Commentary: Securing oneself against real estate ‘contagion’

by Ephraim Vecina05 May 2017
While lucrative for savvy industry players, the outsized contribution of the Canadian real estate sector to the national economy makes protecting oneself from the worst effects of a hypothetical crash all the more important.

“Too much exposure to real estate can be toxic to your financial health,” The Globe and Mail columnist and markets observer Rob Carrick wrote recently. “Housing has carried the Canadian economy for years, but there are signs of stress that go beyond the debate about how big a bubble the real estate market in Toronto and surrounding cities is.”

“Falling house prices might seem the big risk in real estate today. But recent events show how a much broader range of your financial assets can be affected,” Carrick added, alluding to lender Home Capital Group Inc.’s mounting troubles that have led to experts warning of the possibility of a “contagion” spreading through the rest of the Canadian financial system.

Carrick encourages securing the savings pot first.

“Find out whether the bank holding your savings is a diversified bank/trust company/credit union, or mainly a mortgage lender like Home Capital. Be strict about staying below the CDIC limit with accounts at banks that focus on mortgages, or consider alternatives if you want to avoid the hassle and uncertainty of having your money at least briefly tied up if a financial institution collapses.”

In particular, those who have invested in commercial and residential mortgages or real estate development need to take extra care.

“These investments are not inherently bad, although investors have lost money in some. But it can be risky to stack more exposure to real estate on top of what you’re already getting by owning your house and by holding the kind of stocks and bonds that typically appear in investor portfolios.”

Most importantly, “[don’t] try to purge all financial stocks from your portfolio. It probably can’t be done and, anyway, you don’t want to. While the Home Capital situation has negatively affected sentiment toward bank stocks lately, they’re great long-term money makers.”

However, “[the] bigger the slice of your net worth represented by your house, the more cautious you should be about additional exposure to real estate. Fight the temptation to draw the faulty conclusion that because housing has been a great investment for years now, it’s safe to over-indulge,” Carrick concluded.

Related stories:
Home Capital crisis might precipitate mortgage rates hikes - observers
Commentary: Lender’s troubles a strong warning for the national housing sector

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