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…