Wednesday, March 22, 2023
As I mentioned recently, me and my wife are currently building a new house, and we will move later this Spring. So in this post I would like to talk about some of the considerations that went into this project, beyond personal ones.
Look at the median household in any first world country, or even many of the developing ones: Housing, in the form of a house or apartment, is either the most valuable single item that household possesses, or in the case of renters it is the single largest item of monthly expenditure. It is safe to say that housing is extremely important to us, although obviously it becomes a less pressing concern once the problem is solved and you are in a stable housing situation. House ownership for many people is a huge part of personal finance. Economists frequently rank countries by GDP per person, or median household income. But it turns out that GDP per person doesn't tell you very much how well off people in a country are; a different measure like median household net worth is usually a better descriptor. And median household net worth strongly correlates with house ownership.
Now if you read any sort of news on house prices and rents lately, you will have heard that house prices and rents have been going up, causing affordability problems in many places. But once you get past the usual throwing around blame for the problem, it turns out that this is mostly an urban problem. In many countries urban population is rising, while rural population is shrinking. If you read a sensationalist news headline about large numbers of houses standing empty (16 million in the USA), that is not a nefarious plot to keep housing prices high; instead the empty houses are in very different regions than the ones in which housing is unaffordable.
That gets me to the first important point about our new house: It is in a more rural region. And as a result the base price of that new house is roughly the same as the price we sold our more urban apartment for; and that in spite of the apartment being 30 years older, and smaller than the house. Now there are a lot of personal reasons for people to want to live in urban environments; but in many cases it has to do with employment. My wife and me retired last year, which removed the necessity to live close to our work. And this is Belgium, a relatively small and densely populated country; our "house in the countryside" isn't all that far away by car to the next city. So it isn't as if we will live in a truly isolated spot with no shops around.
In terms of personal finance, a house in which you live yourself tends to be a great investment in most countries and under most market conditions. Living in your own house means you don't need to be afraid of rent increases, any rise in housing prices increases your net worth, and any fall in housing prices doesn't have an effect until you decide to move out and sell the house. That is especially true for retired people who have a certain amount of savings: An investment in your own house is a lot safer than putting the money into the market, and it saves you the large monthly expenditure that would otherwise go towards rent. If you don't have the money, buying a house on credit in conditions of high mortgage rates and high local house prices might be not so generally advisable, and depends a lot more on individual conditions. And yes, I am aware that this is a generational problem. In the 1980s the term Yuppie for young urban professional had a notion of financial success, while in the 2020s young urban professionals are more likely to live paycheck to paycheck, and not be able to afford to buy a house.
The second big feature of the new house compared to the old apartment is energy efficiency. Globally a large chunk of CO2 emissions is due to heating or cooling buildings. That is a consequence of long decades in which fossil fuel was relatively cheap, while housing insulation is relatively expensive. Our new house will comply with a near zero energy building standard, and near zero emission building standards after we add solar panels. Yes, there are disadvantages, like the walls being very thick, and the house needing a ventilation system. A lot of the fresh air in a regular house comes in through gaps between window frames and wall. Eliminating those makes a house more energy efficient, but then you need artificial ventilation (preferably with heat exchange) to keep oxygen up and humidity down. On the plus side, features like thick walls and triple glazing also isolate the house from outside noise.
There are political and economical aspects to housing insulation. On the political front, many countries have signed up to various conventions like the Paris climate agreement; getting national CO2 emissions down necessitates making houses more energy efficient. Thus the pressure by regulations on home owners to increase the energy efficiency of their houses is mounting. But installing proper insulation on a new house is a lot easier than getting to the same level of energy efficiency by renovation. Expect to hear a lot more on that subject, because the commitments of governments to energy efficiency of buildings in 2030 currently largely exceed the capacity of the construction industry to do so; and the capacity of some home owners to pay for all that renovation.
The economic aspects of housing insulation are a lot more complicated. Energy prices are volatile in general, and specifically so in Europe since the start of the Ukraine war. A perfectly isolated house would need no energy to heat; it would also suffocate you, so it isn't the perfect example. But the point is that all the heating energy you consume is eventually lost to the outside, with insulation determining how fast that loss is, and thus how much energy you need to keep your house at a given temperature. If energy costs are high, housing insulation is a good investment; if energy costs are very low, it takes much longer for that investment to pay back in lower energy bills.
So in the end our nicely isolated new house has a bunch of different advantages, some of which you might value more highly than others: Our energy bills we be lower, and we will be less susceptible to sudden increases in heating costs. Our environmental footprint will be lower, and there is less of chance of being impacted by new government regulations on building energy efficiency. If you combine that with personal finance advantages listed above, you get to a situation which is good for retired people: Savings safely invested, monthly expenditures lowered, and less volatile. It is generally a good idea to adjust your lifestyle to changing conditions, in this case retirement. But admittedly this isn't easy, as people might have a sentimental attachment to the place they live in, or consider major life changes to be either too scary or too difficult.