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October 25, 2014

 

Investment “advisors” should rate housing

Can a diversified portfolio exclude Canada’s most popular asset?

 

House prices have increased by more than 80 percent during the past decade compared to about 65 percent for the S&P/TSX. The average selling price of existing homes sold last month alone rose by 5.9 percent to $408,795 compared to the same period a year ago according to the Canadian Real Estate Association.

 

So why aren’t more investment advisors telling their clients to consider housing?

 

RBC Global Asset Management recently published its fall investment outlook. In it the firm recommends that global investors put 59 percent of their assets in equities, 40 percent in fixed income securities and the balance in cash. CIBC, Scotiabank, TD Securities, Bank of Montreal and other major financial institutions regularly issue similar recommendations. Rarely is there a word in these forecasts about housing, which for many Canadians is their single most important asset.

 

Housing is pricy. But so are stocks.

To be fair to investment advisors, there is a good case to be made that Canadian housing is fully valued, if not pricey, particularly relative to household incomes and rents. So putting money into property right now could be dicey. However stocks too are at fairly high levels in historical terms, despite their recent pullback.

 

Furthermore providing the “average family,” with advice about how much real estate they should be holding is not easy. There are a big difference in the needs of students, singles, newly-wedded couples, retirees and other groups. However the fact that these groups have differing equities and fixed income needs does not prevent advisors from recommending benchmark portfolios.

 

Close to 70 percent of Canada’s 13.3 million households owned their own homes according to a Statistics Canada Household Survey conducted in 2011. Given the huge run-up in value many have seen, there can be no doubt that home ownership is at least in part an investment decision. However there is a sore lack of information available as to what percentage of their assets Canadians should invest in this category.

 

It all comes down to money

An old Latin expression “cui bono,” (who benefits?) provides a hint as to why investment firms don’t provide much public advice about housing, relative to other asset categories.

 

That’s because most “advisors” generally get fees, performance bonuses or higher ratings if they get you to buy stocks, bonds or mutual funds. However if you withdraw money from your investment account to buy a house or condominium, they lose out big time. So they have little incentive to encourage you to do so.

 

To be fair, many individual advisors do take into account their clients’ real estate opportunities when making investment recommendations in private meetings. However it’s time that larger firms start to do this in their written recommendations too.

 

The fact is that over the long term a fully diversified benchmark family asset portfolio should include stocks, bonds, residential real estate and probably even some cash.

 

If your investment “advisor” isn’t telling you that he is probably more of a salesman than an advisor.

 

peter@peterdiekmeyer.com

 

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