UBS: The role of home ownership in asset allocation

Thursday Oct 01st, 2020


The role of home ownership in asset allocation

CIO Daily Updates

by Chief Investment Office01 Oct 2020

Thought of the day

The specter of a global recession has haunted housing markets for years. For a vast majority of households, housing is a crucial stepping stone on the path to reaching their financial lifetime goals and an important vehicle for passing on wealth to later generations. As such, housing is an important component in the Longevity and Legacy strategies within the Liquidity. Longevity. Legacy. approach to wealth management.

Yet in the midst of the current pandemic-triggered shock, the fear of a housing market downturn has so far turned out to be unfounded. Despite the sharpest global economic downturn in more than 60 years, house prices have actually accelerated in the last four quarters, supported by governments’ fiscal support and central banks’ monetary stimulus.

According to the latest UBS Global Real Estate Bubble Index, (PDF, 2 MB) Munich and Frankfurt are currently the major cities with the most distinct bubble risk assessments globally. Prices are falling in only four cities in our survey; the last time there were fewer cities with negative price growth was 2006.

The current acceleration is not sustainable, in our view. Rents have already been falling in most cities, indicating that a correction phase in house prices will likely emerge when government subsidies fade and pressure on household incomes increases. For the longer term, the coronavirus pandemic has also called into question the growth prospects for housing in urban centers, given the widespread adoption of home working.

But housing is an illiquid, indivisible bulk asset with high transaction costs, meaning it can be difficult to adjust your exposure to it easily. Against this backdrop, we recommend investors consider a number of actions:

  • The asset allocation of a first-home buyer is typically illiquid and not highly diversified given today's high house prices. So when building wealth over time, the household should focus on accumulating liquid assets to increase diversification and financial flexibility. In our view, current equity market volatility offers the opportunity to accumulate long-term positions in equities. We also recommend taking a thematic approach to investing to find the winners and avoid the losers from the pandemic, including themes accelerated by COVID-19 and sustainability.
  • Despite the prospect of low rates for the foreseeable future, from a housing perspective it is important to consider interest rate risk. Historically, rising interest rates have been the main trigger for corrections of housing markets. Consequently, you might want to think about reducing the duration of your financial portfolio if the bulk of your wealth is in housing.
  • Even in the absence of a broad market correction, the potential for widespread capital gains in housing seems depleted. This is of particular importance for buy-to-let investors as price-to-rent ratios have reached a record high (i.e., yields are low) and rental growth is uncertain. In this environment, owners of multiple properties should consider taking profit as investors are likely to find other assets with better risk-return characteristics.
  • Mortgaging is a tool homeowners can use to build wealth, accumulate assets, and manage liquidity. It can be worthwhile postponing the debt amortization if the expected return on financial investments exceeds the mortgage interest rate costs. In global housing markets, the average nominal price decline during correction phases has been around 17% over the past 40 years. Price corrections exceeded one-third in only 10% of cases. So, when loan-to-value ratios are less than 60%, a shortfall becomes unlikely although consideration should also be given to mortgage repayment affordability.

Read more on our thoughts on home ownership and its role in asset allocation in our report "Housing as a financial asset." (PDF, 394 KB)

Liquidity. Longevity. Legacy. disclaimer: Timeframes may vary. Strategies are subject to individual client goals, objectives, and suitability. This approach is not a promise or guarantee that wealth, or any financial results, can or will be achieved.

Post a comment