An investment can be seen as money spent on capital goods and services which in turn yields profit over time. A house is a physical structure that is usually built for the purpose of providing comfort and shelter. In Nigeria, getting a house built is a herculean task that could take years to complete. Some, who are not that lucky, end up abandoning the building project. This may sound strange, but it is a fact that a housing property is not an investment. On the surface, it may seem to be one, but under close scrutiny, one will discover that it is not.
Let’s look at the various reasons for this fact.
A building loses value with time; this is known as depreciation. Same cannot be said for the land on which it is built. The depreciation is a result of the effects of age (wear and tear) on the structure. For example, a house built in the 80s can no longer retain the same value it had during construction.
Remember, there is what we call time value of money. If you built the house with the sum of N1.2 million then, that same house may be valued at say N4million now, but considering the value of money then, it should have been much higher.
What it means is that the house has depreciated in value due to the passage of time. The value of the naira has depreciated by more than 150% over the years. Moreover, if you sell your old house today, your selling point is the plot on which the house is built and not the actual building itself.
If you live in your own house presently, it will at best help you conserve some money due to the fact that you won’t be paying rent anymore. Though the cost of acquiring a house has comparative advantage over payment of rent, it does not mean that the house is a source of income generation.
The truth is: it will take quite a couple of years for the total sum of money used in building a house to be recouped, and that by that time, the house must have depreciated in value. Considering that most of the rent collected in the house is used in maintenance and servicing loans acquired for building it, the house will not be termed as an income generator.
Input Recovery is Impossible
Unless you wish to sell off your house within a 10 year window, you will not be able to recover your input as long as you are the one living in it. This can be attributed to two major factors:
- Depreciation of structure
- Fall in the purchasing power of the currency (especially in Nigeria)
If you consider the twin issues of depreciating structure and fall in purchasing power of the naira, it will be very evident that houses built for self-purpose rather than for rent or business cannot be said to be an investment platform. They are simply for comfort or pleasure rather than a means of creating wealth over time.
One must not confuse investment and asset at this point in time. The land, on which the structure is built, is an asset, which appreciates over time, while the building can also be regarded as an asset, because it can be used in accessing loan facilities. Unfortunately, when it comes to the issue of investments, a house you built for the sole purpose of accommodating your family cannot be regarded as an investment.
Since the structure is not on rent, you will not recover the money you have used in building the house. Such money is classified under consumption and not investment. It is only in real estate, that money spent in erecting a structure is classified as an investment or input. The money spent in building industrial structures like banking houses, store houses, warehouses, hospitals and restaurants can be classified under capital investment, because when they begin operations, they are able to recover the total costs of erecting such structures.
There is a whole lot of difference between these 2 types of structures – one is for personal use, while the other is for business purposes. The former is not an investment, while the latter is an investment that usually yields dividend over time depending on the nature of business it is being deployed for.
Impact of location on value of a house
The actual value of a house can be impacted negatively or positively depending on the location and type of land where the house is built upon. A house built on a water logged land that is located in the remote part of a town can never be termed as an investment; this is due to the negative impact such environmental factors will have on the face value of the house.
A house that is built on an erosion-prone area also has similar drawbacks and it is difficult to place such houses under the categories of investment portfolio. So many houses built in erosion-prone and flood-prone areas have been abandoned due to the deteriorating states of the houses which have become a hazard in itself and the safety of such individuals can no longer be guaranteed.
There have been numerous cases of houses that collapsed due to the negative impact of the land on which such houses were built and the location of such houses. In such cases, the houses cannot be termed as investments due to losses incurred.