26/08/2024
IS A HOUSE AN ASSET OR A LIABILITY?
August 15, 2024 The Money Engineer
I have seen some misleading content from some “financial gurus” claiming that a house is not an asset but a liability. This opinion runs counter to my training as a professional , so I decided to investigate this matter to present an informed view.
We shall start our discourse by defining what an asset and a liability are using generally accepted accounting principles. An asset is basically something of value that you own and is expected to provide some future economic benefit to you. Assets can be short-term or long-term. Short-term assets or current assets typically last less than a year. They may include things like cash, receivables, and inventory. Long-term assets or noncurrent assets are expected to last more than a year. They include things like property, plant and equipment, investments, etc. Assets can also be classified as intangible, like software and patents, or tangible, like vehicles.
Liabilities can be thought of as the opposite of assets. A liability is something you owe someone else and typically includes loans, mortgages, payables, etc. They may also be short-term or long-term.
So we can see that something we own from which we derive some benefit is an asset. A house that you own and live in and provides a safe space for your family is clearly an asset. Now, you may have a mortgage on the house, which means you have both an asset and a liability at the same time. Now, depending on the transaction terms, you may have a positive or negative equity in the house. For instance, if house prices drop and you still have a huge mortgage, you may end up with negative equity. Also, if interest rates go up and your mortgage payments go up, it may affect your day-to-day cash flows.
We now see why some financial gurus say that a house is a liability. The house you live in does not generate income, but you may be paying a mortgage on it. This makes a residential house a potentially bad investment. However, this does not mean that a house is not an asset.
Remember, investments are assets. You might have a loss-making venture, but nonetheless, it will be considered an asset from an accounting perspective, albeit with an impaired valuation.
The idea is to own a place to live without going broke. A modest house within your means is a wise investment and will pay intangible dividends to your family for decades to come. The decision to own a home should not just be based on economic factors. There are social and cultural reasons to own your own place. A house gives you a sense of accomplishment and belonging, which nothing else can do. Building or buying a house means you are grounded and ready to settle down. It is a significant investment in your community to build. It is a permanent address on this lonely planet. It is a haven of safety, peace, and the last dwelling place when all else fails.
So, true a house may turn out to be a bad investment if you build too big and borrow too much, but a modest house is definitely an asset. The alternative is to continue renting in peace without admonishing homeowners for making a “bad investment decision.”
