Episode 61: Stocks VS Real Estate | Mortal Confab

What if every house on your street had a ticker tape running to tell you what it was worth last week, last month, or last year? What if it was as easy to sell a piece of real estate as it is to sell a stock? Join us this week as Josh & Colin discuss why we treat an investment like real estate differently than we do our stock portfolio and whether that difference is merited. This episode is subtitled: “Josh is right, Colin is wrong, for the first time ever.”

Episode Transcript

BARENAKED MONEY PODCAST: EPISODE 61

Stocks Vs Real Estate| Mortal Confab

Announcer:
You’re about to get lucky with the Barenaked Money Podcast, the show that gives you the naked truth about personal finance. With your hosts, Josh Sheluk and Colin White, portfolio managers with WLWP Wealth Planners IA Private Wealth.
Colin White:
Welcome to the next edition of Barenaked Money. I’m here getting naked with Josh as we do on this semi-regular basis now, and we thought given the current state of tumult in the markets that it was worthwhile reflecting on how you feel. And we will both right off the start say we’re not experts in this, but we’ve watched a lot of people have feelings, right Josh?
Josh Sheluk:
That’s a good way to put it.
Colin White:
So we’re going to talk about some numbers and then talk about how those might be received a little bit differently depending on who you are and where you are. Do you want to start the conversation, Josh?
Josh Sheluk:
Well, you stole this idea from me just so our audience knows, because I kind of floated this idea a few weeks ago on a podcast and you actually didn’t pick up on it at all. And then you came back a few weeks later and said, “Hey, people seem to react differently when they’re talking about real estate being down versus stocks being down. Why do you think that is?”. And I said, “Okay, yeah. We should do a podcast on this like you had suggested”. So just for the record, you stole this idea from me.
Colin White:
All right, let’s reframe it. This podcast will now be titled Josh Is Right, Colin Is Wrong For The First Time Ever. We’ll stipulate to that.
Josh Sheluk:
Okay, first time ever. So putting one finally in that checkbox for me. So we’ve kind of started going down this path because a lot of things are down this year in value, and real estate is one of those things. Stocks are also one of those things. But in our conversations people tend to focus a lot more on one than the other, or they tend to worry a lot more about one than the other, and that’s the stock portfolio. And the reactions and the way to deal with it seems to be different in each case. What have you been seeing in terms of the real estate numbers? How much is the market down so far this year?
Colin White:
Well, let’s put it all in context. We’ll include the real estate numbers, but let’s put it all in context. So from peak to trough, which is again how people tend to feel like they anchor on the biggest number and then how low did it go. So I’m buying into that way of thinking, even though it scientifically doesn’t have as much usefulness as maybe doing it different ways. But I did this a few days ago I think as of the 17th of October or so, the TSX was down 16%. The S&P 500 US Index is down 22.41. XBB, which is a short term or shorter term bond fund or more traditional bond fund I guess, Canadian bond fund, is down 16%. XLB, which is a long term bond, which is down 27% peak to trough. Gold was down 20%. And ETF made up entirely of the Canadian banks, equally weighted, was down 21.95%.
So yeah, it’s been bad pretty much right across the board. But to Josh’s point, the real estate is… The average price of a host sold in Canada is down. What was the number I gave? I didn’t give the number. The number is actually down more than 21% this year. So the average price in February that a house is selling for in Canada was $816,720 and it dropped to $640,479, so that’s a 21% drop. So real estate is right in the ballpark with everything else, but people tend to look at that differently. And Josh and I both went back and forth and was trying to figure it out, because there’s other numbers around the real estate number that would be interesting to know that aren’t available necessarily in a timely fashion. But it leads to conversation about price discovery. How the stock market trades thousands of times a second every day and one share of the Royal Bank is worth the same anywhere in Canada, and real estate is harder to measure than that.
So if the average selling price is down, that means there’s all kinds of things that have happened within the real estate market. There are areas that would have no bid, meaning that you just can’t sell a property right now because of the way things have changed, and other areas that are less effective. So it’s not quite homogeneous, but on average? Yeah, it’s pretty much the same as everywhere else. And people, because not everybody’s knocking on their door every day telling them exactly what their house is worth, don’t necessarily have as much information. But even when confronted with the fact that their property’s worth less than it was a year ago, even if that number’s 20% less, tend to kind of shrug and say that’s not a big deal.
And that’s a little confusing, because housing crosses the line between being something we live in and something we consider an investment. And if it’s just something you live in, yeah you can kind of shrug and say, “That’s not a big deal”. But if you’ve been into it saying, “Hey, I’m going to buy four or five houses saying this is my thing”, thinking that somehow this is going to get through a tough time in the stock market, that hasn’t really worn out this time around. You are in as much pain, and depending on how levered you are, how much money you owe, you might be even in more pain than you would be with a different kind of investment. But people always have impressions that there are certain kinds of things that are always good.
Josh, what’s your favorite thing that people say to you is like, “This is always a good thing to have money in”?
Josh Sheluk:
Well, real estate is the one that I think comes to mind first and foremost. But you mentioned earlier on the Canadian banks as well, people seem to think that these are can’t miss investments. So those are probably the two that I hear the most about. But coming back to the real estate thing, so I went through the thought process of, “Okay, why do people think this way about real estate differently than stocks”? Just for the sake of comparison here and the ease of our conversation, let’s look at stocks versus real estate and why people think differently about these things. I came up with three things. So you stole my thunder a little bit there, Colin, but let me go through these and you can kind of play devil’s advocate or give me another check for being right for once in my life.
Colin White:
Well, that’s going to stick. Okay.
Josh Sheluk:
And when we talk about the reactions to stocks, a lot of people, a lot of investors want to sell their stocks when they’re down in value. And there’s a whole bunch of reasons why people feel that that’s the right thing to do, but generally you’re running away from the pain. You’re sort of running away from the fear of the value of your investments, the value of your wealth dropping. So my first point here why I think people react this way to stocks and not to real estate is it’s just so much easier to sell and buy, to buy and sell, stocks than it is real estate. With your real estate you don’t have an electronic market that you can log into at any given point in the day from 9:30 to 4:00, you don’t have the significant transaction costs that you do, the legal ramifications that you do with real estate. So it’s so much easier to buy and sell stocks. If we made buying and sell selling real estate that easy, maybe people are a little bit more inclined to buy and sell their houses just the way that they do with their stock portfolio.
Colin White:
Well yeah, no that’s for sure true and ease of access is one thing. I’m afraid to say anything else because I don’t know your list, I’m afraid I’m going to stumble onto something else and steal more of your thunder. So I’m going to wait until you say all three things out loud so you get full and honest credit for all three things.
Josh Sheluk:
Well the next two are things that you already touched on. So the second one that I have here is it’s your home. People don’t always… Not always, but a lot of the times when people are thinking about real estate and the clients that we work with, it’s their home that they’re talking about. So they just feel differently about it. It’s not purely a financial decision whether they’re buying or selling. They’re not just going to pick up their home because the value of their house is down 10% because that disrupts so many other things in their life if they were to do so. So I think that maybe even more so than that first ease of transaction is more important and something that’s very relevant to why people don’t react with sort of a knee jerk reaction every time values are up or down 10%.
Colin White:
Yeah, well that’s true. And your third one? I’m not going to say anything more because I’m not going to step on your toes ever again, I feel bad about that.
Josh Sheluk:
Oh, I’m sure you will. I’m sure you will. So the third one is I think the most relevant and something that you touched on. Your house is not priced every second of every day. Yes, someone might come by once in a while and say, “Hey, your house is up 10% from last year. Your house is down 10% from last year”. But you’re not slapped in the face with it all the time, every second of every day with, “Here’s the value of your home now. Here’s the value of your home now. Here’s the value of your home now. Oh by the way, your house was worth this much five months ago. This much five minutes ago. This much five weeks ago. This much a year ago. If you had done something differently February the 22nd of 2022, you would’ve saved yourself this much money”.
So that sort of slap in the face is not there with your house. I just started thinking of, “Okay, what if you came home to your house every day and there’s a ticker tape above your garage or above your front door that tells you how much your house is worth. And not only that, you’re driving down the street, every other house along your street has the same ticker tape that tells you how much that house is worth on a daily basis, every second of every day. And it shows you that, but it’s also super easy for you to see how much each of those houses was worth a week ago, a month ago, a year ago”.
Colin White:
And theirs-
Josh Sheluk:
People would act differently. People would act differently if they had this in their face all the time. And then next thing they know, “Oh their neighbor’s house is up $20,000 and their house is down $20,000. Well what the hell is that guy doing that I’m doing differently? He bought a new big screen TV. Maybe I should buy a new big screen TV? Maybe my house will go up 40 grand if I do that?”. So it’s a silly analogy, but this is the way that people react when it comes to stocks. They see one stock doing one thing, they want to sell theirs and buy that because that one’s doing better and they think that’s a good idea.
Colin White:
Well the other thing in the stock market, there’s always a willing buyer within a couple cents of the last transaction as a rule, so you have a ready made market. But there is a bigger thing at play here that helps people compartmentalize things. And a house is a tangible thing. You can walk around in it, you can touch it, you can feel it, you can smell it, you can have feelings or memories that are formed in that house. Money is intangible, and we live in an intangible world. And those are two different buckets altogether. And I’ll give you an example because I’ve had conversations with clients this week where they said, “Holy cow, my account’s down a $100,000. If I lose another $100,000 in the next year then that’s going to be bad”. I’m thinking, “What do you think it’s going to go…”? “Well that’s the trend”.
But that’s not how markets work. They go down until they go out. I mean there’s always oscillations and things, but people are willing because it’s something that’s nebulous, it’s something that’s intangible, something that’s not easily understood. They apply whatever logic they have available to them. It’s like, “Well this is my loss this year. Two more years like this I have no more money”. Well wait. No, unless every company goes bankrupt in the same day not all of your money goes away. Now if every company you know goes bankrupt the same day we probably have bigger trouble than your portfolio’s not worth anything, because we’ve gone back to caves and we’re hitting each other with sticks again. So people try applying logic to something in a way that just doesn’t fit. And these are real conversations, and I’m not belittling the conversations because this is how people’s emotions react to things, but when we’re having a conversation that’s where it starts.
And I guess to go back to the start, the point of this whole podcast is, you know what? Real estate is down in one measurement just about as bad as everything else right now, and that doesn’t make real estate a bad investment, it doesn’t mean people shouldn’t have real estate, but just don’t put it on some kind of pedestal that you think it’s completely not affected by these things. And the other thing I guess in the financial world, and Josh reads this all the time, is there’s so much more commentary and so many people holding themselves out as gurus as to talking with certainty of what’s going to happen in the stock market. And some of it’s doom and gloom, and some of it’s really optimistic, but there’s a whole bunch more being written about things that are traded in the stock market. Real estate’s real estate. There’s not as much diversity to discuss in real estate as there would be in stock market commentary, for sure. So there’s always a new story coming along.
Josh Sheluk:
Yeah. The tangibility thing I think is really interesting. I’m glad you brought that up, because stocks do kind of seem to be a figment of somebody’s imagination to some people. And it’s harder to understand when you own a stock like, Oh, I own shares in a business. Yes. Okay, and that business makes profits. Yes, it does. And that business owns real estate itself. Oh yes, that business does. And they have brand value and they have inventory and all these things. That’s what you own when you own a stock. You don’t just own a piece of paper, even though sometimes it feels like that. So if your house goes down in value 20%, you still have the same house, you still have the same four walls and a roof and the same backyard and front yard, the same driveway and garage. When a stock goes down in value 20%, you still have the same business. You still have a hundred shares of Royal Bank or 500 shares of Apple or whatever it is that you own.
That business, Apple’s still going to sell iPhones, they’re still going to generate profits, they’re still going to have their headquarters in California or wherever it is. So it has value, all this stuff has value. So the fact that somebody’s willing to pay you 20% less today than they were a month ago for either of these things, you still fundamentally have the same amount of those things. Just people are looking at it and valuing it differently. And to your point, it’s a lot easier for people to understand, “I have the same house” than it is for them to understand “I have the same number of shares of Apple”.
Colin White:
Yep. And for the listeners, if you just think about the idea that you buy a $500,000 house and the day the transaction closes you get to walk into it and go, “I just bought this”. You drop into my office and give me a check for $500,000 I’ll give you a smile and a handshake, but it maybe doesn’t have the same emotional effect that walking into that house might.
Josh Sheluk:
Oh, that’s pretty great Colin. Smile and a handshake from you? What about-
Colin White:
Well, depending on the circumstances. But no, that sets the fundamental reason. And I think it’s important for everybody to explore where their confidence comes from, because you’re more confident in some things than others. And it behooves you, or it’s to your benefit to kind of say, “Well, why? Why am I more? Should I be? Is that a valid thing?”. And there’s a Mark Twain quote from The Big Short which I just rewatched on a plane… That’s a great movie by the way. And one of the quotes that they include in that movie is, “It’s not what you don’t know is going to hurt you. It’s what you think for sure that just ain’t so”. And this is an example of that. So if you thought that you were protected by having a bunch of real estate to offset your market investments, well that hasn’t worked out this time around.
And this is an odd time. And Josh, you’ve made some good points and had some good conversation around how odd this time period is with regards to the correlation of assets. And this is where I start making fun of people who use correlations all the time, because when shit hits the fan correlations go to one. And I think we’re witnessing a little bit of that now that we’re seeing sell offs across most major asset classes, if not all. And these events occur once in a while, and you shouldn’t assume that you can perfectly plan around them and not have these affect your world.
Josh Sheluk:
Yep, for sure. So I think the purpose of this conversation is just to continue to encourage the right behavior. We don’t want you to think that real estate’s a bad investment. As Colin said before, we don’t want you to think that stocks are a great investment. It’s just that they all have their time and their place, and reacting emotionally to any one of these when it comes to investing, when it comes to your money, is probably not going to be the right move. You don’t want to panic and sell when things are down. You don’t want to get too high when things are going great like they were with real estate six months ago and load up and buy a whole bunch of real estate and take variable mortgages for every piece of that property like so many Canadians did over the last couple years. And oh shoot, all of a sudden interest rates are 4% higher than they were six months ago. So just taking pause, reacting in a levelheaded way to all this stuff, good or bad, knowing that it’s never going to be always good or never going to be always bad with all these different types of investments. That’s super important to remember.
Colin White:
Well, humble is a good thing. And if you want to take a lesson that has kind of been taught to everybody over this last nine months say, going forward is don’t be confident now. Don’t say, “Well, real estate’s going to perform the best from here”. Or, “Well, the stock market’s going to perform the best from here. Or gold. Now is a great entry point for gold”. Again, don’t be confident from here either. It’s all about establishing a good balance in quality investments and then being patient and not having knee jerk reactions to things. Because again, we’re getting lots of questions right now. “Well should have changed my risk profile”? It’s like, “Well, if your risk profile was set up properly going into this, then the answer’s no”. The environment doesn’t change your risk profile, your circumstance changes your risk profile. And if you’re honest, part of your circumstance is your ability to sleep at night. So for people who are not sleeping at night, then yeah I mean that’s now causing you physical pain. And if we can’t avoid that, then maybe changes do need to happen.
But the same way being super confident that other were things you could have been in. Honestly, this is one of the better situations for people like Josh and I to be in, because the worst situation, and this kind of happened early on, if you were heavily invested in Canadian or the Canadian energy sector you looked pretty smart for part of this year. So there was a sector that you could, with a backward facing mirror, you could take a look and say, “Yeah, I could have been there. I should have been there”. Well, I mean the air has kind of come out of that balloon. I mean everything is down to a point and really was no place to hide. Even cash, if you factor in the cost and inflation, if you had gone to cash you still lost a lot of purchasing power over the last year.
So this is one of those times when everything is looking bad. So it’s a unique opportunity to reflect and say, “You know what? I shouldn’t be confident that there’s one course of action at any point in time that’s going to protect me”. Because from time to time everything’s going to get hit, and that just is part of being on the planet and part of existing. And learning that at this moment so that you don’t say, “Oh, that was terrible, but I’m really sure-” Just shut up. Don’t follow up all this good learning with, “Now I’m really sure that-“. No, you’re not. Categorically no, you’re not. There’s way too much nuance here. And as I said, the Canadian market is something that, from a real estate perspective, there’s areas right now that when I say no bid I mean it doesn’t matter what your price is People aren’t buying in certain locations and in certain price points. So it freezes up, and that does happen in capital markets from time to time and it’s quite catastrophic. So let me say the average house price is down 21%, that means half the houses are down more than that so be careful about being confident going forward. And as always, we’re going to preach the keep your long term money long term, keep your short term money short term. Be patient and don’t change your long term plan every couple of weeks.
Josh Sheluk:
Or every couple months for that matter.
Colin White:
Well, I was trying to pick the time horizon I should use for that statement and I settled. Yeah, I think you’re probably closer. Long term plans, maybe once a year could be reviewed. How’s that? Is that safe?
Announcer:
This information has been prepared by White Leblanc Wealth Planners, who is a portfolio manager for iA Private Wealth. Opinions expressed in this podcast are those of the portfolio manager only and do not necessarily reflect those of iA Private Wealth Inc. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.
Colin White:
We’ve noticed something. It seems there a lot of people who would rather try to figure out their lives with an online calculator than airing your finances to a human. Stop doing that. You need to talk to someone who can help direct you, tell you where to start with what you’ve got to make the biggest impact on your future. You can’t figure that out at doihaveenoughcash.com, but you can figure it out by chatting with us. Call us. It’ll be okay. You’ll see.
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