Alex Avery CFA, a long-standing member of CFA Society Toronto, is a managing director and real estate analyst at CIBC World Markets. He has recently published a book, on the role that housing plays in people’s financial planning and investment decision-making, that has risen to the Canadian national bestseller lists. The Wealthy Renter (Dundurn Press, 2016) offers an unbiased analysis of the biggest investment most people will ever make: their housing. Public debate on the own-versus-rent question tends to be dominated by powerful pro-ownership biases that exist among many commentators on the topic, including real estate brokers, mortgage lenders, and financial planners. Avery’s book brings balance to the public debate and, through rigorous analysis of both financial and behavioural considerations, puts the topic in the context of thoughtful and prudent financial planning and investment decision-making. The book presents sound advice to people who are thinking of buying a house, or who are planning their financial future. The Analyst interviewed him about his book.

How would you summarize the analysis and advice in The Wealthy Renter?

The book challenges conventional wisdom about Canadian housing. Its goal is to debunk common misconceptions, including the fallacies that renting is throwing away your money, that home ownership has provided better returns than other common investments, and that home ownership is the best and only practical path to wealth. It explores the financial and non-financial benefits provided by renting, looks at the current state of the Canadian housing market and what really drives housing markets, and helps Canadians better understand housing as an investment and as a lifestyle choice.

What prompted you to write the book?

More than a decade ago, I began writing down my findings from everyday conversations I had with friends and strangers alike about housing. Over the years, what emerged was a clear picture of home ownership as a heavily subsidized, mass-marketed lifestyle choice, promoted on a nearly universal basis by everyone from parents, friends, and neighbours to lenders, brokers, and the government. I decided to publish the book now because of the risks associated with the current state of the Canadian housing market, including record-low interest rates, record-high price-to-income ratios in certain markets, and record-high debt levels among Canadians. Right now is the most important time for Canadians to know as much as possible about housing to ensure they don’t receive and act on bad, biased advice.

Should your analysis be undertaken by financial advisors and individuals? If so, how should they conduct it?

The Wealthy Renter includes simple, quick exercises to help readers understand the true costs of housing and how housing fits into their financial situations. Financial advisors are well positioned to help their clients better understand housing, which, in most cases, represents Canadians’ largest single investment. Since homes are the largest, and typically most leveraged, investment most Canadians will ever make, gaining a better understanding of the housing market is likely to be the most important factor in personal financial success.

What kind of long-term relative returns have house prices in Toronto generated compared with the stock market?

Contrary to popular belief, house prices in Toronto have not outpaced the stock market, as represented by the S&P/TSX Composite Index. Over the past 25 years, Toronto home prices have delivered a compound annual return of just 2.9 percent, versus a return on the S&P/TSX Composite Index of 8.0 percent (taking into account standard transaction costs of 5 percent for homes; a very conservative 1 percent combined cost for annual property taxes and maintenance; and standard equity transaction costs). This represents a 5.1 percent (510 basis point) annual average difference in favour of the stock market.

What do the numbers look like over different time periods?

Even cherry-picking the time frame for the most flattering comparison—which turns out to be the 20 years since the end of 1995—Toronto homes delivered 5.2 percent annually, on average, over the 20-year period, while the TSX delivered 7.4 percent. Much of the belief in high home price performance is more likely associated with the high leverage used to finance homes and the forced savings of monthly mortgage payments. However, high leverage also brings increased exposure to declines in house prices.

How is the comparison affected by taking into account the cost of renting?

Using the Toronto Real Estate Board’s current average house price of $706,000, and the Canada Mortgage and Housing Corporation’s [CMHC] current average two-bedroom unit rent of $1,325 per month, the average annual return on stock market investment would be reduced by 2.25 percent (225 bps) going forward, still leaving a 2.85 percent (285 bps) differential in favour of renting, based on the past 25 years’ relative returns.

Should the involvement of foreign investors in Canadian real estate be factored into people’s thinking about future housing prices today?

The influence of foreign investors is easy to see and understand but hard to prove and measure. Homes are no different from virtually every other asset class in the world, and as low interest rates have pushed the valuations of many assets around the world higher over the last several years, home prices in the internationally attractive cities of Vancouver and Toronto were further boosted by land constraints and one of the most open immigration stances in the world (one of Canada’s greatest assets).

What house price return can Canadians expect in the future in light of demographics, the recent housing price boom, and the tightening regulations on mortgage lending?

I won’t give you a single number, or even a range. But, if Canadian house prices compounded at just 3.7 percent over the past 25-year period—in which Government of Canada 10-year bond yields dropped from over 10 percent to barely over 1 percent, average price to income rose from four to seven times, and Canadian household debt as a percentage of income rose from 70 percent to 170 percent—I’m inclined to think it could be lower than 3.7 percent.

That doesn’t sound encouraging, for either the future or the past. Yet most Canadians continue to choose home ownership over renting. Why?

I think it’s equal parts the broad-based promotion of home ownership and the success of its forced savings element. The promotion of home ownership is often inaccurate or includes intuitive, difficult-to-understand representations of returns, such as “I bought in 1990 for $100,000, and today it’s worth $300,000,” which sounds very good but is actually a compound annual growth rate of only 4.5 percent. Promotions include TV shows about all aspects of home ownership, government incentives like subsidized borrowing rates via CMHC, and tax incentives such as capital gains exemptions, land transfer tax rebates, and RRSP homebuyer plans. Forced savings programs, like the one built into home ownership through mortgage payments, are a critical tool for personal financial planning, providing a path to wealth not reliant on self-discipline. Fortunately, as discussed in The Wealthy Renter, there are several alternative investment plans, such as employer share loans, employer RRSP matching programs, Government of Canada bond purchase programs, automatic payroll deductions, and premium term life insurance policies, that also offer forced saving and can deliver potentially superior returns.

Your book discusses some of the behavioural effects of home ownership.

Yes. Owning a home with a substantial mortgage can limit mobility in the job market, as it can be financially costly to sell a house in an area of high unemployment to move to a region that offers better job prospects. It can be a source of additional worry and concern to families during times of economic recession and falling house prices. Homeowners often succumb to the desire to make costly renovations and improvements, justifying them as an investment, when they’re really more of a consumption item. Home ownership can also be inflexible and costly as people’s needs change in life. Young families often extend themselves financially to buy houses that can accommodate their future family requirements, but are too big for their near-term needs. Later in life, empty nesters often maintain their overly large dwellings due to the complications and costs of selling a house.

What was your motivation and experience as a CFA in writing the book while continuing to be a real estate equities analyst at a chartered bank that provides a substantial percentage of the residential mortgage loans made in Canada?

On the surface, there might seem to be a contradiction between promoting the virtues of renting and offering Canadians mortgages, but the underlying message and goal of the book is to help Canadians make good decisions about housing and promote a healthy housing market. Those are goals all Canadians can support!

How has your role as a bestselling author affected your professional career? Should we all think outside the box sometimes about how we use our professional skills and knowledge as CFAs?

Researching and writing The Wealthy Renter has broadened and deepened my understanding and appreciation of the importance of the housing market to the Canadian economy. The book is also an interesting channel through which to connect with a much broader audience than institutional equity research reaches.

What’s the most important thing you hope readers will take away from the book?

Advice on housing is very heavily biased by parties who have incentives to see more homeowners. The best defence against biased advice is knowledge. I hope The Wealthy Renter helps Canadians make the best housing decisions for their own needs and wants, with the best understanding of the implications of those decisions.

CFA Society Toronto members can receive a 20 percent discount on The Wealthy Renter (ISBN: 9781459736467) until May 31, 2017. Promo code: WRFA.

Telephone orders: 1-800-565-9523 / 416-667-7791.
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