You could if you wanted to, though for whatever reason people are much more comfortable with leveraging 5x to purchase a home than they are with leveraging 5x to invest in a brokerage account.
I think it's because of the mind trickery that makes the first thing a solid "buying a house" investment and the second thing a "gambling on the stock market" game. You can easily see that trickery at work: just confront someone who bought a house on credit with the fact that he just put all his money into a highly leveraged single investment, which combines two of the usual "don'ts" from the "Investment for Dummies" book. You will usually earn blank stares.
Not saying that doing such an investment doesn't make sense in certain circumstances (use the house yourself and plan on staying there for decades), but one should be very clear about the risk profile of it.
Want to start a business with that money? Better have a rock solid business plan. Investing elsewhere? No chance, a bank won't lone that money for you to play with on the stock market, and the rate you would get would wipe out any gains from something safer like a tracker fund.
For anyone that is not content living in the same area for the rest of their life buying is a poor decision. But it is the only way most people can access a loan that size and leverage in that way.
I've resigned myself to the fact you have to buy (in my country at least), and I will just make sure it can be rented easily when I want to move.
Some European countries are much more renter friendly and I would consider renting exclusively there. Germany and Berlin seem more appealing in that regard with the rent control that was put into place recently.
With the way the market is it is likely that mortgage principal + interest + maintenance is actually less than rent...
Add to that property taxes continue to accumulate on buildings. There are quite a few ways to drive a house to worthless. I used to live in a region where houses were <$10k because they were condemned shells in crime-ridden areas.
A house provides a basic human necessity (shelter) and can be insured. It stands to reason that it can be mostly financed with very long-term, cheap, debt capital. Other than mass-scale depopulation, not much will cause a house to dramatically lose value, especially to a first-lien lender.
Stocks are a different animal. Even assuming a company performs well, which it may or may not, there are all sorts of crazy things -- trade tensions, interest rates, valuation changes, investor sentiment for/against various sectors, completely leaving aside rational changes in value due to company performance -- which cause price swings far detached from company fundamentals. US equity markets went up ~30% in the past year. They could fall as well. If anything like this happened in housing, you'd literally get riots in the streets.
I don't think it's an accident that the financial system provides so much credit for housing. Yes, it should probably be a little more expensive (thank Fannie and Freddie for that) and yes, maybe we could use a little more equity, 20%, or 30%. But suggesting houses should be 100% equity-financed like most stock purchases? Doesn't make sense.
I agree 90% is extreme. However, the nice thing about owning a home is that even if it loses value, more often than not, other homes will also lose their value.
Say you buy a 1 bedroom place for 500k, and 5 years later you have 2 children and need a 3 bedroom place, but your home lost value and is now only worth 400k. The good news is that the 3 bedroom place also probably lost value. So even though your home decreased 20% in dollar value, the 3-bedrooms also did too, so your house (as far as in-kind value) is worth the same.
In fact, in some cases you could go further and say it's good if your real-estate loses money. Suppose that you bought that 500k place, and had 100k left in your bank account afterwards. Now 5 years later the real-estate market sinks 20% and your home is worth 400k. Suppose you didn't invest your 100k and it's still all cash. When the housing market sinks 20%, your in-kind trade value plus your existing cash is actually worth more than if the real-estate market did the opposite.
For the above reasons, it's better to think about your primary residence as planting a flag in the area that you want to live rather than a financial investment.
Owning a house is expensive, even after your mortgage is fully paid off. People like to simplify the model so they can feel good about owning a "paid" piece of land.
* The housing loan is non-recourse (you can't lose more than your home), while brokerage is not.
* A housing loan's collateral value is only determined at purchase, not hourly. You can't get "margin called" on your house if its value declines.
All said, I'll give you that people are oddly leverage-adverse when it comes to brokerages and actually take on more risk (to achieve a given expected return) than they need to if they were willing to use light (10-20%) leverage.
I put 3% down when I bought my house. That's 30x leverage.
The difference is that my lender wouldn't call the note on my house if the value of the home dropped below the principal still owed. Not if they want to see the money, anyway.
This conventional wisdom has been increasingly getting less true over the last decade. Valuation increases of 5-10% per year on a regular basis are also "volatility".
Harder to have the same confidence that the stocks I picked will survive a downturn as well as my home.
Not really. There are no margin accounts with terms as favorable as the typical mortgage loans. (Some examples of terms mortgages have that margin loans don't: the absence of margin calls, the low interest rates, the relative diversity and transparency of rates from potential lenders, etc.)
Unlike the US, mortgages typically have 5 year terms (can range from 1 to 10). The amortization period is still 25 years (on average), but you refinance every 5 years.
If you put 20% down on a house, which then loses 10% of it's value, you can't refinance without coughing up enough cash to have the loan be 80% of the appraisal.
As you said, at least in the US you can choose to ride out a crash if you have a 30 year fixed mortgage.
https://www.cbsnews.com/news/adjustable-rate-mortgages-make-...
On the other hand, with a leveraged position in the market, if the value of your portfolio falls to a certain level, you either need to post more capital or your position is liquidated. If you are capital constrained, there is literally nothing you can do in the case of a leveraged position - your broker forces you out.
Regardless, if you keep making your payments, there is no way for a bank to force you out of your mortgage or call for additional capital due to a decline in value. This is the big difference.
it's the same coin, you're just looking at it from a different angle. The timeframes are certainly different between foreclosure and margin calls, but the concept is the same - the lender sees you as more risky than they originally intended, and chooses to liquidate you. In a foreclosure, you "prevent it" by constantly paying the interest. In a margin call, you are not paying until you hit the drop in valuation, and you have to pay to top it back up.