If you take a look at the typical person’s balance sheet, chances are the majority of assets are tied up in their house. This is especially true for young people who simply haven’t had the time to diversify into other assets.
For many people, this is an intentional choice. They’ve witnessed the outstanding long-term performance in markets like Toronto and Vancouver, and they want a piece of the pie. Why would they take risk in the stock market when they can own a beautiful home that also happens to steadily go up in value?
But as we’ll see, owning your own home isn’t all that it’s cracked up to be. At least from an investment point of view. Here are three reasons why your house might be a bad investment.
The dangers of leverage
The typical homeowner puts down between 5% and 20% of the value of their house and finances the rest of the purchase. Most of the time, this works out pretty well. But sometimes it doesn’t, and it can have a devastating effect on your net worth.
Say you spend $50,000 of your own cash to buy a $500,000 house. Immediately afterwards, the underlying real estate market falls by 10%. Your $500,000 house is now worth $450,000.
The hit is even bigger if we focus on your equity in the property. You haven’t just lost 10%; you’ve actually lost 100% of the down payment. That cash is gone. The only thing left is debt.
Now, this isn’t a huge deal if you hope to hold for a decade or two. But what if life changes and you need to move? A renter can move tomorrow and only be out a security deposit and a little rent. A homeowner has to pay mortgage penalties, legal fees, and a realtor if they want to sell.
Maintenance
People only remember how much their house has appreciated over time. Nobody remembers the cost to keep it nice.
Every homeowner knows repairs and maintenance are a never-ending headache. Appliances need to be fixed. The furnace is making a weird noise. It never ends.
And every decade or so, you’re forced to spend a bunch of money on a big project like replacing the roof or redoing the kitchen.
It gets worse. You can at least delay many major home repairs. There’s no putting off paying your property taxes, insurance, or condo fees.
All these costs can easily add up to hundreds of thousands of dollars over your home’s life, yet nobody factors them in when figuring out how much profit they make on their home.
It’s a poor asset
Many folks take a lot of pride in the amount of equity they have in their home. And I don’t doubt making that last mortgage payment is an incredible feeling.
But home equity isn’t a great asset. It just kind of sits there, doing nothing. You still have to pay the mortgage. It doesn’t generate any income. You can’t even access it unless you borrow from a bank.
Some people intentionally minimize their home equity, choosing to stay in debt longer and use the excess cash to invest in excellent stocks. I think that’s a sound strategy.
The better way to buy real estate
If you’re looking for real estate exposure in your own portfolio, the better way is to buy investment real estate.
I’m personally doing so by buying Canadian REITs — an asset class that generates significant income, comes with professional managers to do all the work for me, and is currently on sale. The REITs I buy today should generate significant income for decades to come.
Here’s an article talking about one of the REITs I own, SmartCentres REIT. SmartCentres features a solid portfolio, oodles of redevelopment potential, one of the best management teams in the business, and, perhaps most importantly, an excellent distribution yield. Shares are currently on sale, too.
The bottom line
There’s nothing wrong with buying a house. It’s nice to have somewhere you can call your own. Creating stability in your chosen neighbourhood is a good thing, too. And you can always borrow against it if you really need cash.
Just remember that it’s not really a great investment.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
