Alex Avery worked as a top-ranked institutional equity research analyst, who advised institutional investors on real estate investments. Alex also worked for CIBC Capital Markets, one of Canada’s largest investment brokerages from 2005 to 2017 and led the real estate research team. Today, he acts as a trustee for H & R Real Estate Investment Trust (REIT). This interview took place in Alex’s office at 199 Bay Street on the 48th floor. The date and time of the interview was May 22, 2018 (Tuesday @1100). The duration of the interview was 21 minutes and 50 seconds.
Urgen Kuyee: Hi Alex, why don’t you let my readers know a little bit about yourself? Which school did you go to? How did you get into personal finance and real estate?
Alex Avery: I went to McMaster University and I took an engineering and management program, which is essentially a double major in engineering and business. When I finished that I went directly into the MBA program, also at McMaster. While I was doing that MBA program, I worked at a company called Altus Group, which focused on valuation and Market data for the real estate market and from there, I found my way into equity research studying real estate.
UK: How long ago was this? When did you graduate?
AA: I graduated from McMaster in 2002 and 2003.
UK: Let’s talk about your book, The Wealthy Renter. What led you to write this book?
AA: I worked at CIBC for about 12 years and in the early years, 2005, 2006 and 2007, my wife and I, we worked a lot and we would often go out for dinner and sit on the patio or wherever you found yourself in a public environment. And being social people, we would end up talking to the couple at the next table or the waiter. When you meet new people, people often ask what do you do? I would say I work at the bank and that usually killed the conversation. (Laughs)
AA: But for those who ask the next question, which was what do you do at the bank? I would say I am a real estate analyst and even though that had an entirely different meaning than what most people thought, their next question was should I buy a house? That was not my focus but I ended up having lots of conversation about housing and what I found in those years was that a lot of these people, generally younger people had very distorted views of what home ownership was about. I came to sort of see patterns in these conversations and these misconceptions that people have.
So, I started writing them down just because I found them interesting ideas. After a few years of writing them down and then, writing down the misconception and thinking through how that misconception came to be and what the reality was. I started to see this pattern where you could see the effect of what is a really pro home ownership lobby for a lack of a better description, influencing the way that young people made housing decisions. After 4 or 5 or 6 years of writing those ideas down, I had come to the conclusion that the pro homeownership lobby was very very powerful but also that a principal residence is actually not a very good financial investment and that’s one of the things that I go through in great detail in the book.
But, then an interesting thing happened. I had written basically 2/3 of a book on how your principal residence is not a particularly good investment. My wife and I had twins in 2010. And, pretty soon we really wanted to buy a house even though I had basically written a book about how it is a bad investment. So, then around the same time, I got into around 35000 words and I thought, “Wouldn’t it be funny if this actually turned into a book?” A couple of years later, I got into touch with the publisher, nearly published the book in 2013, didn’t end up doing that for a variety of reasons including we had another child and life was busy. And, then ended up at the end of 2015 reconnecting with the publisher and publishing the book in the fall of 2016.
UK: When you say young people, you mean millennials like people from age 20–37?
AA: At the time, I was one of those young people. I think when you think about the spectrum of housing need across your life, the really important decisions come in your twenties and thirties when you’re deciding you know when to buy your first house or your first condo. Whether to buy or to rent and then, where you are locating. I mean it’s a crazy time particularly when you’re in your 20s, you are embarking on a new career. You may or may not have a partner, you probably don’t have kids and you have a lot of flexibility. There’s lots of job changing going on and it just seems very very inconsistent to me to have that much dynamic or that many dynamic elements in your life and at the same time, plunk down all of your life savings to buy an asset that’s a multiple of your net worth. It has high transaction costs and probably doesn’t match you needs.
So, this whole pro homeownership lobby, the marketing campaigns, the pressure that you get from real estate agents and your family and the government and all sorts of other sources to buy a house just really isn’t consistent with what people need from their housing. It’s a very biased viewpoint that I basically set out to make the case, the opposite case to what the pro homeownership lobby pushes for by writing this book. And, saying not only is renting okay but it’s actually a great financial decision for a lot of people. It provides a lot of flexibility. It is a much lower risk option and don’t feel the pressure to make a decision that’s that important based on other people’s biases.
UK: What are some of the reactions you have received from your readers?
AA: It’s a fabulous topic for reader engagement because everyone has an opinion on housing. Everyone believes that they are an expert in housing whether they express it that way or not. A lot of people believe that home ownership is the best investment that you could ever make because particularly in markets like Toronto or Vancouver where people bought houses 5 or 10 years ago and you know on paper made huge gains. Perhaps comprising the majority of their net worth now, they think that that was a very smart decision that they made. They made a lot of money and for anyone to say the opposite is heresy.
So, you get a lot of people that push back against the idea that a principle residence is a poor financial investment but there’s also the opposite end of the spectrum where I’ve had all sorts of people reach out and say you know I’ve always been a lifelong renter and it served me very well. I have had the discipline to save through other means to accumulate retirement wealth. A woman that I worked with who was basically retired found herself living alone in a 9000 sq ft home, sold it for 5 million dollars and the sense of relief that she had with that was enormous because she took that money and put it into dividend producing investments and ended up having so much free cash flow. She no longer had the burden of maintaining a 9000 sq ft house and had a lot more flexibility and a lot less stress in her life.
UK: What are one to three books that have greatly influenced your life?
AA: Well, The Wealthy Barber. I did talk to David Chilton when I was putting my book together and he was very supportive and encouraging.
UK: Did he give you the green light for the title of your book?
AA: He did. (Laughs) So, that was one. Let me just think about that. That’s a tough question.
UK: No problem, we can come back.
UK: In your book, you talk about how the governments of virtually every developed country in the world have stepped into the business of promoting home ownership. How has the Canadian government been doing this?
AA: The government promotes home ownership through a variety of policies that are designed to encourage home ownership. If you want to take money out of your RRSP, you have to pay a massive tax hit unless of course, you’re taking it out to buy a house. You can’t do it to buy a car, you can’t do it to start a business, you can’t do it to take a trip, it’s only to buy a house. If you buy a house and you are a first time homebuyer, you get a rebate on your land transfer tax, there are no capital gains on a principal residence. There aren’t lot of other investments where you can make a capital gain and the government wont tax them.
CMHC (Canada Mortgage and Housing Corporation) is an enormous organization that is specifically designed to facilitate homeownership amongst Canadians. And, the reasons for promoting homeownership are many and the government isn’t, you know there’s no evil intention associated with promoting home ownership. From a government perspective, it’s actually quite a positive thing. A society of homeowners generally is more productive if you have a mortgage, you tend to go to work everyday. You have got a big shiny thing that you want to protect. You tend to not commit as many crimes. There are all sorts of very positive dynamics associated with home ownership. But, that’s society as a whole. As an individual I mean what’s best for everyone might not be best for you. So, there are a lot of different methods through which they promote home ownership and politicians will very overtly target rising home ownership as a policy target. Because generally speaking if you know home ownership is rising, you have got lots of construction activity, the economy is doing well and voters are more likely to support an incumbent politician if home ownership is rising and if the economy is doing well. If you’re happy and you have got this big shiny thing that you’re really enjoying and this politician helped you get that, you’re more likely to support him. George Bush in 2002 made some pretty incredible pro home ownership policy changes and the announcements and those were directly contributing to the housing crash that happened in the United States in 2006 through 2009. Funny enough in 2015, when Harper was trying to get elected for a final time, which was unsuccessful. One of his last-ditch policy moves was to promise that he would target increasing home ownership to I think it was 72 and a half percent. Fortunately, he didn’t get re-elected and wasn’t able to further metal in the housing market.
UK: At my workplace, I talk to my co-workers especially senior nurses and when there is a discussion about home ownership versus renting, they usually tell me how when you pay for your mortgage, it is kind of like forced savings. What’s you take on the notion that being a homeowner and paying for your mortgage is similar to a forced savings plan?
AA: It is a forced savings plan and that’s probably the top argument supporting home ownership is that it’s a forced savings program. The unfortunate thing about it is that as a forced savings program, it’s not a very good forced savings program because in addition to the principal amount that you’re paying down on your mortgage every month, you’re also paying a huge amount in maintenance on your property and you’re paying property taxes. There’s a very good chance that your total cost of housing is a significant amount higher than what it would be if you were renting that place for a variety of reasons. And, perhaps the number one argument against home ownership as a forced savings program is that it has all sorts of ancillary effects on the rest of your life. You have reduced labour mobility, you have reduced flexibility in terms of what job you would take, not necessarily what city you might live in.
I mean as an investment, a house is influenced by things like you know you don’t want to move because the market timing is not right or your kids are going through a tough time at school or you’ve settled in the neighbourhood, you like your neighbours. All of those things are influencing the investment that you’re enrolled in this forced savings program to invest in and it’s a very very concentrated investment. If you look at some of the alternative forced savings programs that exist, they are lot more diversified, they tend to have better long-term investment track records for the assets that you’re buying. I guess the only real difference is that the home ownership forced savings program is very very powerful in terms of making people stick with the forced savings program. And part of that is the high transaction costs on buying and selling houses but also the fact that you live in this forced savings program. It’s more personalized than a forced savings program buying stocks or bonds.
UK: This is not a housing question but let’s say a 27-year-old nurse, she makes about 65K/year and wants to save about 10 percent yearly for her retirement. Would you tell her to go with a TFSA or an RRSP?
AA: 27-year-old nurse.
UK: Yes, making 65K/year and wants to save about 10 percent yearly for her retirement. She is confused if she wants to put money into her TFSA or RRSP?
AA: That’s a good question. Based on that limited information, I would imagine that nurses’ incomes rise fairly substantially between the age of 27 and 40.
UK: I will also say this, she has a great defined benefit pension plan called HOOPP.
AA: Probably TFSA because the tax savings benefit of contributing to your RRSP at a lower tax rate is less material and with the TFSA, you do have the flexibility to withdraw should you need it. With that strong defined benefit plan that you have got in place, I think TFSA would probably be the way I would go.
UK: How do you invest your money? Do you mind sharing what’s in your portfolio today?
AA: Sure. I have recently left CIBC where I was an equity analyst. I have partnered with Front Four Capital which is an event-driven hedge fund based out of Connecticut. We have recently launched a fund focused on real estate securities in North America, long and short and the underlying entities all have the common theme of being real estate-related. So, that’s a big part of our investment portfolio. And, having worked at the bank for a long time, I have a pretty substantial amount of CIBC shares. It might surprise people but we actually own our house as well which is a pretty sizable investment given the Toronto housing market.
UK: Lastly, what are bad recommendations you hear in your profession or area of expertise? What advice should Canadians ignore?
AA: I think one of the common beliefs around housing is that house prices always go up. They don’t always go up and the markets in which they have shown a strong propensity to rise overtime are many fewer than the ones where you see has prices stagnate or go down. It just so happens that the lot of the media attention is focused on the ones where those prices go up consistently and to follow that investment maxim that house prices always go up can put you out a lot of risk. I think the best piece of advice that you can offer to individuals particularly younger people is to educate yourself on investments and it doesn’t have to be a full under-graduate degree in finance or a CFA program or anything too intense but simply understanding the landscape of the investment industry and the different types of investments that are out there I think is really important. I think personal finance education is underserved in Canada. In fact, that was one of the objectives of The Wealthy Renter was to help people understand housing a little bit better.
So, I would say educating yourself in personal finance is important to understanding the investment industry. It’s an industry that is undergoing a dramatic amount of disruption right now as new regulations are forcing the disclosure of the incentives and the compensation that industry participants are benefiting from. And so you have got mutual fund industry that has changed dramatically, you’ve got index funds and exchange-traded funds. The investment advisor role is changing pretty significantly and if you’re lucky enough to be part of a defined benefit pension plan, you are in fabulous shape. And even if you are, it is really beneficial to understand as much as you can about finance. The Wealthy Renter plays a small part in that and helping people better understand the financial elements of principal residences.
UK: Would you like to take a stab at one to three books that have greatly influenced your life before I let you go?
AA: Yes, so I think The Wealthy Barber is one. David Chilton’s seminal work. Manufacturing Consent is another book that I found very interesting. It’s when you don’t necessarily have to agree with different philosophies or perspectives on the world but just to see what the other side of the argument might be. Manufacturing Consent is a fairly socialist perspective on the way that the capitalist society influences things like politics and all sorts of elements of society. It’s a fascinating insight into how political systems work and how the capitalist system works.
UK: Great. Thank you so much for your time, Alex.
AA: Thanks Urgen.
This interview has been edited and condensed.