is like drinking the milk.” No it’s not, in one scenario after X days I have a cow and some milk, in the other I have a house that’s worth a bit less (requires maintenance). In the first case my net worth increased, in the second it decreased. I can make more cows with my cow, I can’t make more houses with my house. I don’t agree with your analogy at all. Cow = wrench, house = car.
Assume milk goes bad after one day. Then the analogy is exact.
If I drink one day’s milk production I can’t sell that same milk, but I can sell future milk.
If I live in a house for one day I can’t rent out that day’s shelter, but I can rent out future shelter.
Cows require maintenance too.
Sure, cows breed calves, and houses don’t breed houses. But calves drink some of the milk. Maybe I could rent out half my house to builders, in exchange for a share in the new houses they build.
Yes, if you live in the house and rent the basement, then the analogy works.