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How that other market is doing: residential real estate Print
We receive inquiries from time to time from our members on the appropriate role for what is often their most important asset, their residence, in their investment portfolio. We look in this commentary at how an investor should view this asset as well as the current state of residential real estate markets in Canada and elsewhere.

The key asset classes in any investment portfolio worthy of the name are equities (shares) and bonds (debt); for more information, see the section diversification and asset classes on our site. Our site also examines what other investments deserve a place in the portfolio of an individual investor; see alternative investments. Our conclusion: as a general rule, it is better to confine these other investments to commercial real estate rental properties, in the form of real estate trusts or REITs; see Alternative investments-commercial leased real estate. So, what place should an investor’s home residence play in his investment portfolio?

The rapid increase in house prices in recent years has led many to consider their residence as an investment in the same way as company shares. Many see great virtue in taking out a mortgage to buy a house. In contrast, the investment philosophy of our site is to minimize if not totally avoid borrowing for investment purposes because of the risks associated with the leverage: see the section Types of accounts and our commentary Your Broker’s Margin Account Form.  As recently as 2005  Mr. Ben Bernanke, as educated and respected a person as you will find and  the current president of the American Federal Reserve Bank, said:

In 2005, Ben S. Bernanke, then an adviser to President Bush and now the Fed chairman, said "strong fundamentals" were the main force behind the rise in prices. "We've never had a decline in housing prices on a nationwide basis," he added. Source: Article 2007 New York Times doc.975

Our site (see the section The family residence) explains why, even if your house can be a significant and useful asset, it is more prudent not to regard it as part of your financial investments. Here are three reasons by the author Ferri:

• The main goal is a place of residence, and any net return after expenses is incidental.
• its true value is never certain before resale.
• you can not use the techniques of portfolio rebalancing (see rebalancing the portfolio) to reflect changes in its value, for example by selling or buying a percentage of your residence.
Your comments on this position, which we recognize is likely to disturb some of our readers, are welcome.

That said, let's now look at the current real estate market in Canada and elsewhere. Why? To raise your awareness that there is no certainty that the value of your home will not decrease in value, and to convince you to consider your home primarily as a place to live in and only incidentally as a source of financial returns.

The state of the residential markets: Canada

The government of Canada announced doc.976 in July 2008 moves to protect and strengthen the Canadian housing market (notably, adjustments to the rules for government guaranteed mortgages) in order to ensure Canada’s housing market remains strong and to reduce the risk of a U.S.-style housing bubble developing in Canada. Two comments: firstly, it is very unusual for the Canadian government to describe the economy (or at least the housing sector) of our southern neighbor as being in a bubble; and secondly, the announcement suggests a worry that the bubble will be crossing our border. What is the current status in Canada?

Canadian residential market information is available at various web sites, including www.royal, and Recent market data seem to indicate a slowing national market, but not yet a declining one; see RoyalLepage 2008 survey doc.995 and ScotiaCapital trends report 2008 doc.996. An article doc.978 in May 2008 in the Canadian Moneysense magazine gives a regional perspective. It evaluated on a relative basis the markets in the 35 largest Canadian urban areas using so-called value, momentum and financial health criteria. The result: the three best cities listed are all in the west, while 11 of 12 cities rated the least are found in Quebec or Ontario.

The increase in recent years in house prices has had the effect that more and more people can not afford to buy a house, see 2008 study Royal Bank doc.979. Many people are now turning to the rental market, with the effect that the vacancy rate is declining; see the 2008 report doc.980 by CHMC and the 2008 Wellesley study doc.981.


In the U.S., the situation goes from bad to worse; see the end of 2007 Shiller report doc.982 and a 2008 CNNMoney article doc.984. An S & P Case Shiller housing market price graph doc.985P requires no explanation. But if you want one, the Wikipedia site contains a detailed analysis of the current real estate crisis in the USA; see article Wikipedia U.S. housing bubble doc.986.

A study by Davis and others doc.987 sponsored by the U.S. Federal Reserve has concluded that Americans can no longer afford to buy houses at current prices, and that prices must fall further. A site devoted to making U.S. housing market forecasts, ,also anticipates a continued deterioration of the market and prices, and even industry professionals are becoming more realistic (i.e. pessimistic); see also article BigPicture 2008 doc.988.

The international market

In general, prices of homes abroad have stopped rising, and in some countries have begun to decline; see article doc.989 on the CanadianCapitalist  site  and a  2008 IMF report doc.990 (see also the research doc.991 associated with the IMF report).

In Europe, the English market is plummeting; see the FT 2008 housing article doc.992 and the site And even the French market, which seemed able to resist the problems being experienced elsewhere, is showing mounting signs of weakness,; see article Echos July 2008 doc.993.


How does the Canadian market compare to the above foreign markets. The news is not bad. For instance, according to a recent study of markets in 6 countries, house prices in Canada are more affordable than elsewhere (with the exception of the market in British Columbia); see the 2008 Demographia study doc.994. Logically, downward pressure on prices should be lower in Canada.  

The global housing market may well experience several difficult years. Will Canada be able to avoid the same fate? We do not know, but even the biggest believers in the inevitability of never-ending increases in prices of residential property in Canada must be aware of the new risks lurking over the horizon. There may never be a better time to review the status of your residence as a financial investment.

Last Updated ( Friday, 12 September 2008 )
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