Seventy per cent of Canadian households own their own home. Some also have vacation homes and income properties. Despite this, real estate is rarely considered when determining an investor’s mix of financial assets. GICs, bonds, stocks and pensions are included, but real estate is kept separate.
At our firm, we generally split out the primary home and treat it as a safety cushion that can, if necessary, fund the cost of a retirement home later in life. This is a reasonable approach in most situations, but if you’re living in a city where multi-million dollar houses are common and home equity is the bulk of your wealth, it may be time to start factoring your properties into investment decisions. This means adjusting bond and stock holdings to complement your dominant asset.
From people I’ve talked to, however, there’s no consensus on how to factor in large property holdings. And certainly, every situation is different. My goal here is to give real-estate-heavy investors some things to think about.
Economic drivers
To start, you should know the investment characteristics of your real estate. For instance, the price of your home is tightly linked to the regional economy, specifically the growth, diversity and demographics of the job market. I say regional because Calgary is different than Windsor is different than Montreal. Some markets are heavily influenced by a particular industry, and others by unique factors such as immigration and foreign buyers.
Real estate is highly sensitive to interest rates. Since the 1980s, house prices have benefited from steadily declining mortgage rates. This year, near-zero rates are helping support prices in the face of job losses, rising debt loads and an uncertain economic future.
To understand how important rates are, it’s useful to look at commercial real estate. In this world, prices are put in terms of capitalization or cap rates, which is the annual income earned (after costs) as a percentage of price. A $5-million building that produces $250,000 of income has a cap rate of five per cent. The lower the rate, the higher the valuation.
The sensitivity is revealed when you make a small change to the cap rate. In the example above, if income stays the same but potential buyers demand a seven per cent return (due to rising interest rates), the property value falls to $3.6 million. A rate increase of two percentage points translates into a 28 per cent price drop.
Your real estate
What you own, and how you own it, are also important considerations. For instance, the amount of debt against a property influences how you factor it in. A house or condo with no mortgage is more stable than one that has a large loan attached (as a percentage of the value). In the latter case, the home equity can double or disappear in a heartbeat.
How you categorize an income property depends on whether it produces a positive annual return (after expenses, depreciation, and taxes) or has only a modest (or negative) cash flow. The former can be slotted in with your stable income securities. The latter is a speculation on higher prices and belongs in your higher-risk bucket.
No hard-and-fast rules
A typical Canadian income portfolio that is heavily invested in utilities, banks, telecommunications and REITs is fuelled by the same forces as your real estate, namely the domestic economy and interest rates. You might consider holding fewer of these types of stocks (I know, this is sacrilege in Canada) and instead owning a higher proportion of foreign stocks. This will improve your overall diversification by giving you exposure to different countries and currencies, as well as industries like technology and health care, which are not well represented in the Canadian market.
Life insurance stocks are good income alternatives, as are reset preferreds. Both tend to do well when interest rates are rising, making them an offset to your real estate.
On the fixed-income side, you also want to avoid adding to your rate sensitivity. GICs and short-term bonds, which are immune to rate changes, are better choices than long-term bonds that move dramatically on the slightest change.
When real estate is a large part of your net worth, you’ve got a high-class problem. You’ve done well but are now heavily reliant on one type of asset that is cyclical and illiquid. It may be time to give some consideration to the size and type of your properties, and how they’re financed, when constructing your investment portfolio.
Tom Bradley is
chair and chief investment officer
at Steadyhand Investment Funds, a company that offers individual investors low-fee investment funds and clear-cut advice. He can be reached at
tbradley@steadyhand.com
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.
