I read Patrick Cairns’ article “Your house is not an asset” recently, not realising that it would be a feature of my day. I had gone to see a new client (who had also read the article) and while he was filling in the balance sheet section of the information sheet, he started the debate of whether or not to include his primary residence as an asset. After a reasonably lengthy discussion on the issue, he included it but maintained some reservation, referring to the article a number of times.
While driving back to the office from that meeting, an advertisement on a local talk radio station caught my attention. It went something like “what have you done recently to develop your company’s biggest asset – your staff?” As a business owner I have never seen my staff as an asset, it seems to smack of slavery. Would I value the younger, stronger staff members at a higher price? Maybe those with qualifications and experience are worth more than those without? When I look at the financials I see more expenses associated with staff, rather than them being an asset of some sort. Don’t get me wrong, I understand their importance, and I value their contribution to the business, but are they really assets?
These seemingly unrelated issues have a common basis.
How does one define an asset? What makes a service provider want to frame staff as an asset when there is no convention for capturing them on the balance sheet as such? Why would a financial planning practitioner argue that a home is not an asset when there are accounting principles which account for them as such?
Many of the debates that happen in the financial media can be described as intellectual, academic and of little value. They tend to appear in the media from time to time as new data emerges to support one side of the argument. Such debates, in my opinion, would include the value vs growth debate, index vs active management debate, unit trusts vs RAs, is your home an asset, and so forth. Are leaders born or are they made? Can entrepreneurship be taught? These are all debates in my opinion that do not add real value. Often they tend to be lead by organisations or parties with vested interests of some sort. It is important that readers’ BS meters are working at all times.
Why is your home an asset?
If we were to use the narrow definition of an asset as as Ann Wilson (author of The Wealth Chef) did in Cairns’ article, then perhaps your primary residence is not an asset. However, it is important to note that assets do not all have the same return profile or the same holding cost structure. While your home does not generate any income it is not unique in this regard as other assets also do not generate income. Gold coins are a classic example of an asset that does not generate income. ETFs in commodities such as platinum or silver are also examples, as are zero coupon bonds. These are all different types of assets for an investor, that share this one characteristic.
Your home does have significant associated holding costs, which as Wilson dramatically puts it ‘causes money to flow out of your life’ (some of that money however, causes water and electricity to flow into your life though). This cost structure does not disqualify it from being an asset either. Most other assets have holding costs associated with them. Some as expensive as ‘2 and 20’ (hedge fund investments) or private equity investments. A cursory glance at unit trust performance surveys will show funds with TERs in excess of 3% p.a. which is hideously expensive. Insurance on expensive pieces of art, gold coins or investment cars, for example, can be very expensive. Other assets have cheaper holding costs, but they are there. The issue of high holding costs should rather be seen in the context of calculating actual returns.
It has long been a personal view that property returns are hugely overstated. It is not uncommon for an estate agent to say “this property was worth R1 million last year and is now selling at R1.3 million. That is a return of 30%, which is a lot higher than what you got elsewhere…” for example. It is quite convenient for the agent to ignore the associated costs of that investment, and being a Sunday afternoon, prospective investors are not often in the mood to do the math themselves.
Lastly, your home is an asset even though it does not generate income. It just has a different return profile to other assets. A share in Pick n Pay is likely to give you dividends and capital growth over time. A bond will give its investors coupon payments, and return initial capital at maturity. The return profile on your home is back-end loaded, so no return while you own the asset but all the returns emerging at the time of the sale. Pretty much like a piece of fine art or a gold coin. It is possible to make a loss on your home, as it is with any other asset or investment.
I personally have an affinity to assets that generate income (especially growing income) while you hold them, but I do not subscribe to the view that anything that does not generate income, and that creates cash outflows, is suddenly not an asset. Let’s not go around trying to box everything into one view of the world, or one narrow definition of things. Your home IS an asset.
Craig Gradidge CFP® is co-founder of Gradidge-Mahura Investments, a new generation financial planning business based in Johannesburg. Email him on email@example.com or follow him on Twitter on @gradidgec.