Paying off your home doesn't make sense, but we did it anyway


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We humans are a strange breed when it comes to investment.

Over the summer months, I had a stack of people asking about the big drop in the sharemarket in the November to January period and even more about the fall in property values in many parts of Australia, but in particular Sydney and Melbourne.

These questions are not in the least bit strange, because shares and property are important assets for most of us.

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But what is strange is that questions about a decline in share values are nearly always linked to "Should I sell?". But when it comes to property the questions revolve around "Is it time to buy?", with comments about "bargains" in the market.

What is it with property? We Australians have a really deep desire to own a home to live in.

That is very normal - home ownership brings a variety of emotional and security-related issues into play.

My wife and I have this deep in our DNA. You will have heard and read about my bias towards home ownership over my nearly 40 years of commenting on money.

We are certainly financially poorer for it but since we first had a mortgage in 1984 we have striven to pay it off. Children coming along and moves to houses with more bedrooms saw our mortgage fall and then jump.

We finally got rid of mortgage debt some 20 years after we first had one, in about 2004. I get the "lazy equity" argument, meaning we did not use our home to borrow against to invest.

This was a blessing in the inevitable big downturns but over the decades we were a net financial loser.

As you would expect, investment returns on decent assets greatly outperform the cost of debt in the long run. This was obvious to us in 1984 and it remains obvious today. We could borrow against our home at, say, 4%.

Do we think property and shares will do better than 4% over time? Of course we do.

The income yield alone on shares is more than this, and rental returns on property would pretty much cover it. Then there is the potential for capital growth.

But we made the choice to become debt free on our home, then lock away the title deeds for a really strong emotional reason. We sleep better at night.

Property has a mythical status for Australians and I don't mind that. Hence when prices fall, we still love it and so if it is cheaper it must be "even better".

It is really illogical, though, to not apply the same discipline to shares.

But the history of share ownership is very different from that of property. When I started working in the world of money back in about 1980, some 3% of us owned a share.

So while we have seen shares do very well, arguably better than property over the past four decades, we don't have a deep DNA-type attachment to them. Maybe this is why when they fall, a typical human response is a desire to sell.

A real plus for property is that when it does fall, it is really hard to sell. So we shrug and say "it will pick up".

With shares we have total liquidity and you can sell in a few minutes. We buy most as prices rise, and the most near market peaks. We sell as markets fall, and the most near market bottoms.

We have different experiences with shares.

For example, I've held Commonwealth Bank shares since the float. The price was $5.40.

Since then I have seen them at nearly $90, down to $24 in the GFC and now about $70. I am not silly, so I hold a diversified portfolio.

At any given time some of my shares are having a rough time, others a good time. What I love is the flow of dividends. My portfolio, which is just shares you know, sends us about 5% a year with no effort on my part. Lovely!

Now I think about it more deeply, maybe we are not strange at all. Property is just so familiar to us.

When it falls we think "it'll be right". As our population is growing so quickly, with a long-term perspective that view will be correct.

But so will it be for shares. More people, living longer, with higher levels of wealth than at any point in history will also drive demand for goods and services produced by companies.

So in a strong and growing economy, with a growing population, my answer is that the time to buy quality property or shares is whenever you can. But it is an even better time to buy in a falling market.

The only proviso here is that you have a long-term view and never overborrow.

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Paul Clitheroe AM is founder and editorial adviser of Money magazine. He is one of Australia's leading financial voices, responsible for bringing financial insight to Australians through personal finance books, the Money TV show, and this publication, which he established in 1999. Paul is the chair of the Australian Government Financial Literacy Board and is chairman of InvestSMART Financial Services. He is the chair of Financial Literacy at Macquarie University where he is also a Professor with the School of Business and Economics. Click here to ask Paul your money question. Unfortunately Paul cannot respond to questions posted in the comments section. Please view our disclaimer here.

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