Polls / February 27, 2012

Did you buy your home because it was a good investment or because you "fell in love" with it?

Emotions play a large part in buying a home, with 23% in latest eZonomics online poll saying they “fell in love” with their home and 24% saying both love and investment prospects played a role.

Housing’s emotional pull
The idea of owning a home can tug on the emotions. University of Southern California Professor Richard Green wrote on his Real Estate and Urban Economics blog that “there is something about real estate” compared with other investments. Apart from being something we can touch and feel, homes can give a feeling of control. The professor remembers how happy he was when he bought a property and left the rental market “not because I thought I would make out financially … but because I disliked my landlord and was relieved that I would no longer have to write a check to him”.

Speed buying
For all of the benefits of owing a home, allowing your heart run away with your head can be costly.
And yet there is evidence that people make the decision quickly. ING Direct UK  in 2010 cited evidence that “the average home buyer spends just 21 minutes viewing a property before deciding to buy it.”
Part of the reason for these rapid decisions may be that people quickly form a mental image of themselves living in a property, even though they do not own it. They then either place a higher value on the property or are prepared to borrow more than they first planned. Behavioural economists call this thinking trap the “endowment effect”.

Housing risks
Love, especially for a home, can be tricky. Higher interest rates or lower income may make it difficult to pay the mortgage each month. Owning a home may also make it more difficult to move for a better job or to get work. House prices may also fall, leaving the owner not only with a broken heart but also negative equity.
Even if one controls their emotions, an investment in a home still carries risk. Chris Dillow writes “housing is a riskier investment than many imagine” both because house prices tend to fall when jobs are most at risk and share prices, at least in the US, have for many years been less volatile than house prices. Similar observations were attributed in 2010 to US Federal Reserve Associate Director Karen Pence who was reported in the Wall Street Journal’s Real Time Economics blog as saying homes make a lousy investment.
The risks involved with investing in housing are not confined to the US. Falls in house prices in many countries over the past few years suggest this but press coverage may still give the impression that, over the long term, house prices generally rise. However, the extent of any increase should not be overestimated. Neil Monnery in his 2011 book Safe As Houses examined house price data for many countries going back decades and in some cases centuries. He found that it is “more normal” for house prices to grow at about 1% a year above inflation.

House buying

eZonomics team
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