Kevin O’Leary took the stage to much fanfare last week at the Calgary Real Estate Board’s annual forecast breakfast. The Shark Tank star provided levelheaded commentary on entrepreneurship, investing, and of course Real Estate.
What intrigued many was O’Leary’s approach to a balanced portfolio and the suggestion that real estate is a suitable replacement for fixed income products like government bonds.
The negative sentiment towards bonds is not surprising given that a rising interest rate environment typically leads to a pullback in the bond market. With interest rates at historical lows, it makes sense that investors would look for other safe havens.
However, most have not considered real estate as an asset to replace fixed income largely due to the perceived risk involved after the 2008 crisis in the United States.
Yet, when you consider that real estate over the long term has appreciated fairly steadily with the exception of a few brief periods, it starts to make sense as an investment from a capital preservation perspective.
In fact, capital preservation is exactly why O’Leary advocates that real estate make up a piece of a portfolio that once may have been heavily weighted towards bonds.
O’Leary proposes that an increase in interest rates would be felt far more in the bond market than in the real estate market. Furthermore, he also suggests that housing prices would remain stable even if interest rates increased by one and a half to three percent.
His premise for these statements seemed to be the fact that while demand for housing may dwindle with a weaker economy, the low supply that exists in many parts of the country will hold the prices in line with current values.
What does this all mean to the investor? A balanced portfolio may no longer be made up of a 60/40 split of bonds and equities. Housing now has the potential to outperform bond positions while providing up to three times the returns, with similar levels of capital preservation.
It also seems possible that economic reports predicting massive declines in Canada’s real estate market may not be as accurate as the authors suggest.
Economists often have a tendency to try to predict the future based on history. The problem is that markets are full of surprises, which means that just because the US housing market tanked, doesn’t necessarily mean that Canadian and global housing markets will – no matter how you try to rationalize it.
Regardless of what the market does, purchasing real estate as an investment with the long term in mind makes more sense than ever, which is why we started Cash Flow Club. To learn more please visit www.mortgage360.ca/cash-flow
