Is it smart to buy a property in 2021? I don't think so... Caveat Emptor.

In my finance class today I had the pleasure of having my wonderful estate agent Gabby zoom in and give a first hand account of the property market. Over the past 2 weeks we had been covering this topic and seeing how crazy the market has become. It was interesting hearing first hand accounts from someone who does this for a living. This dovetailed nicely with headlines such as this one:

And that headline is about California, a state that just saw its first population decrease ever. What about the housing market in hotspots such as Texas, Florida or Idaho that are seeing 50% YoY rises in some cases. In case you have not been following the real estate market that closely, here is what's common these days:

• waiving appraisals and/or contingencies;
• deals closing 10-20% above asking price;
• all cash transactions, or at a larger than usual down-payments; and/or
• construction costs that are much higher than in the past (in case you missed it, check out lumber prices).

That is just a partial list. Bottom line is this, even with interest rates hovering near all time lows (yes, I know they ticked up a bit recently, but on any long term chart they are near the bottom of their historical bands), the most rapid housing price rise seen in decades makes it such that buying a house simply doesn't make sense to me. So I have been asking myself the following questions:

What is all of the fuss about buying a place? Why get involved now?

As a disclaimer, I have lived in countries where home ownership is relatively low. Maybe that is why I am asking myself those questions. Side note: Despite it being called the American Dream, home ownership rates in the US are actually not that high compared to other places.

However the real reason why I don't think it makes sense to buy a property in 2021 is that financially it's simply not that great of an investment. We hear of people who have made a lot of money investing in real estate. Sure that exists. NEWS FLASH... There are plenty of other places you could have made a lot of money, and with a lot less headaches. I don't disagree that buying a property after a period of stagnating prices (or a dip such as what happened during the 2008 financial crisis) can lead to some nice financial rewards. But now is not one of those times. Today it is much more likely that one will overpay for their home than get a deal.

Let me run the numbers for you. I created a little spreadsheet to show what would happen if someone bought a $1mil home vs invested the upfront downpayment and closing/other costs in the stock market (index funds). I have attached a screenshot of the spreadsheet below and would be happy to discuss or go over the numbers in more details.

The bottom line of this analysis is that you would end up with a slightly larger amount (highlighted in blue) had you invested in the stock market given: 

• the housing market rises at 3% per year (same for rents);
• the stock market rises 10% per year;
• note: both of these being the long term averages for each asset class, 
• an investment horizon of 8 years (average length of home ownership prior to selling/moving); and
• note 2: I have ignored any renovation/maintenance costs, HOA fees which don't affect renters and would help make the case of renting vs buying.

Even accounting for rising rental costs, you would end up with only a slightly higher net cash amount (highlighted in green) if you bought a place. I do admit that there are tax advantages to owning a home, both in the form of interest deduction and tax free capital gains on the first $250,000 (or $500,000 for married), which would help somewhat the case of the home ownership. The capital gains tax free would not apply to investment properties of course.

Bottom line is this. Buying a place is a not a slam dunk decision and for those that like to reduce the headaches in one's life, renting probably wins out. At a minimum: Caveat Emptor!