Investing in real estate has shown consistent long-term appreciation over the long run.
For most of us, the purchase of real estate, whether a house or an apartment, will be the single largest purchase of our lives. While we may not realize it right away, this purchase will most likely also become our single best investment in life, and by far.
The well-known Maslow’s pyramid puts security as the second most important category of human needs, right after the physiological needs (eating, drinking, sleeping, etc). Throughout history, the times of crisis have always been marked by evictions of those who could no longer pay their rent or keep current on their financial obligations.
Unsurprisingly, becoming a homeowner is, and will continue to be, a high priority objective for many of us. Ownership of one’s home provides security. The place we live in truly becomes our home. Even though one may use a mortgage to finance part of the purchase, the home provides security in the case of financial hardship or retirement.
Owning a home also provides a personal objective in life and obliges us to think about the future. Whether it is about building or growing a family or preparing for retirement, the whole thought process that takes places sometimes way before buying the home is part of a very constructive, and necessary, financial planning reflexion that each one of us should perform.
Important issues such as planning for retirement, planning for inheritance or even planning for raising children will revolve in part around our home.
But often, we do not realize that buying real estate will be by far the best financial investment of our lives. While investing in financial assets such as stocks or bonds is always tainted with a lot of uncertainty and performances can be quite volatile, investing in real estate has shown consistent long-term appreciation over the long run.
Several reasons can help explain the high success of individuals/investors in investing in real estate.
1) Location, location, location: we all know this well-known wisdom that applies to real estate. While the earth is big, the more desirable locations are limited. Buying location in a desirable location or a location that will gain in demand is a sure bet
2) We can understand real estate: while delving into the financial analysis of obscure balance sheets can be understood by a handful of specialists, common sense is enough to understand most aspects of real estate. We can judge the upkeep of a house or evaluate its potential for improvement
3) Long-term view: in the western part of the world people tend to think for the short term. Many companies tend to favour short-term profits over long-term growth while investors focus on short term trades instead of long-term investments. As we know, this is not the best recipe for success. To the contrary, most successful investments are made by buying and holding an asset over time and see its value increase. This is what we usually do when we buy real estate.
For individuals and families, real estate also has several strategic long-term benefits in terms of planning.
First, as countries continue to print money and increase debt, there are long-term uncertainties that are growing regarding the willingness of governments to reimburse their debt and their ability to meet their financial obligations including those related to retirement and pension payments. Therefore, investing in real estate is a means to preserve value for the future in case countries default on their social and/or financial obligations.
Second, in times of financial uncertainty, leaving cash at the bank can be a source of worries. Not only does cash no longer pay any interest, cash is not guaranteed in any country beyond small (symbolic) amounts. The financial crisis of 2008-2009 has reminded everyone that bank failures can happen and that money at the banks is not necessarily safe. To the contrary, investing in real estate puts money in a safe store of value.
Third, in times of deteriorating public finances, governments may seek to raise taxes in unconventional ways. During the crisis that hit Cyprus in 2013, we saw that the government required banks to impose a “haircut” of 47.50% on accounts over EUR 100’000. In other words, the government taxed 47.50% on any account beyond EUR 100’000. Of course, the bank accounts had been frozen prior the announcement and depositors lost millions of EUR in what looked like confiscatory measures. Financial assets can be easily frozen and taxed at confiscatory rates under extraordinary circumstances. On the other hand, it would be exceedingly difficult from a legal point of view as well as lengthy for a government to seize multiple real estate assets from many individuals. This is why governments are attracted at taxing financial assets while they have left real estate assets alone. Especially as real estate does have a positive local economic impact through property taxes and local job creations.
In our opinion, in a world filled with uncertainties, real estate will continue to be viewed as many individuals and investor as the only asset that can provide both stable long-term appreciation as well as security in the case of extreme situations. The low interest rate environment should continue to make real estate financing particularly attractive.
Ricardo Guerreiro – CEO Real Estate Boutique (Portugal)
Anton Sussland – Sussland & Co Asset Management / Daniel Gugl – Good Land SARL (Suiça)