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Inheritance: The Second Property Theory

Why rushing to buy a cottage isn’t always the best investment decision.

The Second Property Theory

Assuming that the so-called “trillion” dollars on line in the inheritance pipeline does materialize, what advice are boomers being provided regarding their housing needs?

Increasingly, they are being told after paying down their mortgage debt, the next housing option they should consider is a second property – preferably a cottage or a farmhouse located in a non-urban area.

There are several fundamental problems with this “get rich, buy a cottage” theory.

First, the demand for cottages and other second properties has historically been linked to the overall trend in residential real estate prices. Prices of cottages have risen only during periods of a general increase in overall price levels.

Second, remember conspicuous consumption – the purchase of goods and services simply to satisfy wants, not needs. Well, cottages have traditionally fallen into this category. In contrast to other types of housing, they are viewed as a luxury good, not a necessity. While proponents of the “get rich, buy a cottage” theme suggest that demographics will be the greatest factor propelling demand, demographics alone are not enough.

Factors That Affect Cottage Demand

The overall economic environment is much more significant in determining households’ short-term expenditure decisions.

The preferences of households have changed. Increasingly, primary market research indicates that as a result of the recent real estate bust combined with a slow performing economy, households are not willing to ante up on mortgage debt and real estate. Many households are looking at the opportunity costs of investment in real estate compared to expenditures on a number of other things (home improvements, swimming pools, travelling, etc.) and are increasingly deciding to opt out of large houses and multiple home ownership.

Leveraging the purchase of a cottage should not be done on the assumption of substantial increases in value in excess of normal trends. If there are still disbelievers out there, they should take a drive up to “cottage country” on any weekend and count the number of “For Sale” signs.

- Special Thanks to Mary McDonough

4 years ago

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