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‘Why housing has outperformed equities’ since 1870

A roundup of what The Globe and Mail's market strategist Scott Barlow is reading today on the Web

Geopolitics website Policy Tensor attempts to explain why housing prices have outperformed all other assets classes using an impressive set of data reaching back to 1870,

"What explains the superior risk-adjusted performance of housing is the fact that housing assets are not, in fact, owned by the rich or market-based financial intermediaries like other asset classes, but quite broadly held by the small-fry. More technically, the marginal investor in housing is your average householder who finds it extraordinarily hard to diversify away the risk posed by her single-family home to her balance sheet. Since it is so hard for her to diversify this risk away, she must be compensated for that risk."

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Ok, the argument is saying that because few homeowners are wealthy enough to diversify against housing price risk with, for example, substantial equity holdings, then the added risk should result in higher returns for homeowners. I'd need to see the math here, I find it unsatisfying so far. Taking more risk does not automatically explain higher returns in my opinion, particularly for an asset that, unlike farm land, doesn't generate annual cash flow. The post will start a healthy discussion, however.

"Why Housing Has Outperformed Equities Over the Long Run" – Policy Tensor

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Speaking directly to Canadian homeowners, Ritholtz Wealth Management portfolio manager Ben Carlson has a much different view,

"The reason homeowners in Canada should be worried is because housing is typically not a great long-term investment. Housing expert and historian Robert Shiller explains:

"Here is a harsh truth about homeownership: Over the long haul, it's hard for homes to compete with the stock market in real appreciation. That's because companies whose shares are traded on a stock exchange retain a good share of their earnings to plow back into the business. The business should grow and its real stock price should also grow through time — unless the company makes poor decisions, as some certainly do."

"The Canadian Housing Market is Bananas" – A Wealth of Common Sense

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Two bits of technical analysis – one on gold, another on oil – point to bearish short term outlooks. Personally, I'm neither a sceptic or adherent to technicals, it's just one piece of the puzzle for me,

"@Ole_S_Hansen #GOLD - 4th time lucky " – Twitter

"@TylerHKling Where Oil Prices Are Headed macro-ops.com/where-oil-pric… " – Twitter

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I'm not overly concerned (yet) with the sell-off in the S&P 500 yesterday, and neither is the FT,

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"Clearly, risks are more elevated. Even without a ruinous crash, it will be hard to sustain the stock market's post-crisis rally, which means that long-term investors will have to moderate return expectations. But a severe reversal this year is unlikely. History shows that low-volatility, high-valuation environments can last longer than many expect."

"Equity investors may not yet need crash helmets" – Financial Times

"S&P's Biggest Drop Was a Selloff Waiting to Happen" – Bloomberg

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Ex-PIMCO head Mohamed El-Erian details the lost lesson of the financial crisis which, because of Canada's current dependence on real estate activity for growth (ie mortgage debt), is applicable to us,

" Indeed, advanced-country politicians today still seem to be ignoring the limitations of an economic model that relies excessively on finance to create sustainable, inclusive growth. Though those limitations have been laid bare over the last ten years, policymakers did not strengthen adequately the growth model on which their economies depend. Instead, they often acted as if the crisis was merely a cyclical – albeit dramatic – shock, and assumed that the economy would bounce back in a V-like fashion, as it had typically done after a recession."

"The Lost Lesson of the Financial Crisis" – El-Erian, Project Syndicate

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Tweet of the Day: "@SBarlow_ROB GS: 5 key points on hedge fund positioning" – (research excerpt) Twitter

Diversion: Those with $120,000 they're not doing anything with can take an around the world trip on a luxury passenger jet,

"This Boeing jet is a luxury cruise ship for the sky" – Business Insider

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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More

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