Wednesday, May 31, 2006

Your House as a Retirement Nest Egg?

I've heard people say "Saving? I don't need to do that, my house will always appreciate and when I'm retired, I'll live off of the house." First of all, this assumes they'll sell the house to turn the extra value into cash. But what if the house values decline for the next 10 or 15 years?

Can it happen? Well, it happened in Japan.
"Japan provides a nasty warning of what can happen when bubbles burst. Japanese property prices have dropped for 13 consecutive years, by a total of 35% from their peak in 1991 (see chart). Yet the 36% rise in real house prices in Japan in the seven years to 1991 was actually less than the increase over the past seven years in all but one of the eight countries listed above where prices appear overvalued."















The global housing market: Flimsy Foundations. [Economist, Dec. 2004]


Many indicators are now pointing to a slowdown in what has been an incredible housing market. You see more for sale signs along the streets. Houses are on the market longer. Inventories are growing. Prices are being reduced more than once, rather than being bid up over the original asking price. Even the mainstream media has picked up on it.

A lot can be said about whether we are in a housing bubble and if and when it's going to burst. The bottom line is that it's rarely a good idea to put all your eggs into one, well, nest. Diversify. Maybe house prices will always go up and maybe they won't. When it comes to retirement, save money, invest wisely and diversify.

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