Kiyoko Fujimura

Buzzbuzzhome Corp.
March 11, 2010

Investors in Canada’s housing market have been chomping at the bit lately to pick up one-bedroom units in – well just about anywhere there’s a Canadian flag. And while it might be a good instinct for those who can diversify and purchase properties across Canada, purchasers who intend to use the property as their primary residence shouldn’t necessarily follow suit. Here’s why.

Investors are OBSESSED with diversification. In fact, you’d be hard-pressed to find a book on finance that doesn’t have at least one chapter devoted to diversifying your portfolio. Diversification is the idea that you shouldn’t have all your eggs in one basket. For example, having all your wealth in the oil market isn’t a good idea because then your wealth will fluctuate wildly with these prices. BUT, if you spread your wealth across oil, gold, Canadian real estate, bank stocks, Wal-Mart stocks etc., there will be far less variability.

Purchasers who intend to make the home their primary residence and aren’t diversifying are putting all their eggs in one basket. You are putting all of your wealth into ONE real estate market. Compound the lack of diversification with the fact that the Canadian real estate market is likely in a bubble, and you’ve got a recipe for investment disaster.

David Rosenberg, the chief economist and strategist now at Gluskin Sheff + Associates who called a U.S. housing bubble back in 2004…says home prices in Canada are between 15% and 35% overvalued, and could plummet as far as 20% from current levels. Canadian Business

And consider this: the returns over the 25 years prior to 2004 in the Toronto real estate market were on average 5.75% while the returns on the TSX were 8.64%. The S&P 500 index experienced even higher rates of return averaging 13.85%.

So why does ANYONE invest in real estate then? Volatility, the difference year-to-year of your returns, is higher if you invest in stocks. But not always:

Real estate in Vancouver, for example, provided only a 3.68% compounded annual return with nearly the same level of volatility as the S&P 500. Canadian Business

Some of you might be reading this thinking: “Sure, but investing in my home means I don’t have to pay rent.” But consider this:

Canadian personal finance authors Eric Tyson and Tony Martin say a home usually needs to appreciate about 15% in order for the buyer to recoup all of the transaction and maintenance costs. Canadian Business

What makes up this 15%? Fixing your roof, real estate commission charges, land transfer taxes, legal fees etc. Renters don’t have to pay those costs.

Another interesting study was conducted by Andrew Oswald, an economics professor at the University of Warwick in England, that concluded that home ownership perpetuated high unemployment:

[W]hile homeowners are often stuck with their property through tough labour markets, renters can more easily relocate to find work, which lessens structural unemployment. Canadian Business

So you may not consider the prospect of being unemployed at the time of purchase, but it could keep you from finding a job in another city if you’re tied down to a house rather than simply renting.

There’s some food for thought. But let’s end on a happier note! When it comes down to it, a house is a place to live, and even if prices fall you’ll still have a roof over your head. Just so long as you’re not counting on price appreciation to make ends meet in a few years you should be fine!

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