Our other real estate problem – people have too much wealth tied up in houses

In no way does the sharp decline in house prices crush the idea that owning real estate builds wealth.

But, wow, Canadians have put way too much faith that owning houses and condos will bring them financial success over the long term.

An Ipsos poll of 18,000 people documents how much of this country’s total household assets are tied up in real estate. For all Canadians, it’s 77 per cent. Generationally, real estate’s share of assets ranges from lows of 68 per cent for seniors and 71 per cent for boomers to a high of 89 per cent for the young adults of Gen Z.

Houses bought years ago are still up nicely in value, but the market’s sharp decline from its peak on a national basis highlights the risk of depending on housing to build a lifetime’s wealth. Instead, diversify into conventional assets like stocks and bonds. The long-term returns will compare well to real estate and deliver much more real-world utility.

Canadians’ wealth suffers biggest drop on record as markets, real estate swoon

Falling prices have not fixed the No. 1 problem in real estate, which is affordability. We’re making zero progress here because rising interest rates nullify the benefits of lower prices.

Excessive reliance on real estate for wealth building is equally tough to address, partly because owning a lot of real estate sounded earlier this year like shrewd financial planning. House prices kept streaking higher in a market where bidding wars were the norm and winning offers came in way over asking. The buying philosophy: Just get into the market and watch your equity grow.

The average national resale house price peaked at $816,720 in February, which was a 20.6-per-cent jump over the same month in 2021. As per July data, the average resale price has fallen almost 23 per cent since then.

RBC Economics said this summer that the housing market could experience a peak-to-trough sales decline this year and next of 42 per cent, which would be worse than declines in the four previous downturns in 1981-82, 1989-90, 2008-09 and 2016-18. In British Columbia and Ontario, the RBC forecast has resales falling 45 and 38 per cent, respectively.

Real estate so far hasn’t tanked so much as pulled back from unsustainable peaks. In July, 2019, the average price was $499,000, which means you’d still be up an impressive 26 per cent if you bought back then.

It’s now clear that this rise was fuelled by two things in particular – low interest rates and pandemic lockdowns that had people reassessing their living arrangements with an eye to bigger homes with yards. The demand for homes ignited prices, which in turn stoked further demand from both owners and investor/speculators.

Think of this period as a freakish boom generated by circumstances that won’t likely be repeated in your lifetime. We are not in a waiting period just ahead of a new housing gold rush. Interest rates today are too high for that and unlikely to come down much in the next year. Without a vicious recession or a catastrophe like the pandemic, we won’t see rates at the 2020-21 level again.

We do have high levels of expected immigration and a religious level of devotion to home ownership, so there’s no reason to be bearish about the housing market in the medium term and longer. But housing is no longer the answer to all your investing dreams and wishes. You need more in your personal balance sheet.

May I suggest traditional investments such as stocks and bonds, bought either directly or packaged in exchange-traded funds and mutual funds? Stocks had an amazing run after the crash in March, 2020, then pulled back some during the summer. They’re neither cheap, nor screamingly overpriced.

Guidelines for financial planners say that if you hold Canadian stocks for 10 years or more, you should expect average annual total returns around 6.3 per cent before fees. For U.S. stocks, expect 6.6 per cent.

Real estate has made those numbers look sad and it may do so again in the years ahead. For times like now, diversify your wealth beyond houses and condos. A 50-50 blend of real estate and traditional investments would be ideal, but 60-40 in favour of real estate is more realistic in light of the Ipsos findings. Young adults, it’s natural for your house to be your main asset.

A bonus of also holding stocks and bonds: You can sell them with a mouse-click and get access to your money. It’s way more complicated to turn a house into cash you can use.