Your house is not an asset. It is a hedge.
You are born with a natural short housing position. For the rest of your life, you will need somewhere to live. Ideally, somewhere with a roof. To use a (slightly tortured) trading analogy, you are born with a short housing position.
There are several ways to cover this short. In the beginning, your parents usually pay it for you. Once you are on your own, you have various options that can generally be divided up into two categories:
- A floating rate (e.g. a short-term lease)
- A fixed rate (e.g. a long-term lease or a house purchase)
The best option for you will depend on many things e.g. the relative cost of renting v. owning, your need to be geographically flexible (i.e. your liquidity requirement), your ability to obtain credit etc. There is not necessarily a “correct” answer. I have done both at various times of my life.
Whatever option you choose, however, you need to understand that you are only covering a short position. If you choose to buy a house, you are not going long the housing market. You are going flat the housing market using a fixed rate product to lock in your exposure.
If house prices rise, the value of your house (the hedge) increases but so does the cost of shelter, which you are always going to need. If house prices fall, your home loses value, but the cost of shelter falls.
Why does this distinction matter? Because if you purchase a house, you should not fall into the trap of getting excited when house prices rise. You should especially not fall into the trap of borrowing against the rising value of your house (your hedge) to fund increased consumption.
Think about it this way. Imagine if a gold producer used the futures market to hedge future production and lock in a sales price. If the gold price fell (not that it ever will, of course. Fiat money and all that), then the producer would have a gain on its hedge.
However, that gain would be offset by the fact that they can only sell their production at a lower price. If the producer borrowed against that gain in the hedge to buy jet-skis and a winter chalet in Vermont, it would be clear that they were taking a massive gamble.
The same thing applies to your house. If you buy a house, you have covered a short rather than gone long. This means that you need to be very careful about borrowing against that hedge, and even about counting your house value as part of your total assets.
This is hard to do, since a house is usually a large part of someone’s assets, and it is tempting to include it when counting up retirement assets. Except that you still have a natural housing short when you are 66. Sure, you can downsize your house, but then you are playing more of a big house/small house spread game.
You are born naturally short shelter. Your house is not an asset. It is a hedge.