Most Australians will be millionaires, and it isn’t enough

An Australian love affair gone wrong.

Australian’s love property.

We love owning it, we love investing in it, and we love watching renovation shows about it.

However, Australia’s love for property causes a range of issues, with housing affordability being the biggest one.

Let’s get this straight, we have some of the biggest and most expensive homes in the world!

This shouldn’t come as a surprise with Sydney’s median house price recently increasing to over $1.3million, and Melbourne fast approaching the $1million median price mark.

What this means for the average Australian is that they are going to have to commit a huge amount of their income towards buying a house.

I’ve got no issues with people owning their home, in fact it’s fundamental to financial independence.

My issue is people spending way too much on their home, and borrowing too much to do so.

And it’s not just the money they are spending on the house, it’s also the life energy they expend going to work 5 days a week in order to afford a place to live, and the opportunity cost of foregoing investing in favour of buying a bigger house.

Unfortunately, given Australian’s love for property and their debt tolerance, I don’t see this issue reducing any time soon.

But if house prices are set to increase over the long-term, what’s the issue?

The issue is this - your home is a lifestyle asset.

It isn’t putting cash into your pocket like an investment is, in fact, your home will be taking money out of your pocket.

In order to retire, you need money generated from your investments to cover your expenses.

The problem with having all your money tied up in housing is twofold.

Firstly, your home isn’t generating money for you, and secondly, housing is likely one of your biggest expenses. The bigger the house, the more the expenses.

This has a compounding effect because your home isn’t generating an income for you, but is adding to your living expenses. This makes it harder to retire, as you can’t commit as many assets to investing, and your higher expenses mean you need more assets invested in order to retire.

Even if your home goes up in value, the only way to access these funds is to sell your home or take out a loan against it (cue interest and principal repayments).

The reality is though, most people don’t like selling their home because it’s a lifestyle asset, and they don’t want to reduce their lifestyle by buying a cheaper house.

Unfortunately, property is so engrained in the Australian lifestyle that I don’t see this changing anytime soon.

In Robert Kiyosaki’s exceptional book “Rich Dad Poor Dad”, he makes the claim that “your home is not an asset”.

No doubt this claim helped sell the book and was intentionally controversial, because most people view their home as their biggest asset.

However what Kiyosaki is really doing is renouncing the traditional definition of an asset, which is “an item of value that you own that is expected to provide future benefits”.

Instead, he classifies an investment as an asset if it puts money into your pocket.

Otherwise, he considers it a liability.

Whether you adopt Kiyosaki’s view on the definition of an asset, the reality is, your house is a lifestyle asset.

While it serves a valuable purpose in providing shelter to you and your family, from an investment perspective, your home doesn’t put money into your pocket.

In fact, it drains money exponentially.

The bigger the house, the more it costs to run. The bigger the house, the more expensive it is to buy, to run and to sell. This keeps you on the merry go round and deep within the rat race even longer.

My prediction is this - by the time of their retirement, most Australians will be millionaires through the value of their property alone.

But don’t get cocky, this isn’t nearly enough to retire.

If you plan on retiring with just an expensive house to your name, you’re going to be surely disappointed. You might be asset rich, but you’ll surely be cash poor.

I won’t be surprised to see most of my generation retiring with just their home and their super. I’ll be disappointed but no less surprised to see my generation using their super to pay off their home loan, left with only a large house as their core asset in retirement. With little to no assets generating an income for them in retirement…queue Government pensions.

If you are on the path to financial freedom and want to retire early, remember that you can retire at the crossover point where the income generated from your investments exceeds your living expenses.

More financial commitments means less financial freedom, as more investments are required to fund your lifestyle.

Every dollar you commit to your living costs, is a dollar that could have been invested and could be earning you income. Income that you could eventually live off.

It’s the Australian dream to own a home. But the dream home is costing you your financial freedom.