Are Pension Plans Advisable For Those In ‘Bubble’ Real Estate Markets?

According to the latest report form Statistics Canada, it was indicated that employer-sponsored pension plans have $150 billion invested in Canada’s real estate market.

However, as the bubble burst in the hottest housing markets continues to approach, some are wondering as to whether or not the pension plans are putting their eggs in the wrong basket.

“Real estate offers diversification away from stocks and bonds,” said Andrey Pavlov, professor of finance at Simon Fraser University. “Overall, I’m in favour.”

But the professor said he’d be “nervous” about investing in overvalued markets. Pavlov added that there’s a high probability of double damage if workers own homes in a “bubble market” in which their fund is also investing.

“The situation that is bad is if most of your plan members are homeowners…and you invest in the same market, then you’re doubling down on the situation that can hurt in two different ways.”

There’s a yet but distinct possibility that this could happen.

“The pension funds usually start with about a five per cent investment” Pavlov added.

“Outside of Toronto and Vancouver, I think the rest of Canada is fine for real estate investments. So it depends what they have chosen.”