Should young people buy a house?

[Should Young People Buy a House?] Casual Talk on Investment CLEC Investment and Financial Education Institute Blog Post Date: May 31, 2021

Young people should absolutely not buy a house! Buying a house makes you poor.

I've never seen anyone become rich by buying a house; I've only seen developers become rich.

The financial issues of young people buying or renting a house are different between the United States and Taiwan, but conceptually they are similar.

1. External diseconomies:

In Taiwan, young people don't have a lot of money, so they can't afford to buy homes in areas with convenient transportation. They can only buy in the suburbs, such as Wugu, Xinzhuang, Sanxia, Shulin, or even as far as Nankan. When you need to go to Taipei for work, socializing, or dating, it becomes very inconvenient, as it takes a lot of time (spending one-third of your waking life on commuting is not worth it in the short few autumns of life).

The United States is the same. Just looking at the daily traffic on highways 85, 101, 280, and 880 in the Bay Area, you can tell from the congestion.

2. Poor location, property does not appreciate:

Next, let's talk about real estate appreciation. Everyone might think that buying a house allows for loans and leverage, but the primary prerequisite is that the price must increase.

When I was young (thirty years ago), I participated in Acer's housing plan in Longtan and reserved a house costing 9 million TWD. After ten years, when the brand new house was completed, I could only sell it for 6.5 million TWD. (A loss of 2.5 million, plus ten years of opportunity cost. A huge loss!)

Young people in Taiwan buy houses in the suburbs. After twenty years, you will find that your house has aged, your environment is not as good as before, and there are many newer houses being built around you. The increase in value for suburban houses is limited. If after forty years, at retirement, you are still living in the same house, it will be even more unfortunate.

The United States also has the same problem. Large suburban areas are filled with apartment-style buildings (now there is limited land, so only apartments can be built, especially in the Bay Area). Although with the current low interest rate environment, housing prices are rising again, most of them are single-family homes, not apartments. Especially now, with such a large increase, future growth may not meet expectations.

3. Real estate leverage is not as good as you think:

Many people think that real estate can be leveraged because of loans, giving a leverage effect. In fact, when you have paid off half of your mortgage period—for example, with a 30-year loan, by the tenth year—you have already repaid most of the principal, and the leverage effect diminishes.

In Taiwan, many people buy a property and live in it until they retire. There is basically no leverage effect.

4. You might change rooms frequently:

In the United States, school districts are very important, so on average, you will change houses every seven years. Marriage, having children, and school districts for growing children also force you to move. If housing prices rise quickly, you have to pay capital gains tax. If the increase is not significant, although there is a tax exemption, your return is just too low.

In Taiwan, many people buy a house and live in it until retirement. By then, the house is old, its layout is not suitable for wheelchair access, and loft-style houses are even worse. If the location is far from a hospital, it is completely unsuitable for retirement living. Such old houses are basically unwanted.

Young people in Taiwan, when you buy a house, you might think that when housing prices go up, you'll move to a better area and location. But you'll find that good areas increase in price faster than your suburban area, so you simply can't move. Moreover, the monthly cash outflow is higher, leaving no money to invest, and you'll end up with only one house when you're old.

5. Your down payment and mortgage make you poor:

Buying a house in Taiwan for $30 million, with a down payment of $5 million, plus a thirty-year mortgage (a $25 million loan, paying $85,000 per month), your lifetime investable funds will decrease, and you will end up poor with only a shabby house. (You can buy a house at a different price and calculate it yourself.)

Revision: 'If you don't buy a house, a down payment of $5 million will turn into $820 million after forty-five years (at age seventy).'

Also, the monthly mortgage is $85,000, plus property tax of about $60,000 a year, and a monthly housing tax of $5,000. The monthly cash outflow for buying a house is $90,000 (excluding management fees, maintenance fees, etc.).

Revised 'If you are renting instead of buying a house, with a monthly rent of 35,000, for the first 45 years you can have a positive cash flow of 55,000 per month. If you invest for 45 years (with an annual return of 12%), your assets will grow to nearly 1,005,000,000. Adding the 82,000,000 down payment mentioned above, your total investment assets will eventually be 1,084,000,000 TWD.'

Do you think your forty-five-year-old house will be worth a billion at that time?

The price of real estate in the United States is even frighteningly high, and mortgage interest rates are twice as high as in Taiwan. Property taxes range from 1.3% to 3% of the house price. Based on the above calculations, buying a house in the U.S. is even less favorable (holding taxes are too high), and renting is still better than buying.

Buying a house in the United States and eventually retiring, if there is no cash flow, you can only sell the house and pay capital gains tax.

6. Retire and stay in a hotel:

I plan to retire living in a five-star hotel. Even if it costs 4 million TWD a year, I only need to use a small portion of my 40 million TWD capital gains to afford to live in a five-star hotel mansion, instead of a shabby alley.

Finally, some advice for young people: never buy a house lightly. Before buying a house, think carefully, think carefully, and think again.