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November 16, 2016 | The One-Horse Plan

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.


Being its usual sunny self, yesterday this site cited a few reasons why Beaverville real estate is at risk. No, not just Trump. Or RBC’s new home loan rates. Or Wild Bill’s big hammer. Bond yields. The Moister Stress Test. The Fed. Mortgage broker havoc. Not even economic torpor. More important is the meme. When people start thinking houses might get cheaper, they stop buying. Weird, but so true.

For longer than most marriages last, this pathetic blog has been preaching two words: balance and diversification. If you don’t have some, you’re at greater risk. Because millions have ignored my advice, the country’s now exposed, since almost everyone you know has a house, a fat mortgage and precious little liquid wealth. But in the eyes of society, they’re flush. At least for the time being.

However it’s this lack of diversification – having mucho eggs in one residential basket, especially with big debt attached – that should worry us. It certainly worries the feds, the Bank of Canada, the financial regulator, CMHC, ratings agencies and every global body looking in. Now that rates appear ready to swell, and with a volatile populist in charge of America, it’s time you assessed your own personal net worth. Is too much in one asset at one address, on one street in a single city? If so, change it.

But, lots of people don’t get this caution. They never will. Yesterday someone posted this challenge in the steerage section:

“Please enlighten me about the whole “One asset strategy” here. If I understand that concept correctly, it is supposed to be wiser to have a $500,000 house with 250k in mortgage and another 250k in ETFs than to have that house fully paid right? The question is why?

“In terms of risk, if the housing market goes down by let’s say 20%, in both cases the net loss is 100k no matter the diversification. In Garth’s post, that old dude would have lost the same net value would he have borrowed against the house and invested the amount. If housing and stock market would be inversely correlated I guess diversification would then make sense, but they are not.

“So, while I get that ETFs are far, far more liquid than a pile of brick, I don’t really see a big advantage to not having a full paid house vs “diversification” (that is in terms of risk, not speaking of returns). Any input?”

Good questions. After all, the basic investment strategy of generations of little beavers has been the same. Buy house. Pay down mortgage. Retire. Hope for best. When the world was more predictable, houses more affordable, pensions more common, the economy more robust, lives shorter and the basement unfull of cash-sucking Millennials, it almost worked. But no longer.

You’re gambling if you keep the bulk of your net worth in one asset. Any asset. Especially a house. Here’s why it makes sense to channel cash flow into investments, instead of just your mortgage…

  • Houses (actually) are somewhat inversely correlated with financial assets. When interest rates rise, preferreds do too, for example. Houses drop. Economic growth that brings inflation and higher rates also usually breeds better corporate profits – but lately has not come with higher incomes, which real estate needs to thrive.  The next few years look far more promising for liquid assets than properties, which fed off cheap rates and emotion.
  • Logic tells us if you have all your faith in one thing, you’re rolling the dice. It’s why people don’t cross oceans in single-engine planes.
  • Houses cost money, portfolios make it. In years where real estate has no capital gain (such as those ahead of us), properties pose a net cost. Often huge.
  • Liquid assets don’t come with property tax, insurance premiums, maintenance bills, utility costs, closing costs to buy or 5% commissions to sell. They don’t have tenants asking for new toilets. No grass. No snow.
  • You can always rent accommodation. You cannot rent cash flow in retirement.
  • Why shovel cash into paying off a 2% mortgage when a relatively conservative portfolio can deliver 6% or more over time? If the bank was nuts enough to give you money that cheap, use it. Don’t hand it back.
  • Liquidity. Critical. Anyone who’s ever owned a house they can’t sell when they r-e-a-l-l-y need to bail knows this. Most of the time in life there are no bidding wars or multiple offers, so liquidating real estate can be incredibly slow and ultimately costly. Portfolios, on the other hand, sell in seconds. And at the end of the day we all need cash flow, not property.
  • Finally, houses are so done. Sure, some hoods in some cities will continue to experience demand, but as a nation, we’re pooched on property. Mortgage debt is epic. Ownership rates are extreme. The nation’s grossly over-invested. And now the conditions that created this imbalance are changing.
  • Invest all you’ve got in one thing? Not a chance. Until they start selling time.

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November 16th, 2016

Posted In: The Greater Fool

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