O'Leary and replacing fixed income

Rising interest rates likely to threaten bonds

Shark Tank star Kevin O'Leary took the stage to much fanfare last week at CREB®`s annual Forecast Conference and Tradeshow breakfast, providing level-headed commentary on entrepreneurship, investing and, of course, real estate.

What intrigued many was O'Leary's approach to a balanced portfolio and the suggestion real estate is a suitable replacement for fixed income products such as government bonds. The negative sentiment toward bonds is not surprising given an increase to interest rates, which is expected to take place sometime this year, typically leads to a pullback in the bond market. With rates currently at historical lows, it makes sense that investors would look for other safe havens now before the jump.

However, most have not considered real estate as an asset to replace fixed income largely due to the perceived risk involved after the domestic housing market crashed in 2008-09.

Yet, when you consider 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 makes up a piece of a portfolio that once may have been heavily weighted toward bonds.

O'Leary proposes an increase in interest rates would be felt far more in the bond market than in the real estate market. Furthermore, he suggests that housing prices would remain stable even if interest rates increased by one and a half to three per cent.

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 just because the housing market tanked several years ago doesn't automatically mean conditions support it doing so again – 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.

Nolan Matthias holds a bachelor of arts in Economics, is the co-founder of Mortgage360 and the author of The Mortgaged Millionaire. Call Nolan at 403-615-6132 with your questions or to set up an appointment with an Accredited Mortgage Professional (AMP).

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