Ah, the likely murmurs of stone-faced City workers I pass in the morning: just keep earning the paycheque; have to pay the mortgage.
I’ve written before about my general thoughts on buying a house. I was burned in the bubble-pop of 2009, so perhaps I’m jaded. In any case, here are my general thoughts:
- Pros of buying a house
- Decorate it as I (or more likely, my wife) see(s) fit
- A nice feeling
- A diversifying investment, with the opportunity for very high leverage
- A real option: if things get very bad, I can try to convince my wife to allow a lodger or two
- Cons of buying a house
- Continuous repairs + taxes + insurance
- Huge capital outlay
- Extreme illiquidity, such that valuation is very tricky and transaction costs are high. These effects are multiplied by the leverage used
- Reduced financial and physical flexibility: harder to move for whatever reason
I like the diversifying aspect of housing, so can I get the good without the bad? The short answer is yes, I can get the investment characteristics of housing without buying a house. A good example is the iShares Dow Jones Real Estate ETF (IYR), which contains a basket of real estate holding companies, REITs, and developers. The performance of the fund tracks the Case-Shiller 20-city Housing Price Index quite well:
The fund is a bit more volatile than the index, which is probably at least part due to the illiquidity of measuring house prices. In any case, the correlation is reasonable, and the major trends are captured. The ETF is liquid, with OK-ish liquidity on the options for those wanting a leveraged investment.
As a kicker, the dividend yield for IYR is about 3.5%; that’s probably a bit lower than the net rental yield on a buy-to-let, but at least no one calls in the middle of the night needing a toilet unblocked.