A mortgage is a terrible investment

For one, renting isn’t just throwing money away. Renting means that the endless maintenance costs and property taxes that have to be paid on top of the mortgage aren’t your responsibility. In the U.S., renting may mean leaving generous government subsidies on the table — including the mortgage interest deduction, which racked up a bill of $100 billion in 2009, as well as capital gains tax exemptions. But that isn’t exactly throwing money away, especially if the savings are invested into the ownership of productive businesses. And for people not living in the U.S., it’s even worse. Most countries have no mortgage interest deductions, meaning that you effectively pay rent to the bank for your mortgage.

And investing in businesses — or even bonds or cash in the bank — is a safer way to build up wealth. Taking out a mortgage is a bet that you can pay down the mortgage every month. If you can’t keep the schedule of repayments, your home — your entire investment — will be repossessed and sold. If your house is worth less than it was when you bought it, you lose everything you put in. Even if you have equity in the house (which in many cases is also a person’s life savings), a quick sale may mean a cheap price, resulting in a massive financial loss on equity. This means that while mortgages are heavily subsidized, they are a very strange and extremely risky way to invest money.

And even if you don’t miss payments and risk repossession, housing is still highly speculative even with all the subsidies thrown into it by government. (In fact, I’d argue that subsidies make it a riskier bet, because they convince the market that housing is a safe bet. This leads to excessive risk taking, and excessively lowered lending standards, as occurred in the 2007 bubble.)

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