In the last post we talked about the financial return of real estate. But there are other non-financial reasons for which people also buy property.
Real estate is an emotional investment. Many people feel a sense of security from owning a piece of property – it is ingrained in our culture. And this makes sense, a property is something tangible that can be easily seen and touched, unlike financial assets which nowadays are mostly held electronically.
Real estate also gives a feeling of safety. Having a roof over your head that you call your own means that you don’t have to run around and negotiate with landlords and be worried about having to move into a new home every few years.
Owning a property also gives a sense of status – we can signal to our friends and family that we are now earning and are self-sufficient.
In fact, some people prefer to invest in real estate because they tell themselves that the house is appreciating over time – unlike in the market where they can continuously see their portfolio moving up and down.
But emotional investments also have a downside. The same emotions that make us look for status can lead us to overpay for a house. The emotions that give us safety and security also make us hold on to a property much longer than we rationally should if we had to move somewhere else. And whilst there is a general feeling of real estate going up, it is hard to determine the actual total return of the property over time – as we wrote in the last post – whereas in the financial market that return is measurable in an instant.
There are other aspects too – there are stories we tell ourselves about the property we own. “This is the house I grew up in”, “This house is where I will retire and enjoy” and this can also lead to us making irrational decisions and family disputes about the property without us even realizing it.
When it comes to buying your first home, it is very important to be clear about the reason for buying the property. You should definitely evaluate the financials of your first home. But it is also important to recognize and understand what the non-financial reasons for buying the house are. Beyond the house you live in though, it is better to evaluate buying and selling real estate purely on financial metrics because that is what you should do for all the assets you are invested in to build wealth over time.