Is the owner occupied home really an asset?

For most people, the home (and any subsequent homes) they own or come to own down the line is probably the most expensive item they will purchase. Public policy in most countries is also generally encouraging of home ownership (though probably for reasons such as promoting national rootedness as well as reduce systematic banking risk rather than encouraging citizens to own an “asset” per se). At the same time, the media often contributes to “story-telling” windfalls attributed to real estate gains (see Animal Spirits: http://www.amazon.co.uk/Animal-Spirits-Psychology-Economy-Capitalism/dp/0691142335). It can also be seen that the housing price boom in many major cities across the world has reinforced the notion that to not buy a home is to “miss the boat”. Unsurprising, many people hold the view that homes are assets. While it is true that real estate is well known for its ability to buffer inflation and act as a tool for diversification in a mixed asset portfolio, is the owner occupied home really an asset? For sure, owning a home and paying for it through a mortgage is a form of forced savings. One is also not beholden to a landlord. There may also be intangible personal utility in being a houseproud homeowner. What exactly is an asset however?

Robert Kiyosaki, a world-renowned real estate investor would probably not consider an owner-occupied home an asset since he defines asset as an investment or product that generates a net positive income. Shelter (i.e. housing), like food, water, transportation, connectivity, etc., is a consumable good – even if the occupier owns his own home, rent is implicitly paid since by staying in the house (“consuming” it), the owner has forfeited the benefit of rent that would have been payable. Essentially, by buying a home, the homeowner is forfeiting the return to equity or investment return that he or she would normally expect.

From this perspective, the owner-occupied home is not an asset, at least not until a profitable sale takes place and the owner-occupier decides to (1) downgrade (thereby reducing consumption) or (2) times the market by buying low and selling high or (3) buy at below market value and sell at above market value. Assuming an efficient market and the average owner-occupier therefore, the only way for the owner to “unlock” value in his home (apart from say, a reverse mortgage) is to reduce consumption, i.e. downgrade to a less valuable home.

While retirees may downgrade to free-up cash, it is not common for the middle-aged couple to voluntarily downgrade pre-retirement – in fact, as salaries and house prices rise, it would not be uncommon to see such buyers upgrading their houses such that their debt level remains at a similar comfort level most of their working lives. Since the owner-occupier is paying rent to himself, as consumption rises, implicit rent also rises. At most therefore (assuming there is no housing crash in values), an owner-occupied home is an asset insofar that it may be thought of as a disciplined way to save money, which (unlike a bank account), can also be tangibly enjoyed by its occupants.