A Home Is Not Capital

You often hear people talking the “capital” tied up in their home. But it’s wrong to think like that.

A home isn’t capital in the economists’ sense of the word. Economists refer to the purchase of goods that are used in the production of other goods or services as an investment in capital.

Capital isn’t itself consumed – though it often wears out and depreciates in the production process. So, for example, a butcher buying meat isn’t investing in capital, but if he or she buys a new chopping table that is a capital investment.
So if you extrapolate this for houses, your own home is not your capital, but a house or flat bought specifically to rent out is capital – as is any subsequent investment to improve the structure or décor etc.

So if you’re buying furniture for a fully-furnished flat you’re renting out, this is an investment in capital, but buying purely for your own use isn’t.

All this may seem obvious and relatively unimportant, but it’s an important distinction to make if you somehow see buying a home as a route to making money. It can be – but only if you’re lucky and/or if you intend to put a huge amount of effort into improving its value while you live there – with a view to moving onward and upwards repeating the process.

This is important. Until around 2007, one could be forgiven for thinking that a home for the family was somehow an investment in capital because of the property boom. But anyone understanding the important distinction outlined here wouldn’t have fallen into the trap of over-extending themselves in thinking that such “capital” investment was bound to pay off.

And as we all buy and sell in the same market, it’s wise to ignore the value of the home you’ve bought to live in, and to simply enjoy it – unless you plan to turn it into capital by letting it out, that is.

Tags: asset, capital, home, investment, Real Estate

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