Housing

Episode 209: Optimal Allocations to Owned Housing & Gender Equality in Financial Planning

Welcome to another episode of the Rational Reminder Podcast! In today’s jam-packed episode, we start by going through the feedback received on our limited crypto series and outline upcoming guests. We also give a breakdown of Cal Newport’s book, Deep Work, and the importance and long-term benefits of engaging in deep work. We then follow-up on our recent episode with Rebecca Walker by discussing gender equality in financial planning. Lastly, tune in to also have a rundown of the housing market and its investment potential, price risks associated with home ownership, the effects homeowner’s occupation has on their household investment and more!


Key Points From This Episode:

  • We go through feedback received on the limited edition crypto series. [0:01:40]

  • An outline of the upcoming guests we are going to have on the show. [0:05:51]

  • This week’s book review, Deep Work written by Cal Newport. [0:09:01]

  • Some of the common workplace problems highlighted in the book. [0:14:30]

  • How work can be more enjoyable than free time and reasons why. [0:15:56]

  • Ways to overcome common workplace problems and engage with ‘deep work.’ [0:16:47]

  • The long-term benefits of engaging with deep work and why it is needed. [0:20:21]

  • A follow-up on our recent episode with Rebecca Walker and the feedback received. [0:20:49]

  • Discussion about the data that is related to Rebecca’s points from the episode. [0:22:10]

  • We unravel the nuance concerning the gender pay gap and financial planning. [0:26:10]

  • An important takeaway concerning our discussion on the gender pay gap. [0:33:19]

  • Rundown of the housing market and its investment potential. [0:33:58]

  • Find out how an owned home can act like an investment. [0:37:42]

  • Learn more about ‘Portfolio Theory’ concerning property investment. [0:40:50]

  • An interesting aspect regarding peoples’ occupation and property investments. [0:46:18]

  • How people reduce the risk associated with property investments. [0:47:45]


Read the Transcript:

Ben Felix: This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision making from two Canadians. We are hosted by me, Benjamin Felix and Cameron Passmore, portfolio managers at PWL Capital.

Cameron Passmore: Welcome to episode 209, and we're in the middle of the vacation season. Yes, Ben and I are actually planning on taking some time off shockingly. I mean, this is barely a part-time job for both of us, so it may not feel a whole lot different. I'm off to Ireland. We'll see how that goes, given the complete chaos in Canadian and I hear international airports, but we'll see how that goes. Any big plans for you?

Ben Felix: Nope. I'm mirroring your time off as you know. I'll be off at the same times that you're off. I have to. Otherwise, we can't coordinate our vacations because we have to do the podcast when we're both around.

Cameron Passmore: Yeah. The week after we're back, I think we have four recordings that week. It gets real busy, real fast.

Ben Felix: That's a normal week, isn't it? Lately with the crypto podcast. We're not going to go anywhere, but I've been telling my wife since we moved here that we shouldn't do any traveling until we've gone five minutes down the highway. Because where we live, there's all these beautiful lakes and beaches just like literally five minute drive down the highway. I haven't gone to check that out yet, but my wife did go with the kids a couple days ago since they've done school. She said it's like beautiful sandy beaches and crystal clear water. She's like, "Well, I told you." We'll probably go check that out.

Cameron Passmore: It's spectacular where you live.

Ben Felix: Yeah.

Cameron Passmore: Okay, you want to update us on the crypto podcast?

Ben Felix: Yeah. I just want to say on the crypto podcast that it's funny, we're covering this topic that's very different from what we usually talk about because crypto's a new thing, so a lot of people have opinions. It's really hard to talk about this thing without talking to people that have opinions. We talked to Bruce Schneier last week. I thought he was great. But at the end of the day, it was his opinions about crypto and how this fits into all of the different things that he has expertise in. That's very different from talking to somebody about their empirical findings of their most recent paper.

Cameron Passmore: Right.

Ben Felix: The interesting thing is that the polarization in comments on episodes is extreme. Usually it's data, so people might have questions or comments about the data or how the research was conducted or whatever, but we're in this realm now where some people are like, "Wow, that was the best episode ever," and some people are like, "Wow, that guy was an idiot."

Cameron Passmore: I'm wondering why we aren't pushing back harder.

Ben Felix: Well, we've heard that too, but I mean, I think it's a similar effect where because we're talking to people about their opinions and many people have opinions that disagree with whatever our guest is going to say, and when they hear that, they'll often say to us, "Well, why didn't you push back on that opinion that they had? It was different than my opinion." In some cases, it's like, well... Like when we talked to Steven Deal, some people wanted us to push back on his point about mining concentration, for example. I mean, in that case, that was one of the first recordings we did in the crypto space. We were still pretty green back then. Still are now.

Cameron Passmore: I was going to say.

Ben Felix: But anyway, it's hard to push back on. It's hard, but it's also I don't know how productive it would be. But you're right, we have been getting more of that feedback that people want us to be arguing with guests. And that came up in the Rebecca Walker episode too. That was another case of maybe there was more opinion than usual in that, although we're going to talk more about that in a minute. I think there was more data than maybe people realized behind a lot of the things that Rebecca Walker said, but that was another case where she said things and some people said, "Well, you should have pushed back on this." But anyway, as we'll talk about it, in that case, I don't think that there was anything we needed to push back on.

This week on the crypto podcast, we're talking to Nick Weaver. The reason that I went on most of that rant just now is I wanted to say that our hope with the crypto series is not to bash crypto. We want to learn about it. But I think the challenge that we had trying to do that is that at the surface, when you start looking for information about crypto, there's two things that you find. Well, it's the extremes. There's very negative commentary, which come from some of the people that we've talked to so far, and the conspiracy theory, anti-government, completely insane positive commentary about crypto. Yes, I just released my own bias on that. In doing that this podcast, I refuse to entertain...

I mean, I was thinking about this. It's like on Rational Reminder, it's like someone's saying, "You guys should have someone that's leading the GameStop conspiracy theory. You should have them on Rational Reminder to talk about that." It's like, no, we're not going to do that, and it's the same thing for the crypto podcast. We're not going to have that type of perspective because I don't think it's in any way productive. Anyway, you start going to look for information. You find the super negative stuff first.

I do think that we have some more balanced guests coming up and some people with more diverse perspectives, like the last few have been very critical on the perspective of the technology, but we have more people coming up who are looking at it from a completely different angle and some people who think that there is some potentially very interesting applications on the technology. Nick Weaver, again, is very negative on crypto. I wanted to give kind of a disclaimer, not all the episodes are like that, so bear with us. We're learning as we go here too.

Cameron Passmore: All right. Other upcoming guests on this podcast next week is Ludovic Phalippou on private equity. Two weeks after that is Ralph Koijen talking about demand system, asset pricing, and inelastic markets. Then two weeks after that will be Jay Van Bavel, the co-author of the book The Power of Us. He talks about how group identities affect our interpretation of reality.

Ben Felix: Jay's stuff was really good.

Cameron Passmore: He was great.

Ben Felix: His book was good and that conversation was a lot of fun.

Cameron Passmore: He's a super interesting guest.

Ben Felix: Ludovic was very good too.

Cameron Passmore: Absolutely. A nice review from Quinn Vickers from the state said he has interest in reading more. Consistently on the show, you discuss reading and reading habits. I often found myself chucked by the analysis paralysis, in that there is so much to read that I end up not choosing anything. But he asked if we can put copies or links to papers and books in the show notes or in the community, and they're both there. There is a book list in the community and I believe all the papers are linked in the show notes, right, Ben?

Ben Felix: Yeah. If you look in the YouTube notes for each show, they're in there.

Cameron Passmore: It's all there. That's a nice context recently. Mentor from The Netherlands on Twitter suggested that we connect with Vitalik Buterin, Ethereum fame, which I think you tried to reach out.

Ben Felix: Yeah. It's not going to happen. Not going to happen.

Cameron Passmore: We appreciate the suggestion of another avid reader.

Ben Felix: Not because we wouldn't. I want to be clear on that. I would gladly talk to Vitalik, if anybody knows Vitalik. I asked Cam Harvey, our past guest, because Vitalik wrote the forward to his book. Cam said he didn't know him well enough to make an introduction. But yeah, I didn't mean that as we would not talk to him. I would. I think he's actually in a lot of ways very thoughtful.

Cameron Passmore: Absolutely. Another avid reader, James on Twitter. He and I were competing for the most number of books to be read in the past 30 days. He asked me if audiobooks count. I said, of course, they count. I also heard from Cole from Seattle and Jody from Flint, Michigan who connected on LinkedIn. It's great to connect with both of you guys. If you want to connect with us, we're both on Twitter. Rational Reminder is also on Instagram. Don't forget all of our episodes are on YouTube, so you can follow us over there as well. Had a bunch of new people connect with me on Peloton this past week. I'm at CP313 and also #RationalReminder. I'm also on Goodreads. Did you hear the news from Angelica, Ben, that we now have the beverage, the canned beverage koozies in stock in the store?

I was wondering what happened to that order and the supply chain delays. It's been months. We ordered those I think in February. It's these little, everyone knows, little foam koozies to go over your drink can. They're available as of now, and the price is two for $15. But if you place any order in the store and just ask Jackie for a free drink cozy, she'll throw one in your order for free if you order something else, or if you order a couple of these, you'll get three. Those are pretty cool. Anything else?

Ben Felix: Nope. Let's go ahead to the episode. Welcome to episode 209 of the Rational Reminder Podcast.

Cameron Passmore: I think this is my favorite book review. You know that?

Ben Felix: You said that earlier. I haven't read your notes, so I'm looking forward to hearing it.

Cameron Passmore: This is such a good book, such an impactful book. I guaranteed Ben before recording this that he will enjoy this, because we've had a lot of discussions lately about this exact topic. The book is called Deep Work: Rules for Focused Success in a Distracted World by Cal Newport. Some people have asked where these books come from and the purpose of this podcast and for our company is to help people find and fund their good lives. The focus has been on bringing rational findings in the investment world. But as you know, we're reading all kinds of different stuff. If we think that a book can impact and help you find your good life, we like to share that information.

That's the motivation behind what I've been choosing to read. This book, as the author says, a deep life is a good life. A good friend of both you and me, Ben, DC recommended this book. DC is a very avid reader and a regular listener to the podcast. You remember when we talked about the book Stolen Focus earlier this year by Johann Hari, and that book highlighted why we are all so distracted and gave some suggestions how to improve your life and not be so distracted. Well, Deep Work is a book that explains why deep work is so important and how we have to get more of it.

By way of background, Cal Newport, I took a look at his background, he has a PhD in electrical engineering and computer science and is currently a tenured computer science professor at Georgetown University. He focuses on the intersection of digital technology and culture, published more than 60 peer reviewed papers, and is the bestselling author of seven books on subjects like deep work, digital minimalization, and how to regain attention. In short, I think he's saw that's worth listening to. The idea that he puts forward is this, a core ability that you need to thrive in the new economy is to be able to quickly master hard things, the ability to produce at an elite level in terms of both quality and speed.

That's his proposition. First, what is deep work? Deep work, he defines it as professional activities performed in a state of distraction-free concentration that push your cognitive capabilities to the limit. These efforts create new value, improve your skill, and, this is the key, are hard to replicate. The problem today is that knowledge workers are losing familiarity with deep work and for all kinds of reasons that we talked about before. Get this for a couple of stats. The average knowledge worker now spends more than 60% of the work week engaged in electronic communication and internet searching. 30% of the worker's time is dedicated to reading and answering email alone.

Talk about a killer of deep work. What this means is that most people are doing way, way too much what he calls shallow work, which is non-cognitively demanding logistical style tasks. The other problem is that it's really hard to unwind out of shallow work. All of this presents what he argues is an opportunity for people. He says the opportunity is this, it's what he calls the deep work hypothesis, which is the ability to perform deep work. That ability is becoming increasingly rare at exactly the same time that is becoming increasingly valuable in our economy. We need now more than ever people to do deep work. That's a consequence that few who cultivate this skill and then make it the core of their working life will thrive.

This is the opportunity. There's a huge need and opportunity for people to figure out the benefit of deep work and to pull it off in their day-to-day. He starts by explaining what he does to have more deep work. He builds his day around a core of carefully chosen deep work activities. And then he says there's some shallow activities he cannot avoid. He batches them into small what he calls bursts at the beginning and the end of his days. He's learned that for him three or four hours a day, five days a week of uninterrupted concentration produce a lot of valuable output. And that's very similar to what Gene Fama told us about back in episode 200. But you think about that paradox, right?

This is a time when more than ever this skill is needed, but there's more distractions than ever just in your day-to-day work, the day-to-day task that you do, or what do you call semi-distractions like Twitter and Instagram, where your phone's always beside you and it's so easy just to kind of check in and appear to be busy. To produce at your peak level, you need to work for extended periods with full concentration on a single task free from distraction. You and I have talked about that a fair amount lately, right? Meetings just break up that concentration. If it takes time, for example, for you to prepare a piece on the investment research for the podcast, it's very hard to do that when you're jumping in and out of other tasks.

Ben Felix: I would go as far as saying, it's not possible to do well, which is I think kind of like what Cal Newport's saying.

Cameron Passmore: Some of the most common workplace problems, running your data of your inbox feels good. It feels like you're completing stuff. It's not very productive. It gives you full sense of productivity. This one you might relate to, regularly occurring meetings for projects that fracture schedules to the point where sustained focused through the day, as you say, becomes impossible. And busyness as a rule for productivity, doing lots of stuff in a visible manner, not necessarily productive. If you can figure out how to do deep work, he answers, how it can make your life better. He talks about how our brains are constructed, such that our worldview is based on what we pay attention to.

Therefore, if you spend more time in deep work, your mind will understand your world as being more rich and meaningful and fulfilling, and your brain will have less time to notice the smaller and less meaningful stuff that might upset you. It's a win-win there. I think we talked about this before, but this is often referred to as the flow state. I think you talked about this in the good life, right?

Ben Felix: Oh yeah.

Cameron Passmore: Which is popularized by the psychologist Mihaly Csikszentmihalyi. He said the best moments occur usually when a person's body or mind is stretched to its limits and a voluntary effort to accomplish something difficult and worthwhile. He just passed away last year.

Ben Felix: Oh, I didn't know that.

Cameron Passmore: Yeah. Anyways, what can you do? Here's the takeaways for you. Here's the list of takeaways. What can you do to become a disciple of depth in a shallow world?

Ben Felix: Wait, wait, you skipped a great bullet point here.

Cameron Passmore: Fire away.

Ben Felix: Csikszentmihalyi put forth that jobs are actually easier to enjoy than free time because they have built in goals, feedback, rules, and challenges, all of which encourage one to become involved in one's work to concentrate and lose one's self in it. That's huge. You can't skip that.

Cameron Passmore: And it's easier than play. Getting into flow at work is much hugely getting into flow at play.

Ben Felix: Huh! That's super interesting. Free time, on the other hand, is unstructured and requires much greater effort to be shaped into something that can be enjoyed. It makes a lot more sense now why thinking about my week off I've been...

Cameron Passmore: Did I not say you'd like this? I did call it.

Ben Felix: You're right. I like it.

Cameron Passmore: All right. Here's your to-do or here's what you can do to get into deep work. First thing he says, you have to decide on your depth philosophy. There's four different philosophies. One is the monastic philosophy, so be like a monk. This is where you have a well defined professional goal, and then eliminate everything around you that happens to be shallow to become monk-like. Another one is bimodal philosophy. This is where you divide up time between work time and shallow time. This is exactly the model that ne Fama said. I want four hours a day. I don't care what time the day it is. I just want my four hours. It could be morning, afternoon. The other one is the arrhythmic philosophy, which is just make it a habit.

Every day from 8:00 until 12:00 is your deep work time period. You don't change it. 8:00 until 12:00. That's just the way it's going to be. Another one that he talked about that some people are very successful with is the journalistic philosophy, which is journalists have deadlines. They have kind of more chaotic schedules as he explains, so you kind of grab the time whenever you can. I know for me that will not work. I can't get into deep work like that. Number two, clarify your deep work rules and rituals deliberately, so how long, where you're going to be, what are the habits you're going to focus on, is your phone near you, what are you going to eat, what are you going to drink.

Number three, focus on the wildly important. He says try to say yes to the subject that arouses a terrifying longing and let the terrifying longing crowd out everything else. Find the wildly important. Number four, once you've identified a wildly important goal, you need to create a framework and cadence of accountability. Measure success and keep a compelling scoreboard. Don't take breaks from distraction. Instead, take breaks from focus time. Focus time is the focus. Quit social media. Decide in advance what you're going to do with every minute of your workday.

Do productive meditation, which is a period in which you're occupied physically, but not mentally, walking, jogging, driving, for example, and then focus your attention on a single well-defined professional problem. Here's another one, ask your boss for a shallow work budget. What percentage of my time should be spent on shallow work? I mean, what a great question. Do not reply to an email message if any of the following applies: if it's ambiguous or otherwise makes it hard for you to generate a regional response, if it's not a question or proposal that interests you, if it's nothing really good would happen if you did respond and nothing really bad will happen if you didn't.

Of course, there's always exceptions to these rules. They are just quick tips. Number five, be smart about deep working collaboratively. This you and I talked about last week. His point is, yes, it can work, but never forget that distraction destroys depth and deep work. He suggests to separate the pursuit of what many people talk about those serendipitous encounters in the office, separate that from deep thinking efforts collaboratively. Mixing them, he says, creates a sludge that impedes both goals. If it's mixing collaborative, call it what it is, that's what it is. If it's deep work that you want to do collaboratively, set the objectives and then leverage together using a whiteboard or something to solve a specific problem or challenge.

Don't expect the two to happen automatically. Anyways, bottom line, a commitment to deep work is, as he says, not a moral stance and it's not a philosophical statement. It's instead a pragmatic recognition that the ability to concentrate is a skill that gets valuable things done. Deep work is so important. We need it to solve big problems, and we also need it for personal fulfillment. Fabulous book.

Ben Felix: I agree. Lots of confirmation bias in there for me.

Cameron Passmore: Well, for both of us.

Ben Felix: All right. Should we move to following up on Rebecca Walker's episode and the interesting discussion that spurred?

Cameron Passmore: Sure.

Ben Felix: We knew, to be clear, we knew it was a different episode. We knew it was a different type of guest, all that kind of stuff. It was the most controversial episode, and I have specific measurements for that, that we've released so far. I'm measuring controversiality, I don't know if that's the right word, how controversial it was by the comments, the sharp division in the comments both on YouTube and in the Rational Reminder community. It was literally... Like I said earlier, there was comments saying, "This was the best episode ever, and I got my wife to listen to the whole thing," and there were comments saying not very nice things.

Cameron Passmore: Lisa really enjoyed it.

Ben Felix: There you go. And then also measured by likes and dislikes on YouTube. You can't see it in the public facing video, but in our back end, you can see the ratio of likes versus dislikes. This was by far the... Both on CSI and Rational Reminder, it was by far the most controversial from that perspective video that we've ever done, which is interesting, because none of it seemed overly controversial to me. Now, I do think it's an important topic, so we just wanted to address some of the feedback that we got. A common comment was that Rebecca didn't have evidence to back up her claims. I thought we would talk a little bit about some of the data that's related to some of the stuff that she talked about.

On financial literacy, in the data, and this is pretty conclusive across many, many studies, it's not a politically motivated statement. I don't consider myself to have very strong political leanings. I actually feel like I'm too uneducated on politics to lean a certain way. That's something that I should probably work on. Maybe I should have a political leaning, but I don't.

Cameron Passmore: That's a very interesting comment actually. There's a lot of humility in that.

Ben Felix: I don't pay attention to it. My dad's more knowledgeable about that stuff. When it's time to vote, I'll spend time talking to him to understand what the issues are and all that kind of stuff.

Cameron Passmore: But it's a good example of something that's incredibly complicated, so many constituents, and the issues are so complicated that so many people have such quick opinions. Like really?

Ben Felix: Yep. Anyway, I don't have any political skin in the game. I don't have an ideological stance on any of this stuff. But financial literacy and women, lots of studies. We can put links because people may want to review the data that we're talking about. We can put links in the show notes, as the reviewer asked. I've got all the studies here, but we can link them. What they show is that all around the world and in the countries that have been studied, and there have been studies in many countries, it's all through surveys, including in countries like Finland, which has a relatively equal society in terms of gender, there is a meaningful financial literacy gap between men and women. That's what the data say.

You can interpret it how you want, but that is what the data say. The gap in financial literacy, it's there in aggregate across all of the data, but it's also there within each financial literacy topic that's been included in these studies. It's also present across all of the different countries that have been studied, across income levels within the countries, and across different age groups within the countries that have been studied. No matter how you slice the data, this financial literacy gap between men and women seems to exist. There's a further gap for minorities, which is, again, something that Rebecca talked about and that data's all in these studies.

Women are also disproportionately more likely to indicate that they don't know the answer to specific questions, which is interesting, because I think it highlights the difference in confidence that other studies have shown that men can be overconfident when it comes to financial matters. But these studies suggest that women might actually be under confident, which comes with its own set of problems which we'll talk a little bit more about later. Women who are less financially literate are also less likely to plan for retirement and they're also less likely to be successful in sticking to a plan if they do plan. That has, I think, pretty obvious implications in the long run. Keep in mind, we're not talking about how things should be or what women should do.

This is completely separate from that. What did the data say? What is the status? Another big one is the gender pay gap, which is something that I'd always taken for granted. That's a fact. Rebecca said on the podcast, that was one of the things that people wanted us to push back on. And then there were some pretty I would go as far as saying vitriolic comments in the Rational Reminder community about this, about how there isn't actually a gender pay gap. It is kind of interesting. I wasn't expecting this to be a point of contention, because like I said, I've always taken it for granted. But like in Canada, for example, 2021 from Sizzix, Canada, the gender pay gap was 11% based on hourly pay in 2021 that was.

And then if you look at Ontario in 2020, for example, just to show a different measure, the hourly wage gap was the same, but the annual wage gap was 29% as opposed to 11% based on hourly because women work fewer hours than men do on average. I'd heard these data before and whatever. When Rebecca said that, it sounded fine, but there is some nuance. I learned this from these people pushing back in the comments. The gender pay gap is cited as those unadjusted figures that I was just talking about. It's like the average man versus the average woman, what is their income?

But you can adjust that number for things like hours worked, like I just said, but also for things like job title, education, experience, industry, job level. You make all those adjustments and the gender wage gap almost goes away. Almost. It doesn't go away. It's still there. But it's like in one sample of US data that I have, it goes down to about 1%.

Cameron Passmore: Fascinating.

Ben Felix: It is a big reduction, which is interesting. Now, I don't think that this means that the gender pay gap doesn't exist. It tells us that on the very specific basis of equal work for equal pay, there is a very small gender pay gap. But the reality is women and men don't tend to do equal work and they don't tend to work equal hours. Now, where this gets pretty messy and I think why some of these comments in the community were so heated is that this becomes very ideological very quickly. There are two perspectives on... Because now we have two data points. We have the gender pay gap average, uncontrolled pay gap it's called, and we have the controlled gender pay gap. When you see that, there are two ways at least that I've seen so far, two ways that it can be interpreted.

One way is that we live in a free market capitalist society and women are free to choose the work that they want to do. Because they're doing lower paying work, it must mean that's what they want to do. That's one argument. I personally think that sounds kind of crazy, but that's fine. The other argument, which I think sounds less crazy, keeping in mind that I hadn't spent any time thinking about gender equality issues until yesterday, and not that I hadn't spent any time, but not any serious time looking at any literature, the other argument is that gender stereotypes and social norms influence how women choose between career and family. For example, there's social pressure for a woman to stay home and raise kids and sacrifice her career, while the man works.

You can see those are two very different interpretations of the same data. On the one hand, women are making a free choice. On the other hand, there's societal pressure and stereotypes that result in them doing lower paid work. There is a ton of literature on this and all of it that I could find points to stereotypes and social norms driving the observed data. Not that women are voluntarily choosing to do lower paid work, which that sounds right intuitively. But like I said, there's lots of literature that, again, we can include links to. And then the other piece of that's interesting is that the gender pay gap and related is that the gender pay gap is a lot wider for women who have children than for those who don't.

Both the adjusted and unadjusted pay gap is wider for women who have children. Again, that doesn't answer are women doing that because they want to, because that's in their nature, or they're doing that because there's a social pressure to do that? Why does this matter? Why is this important to talk about? Why did we feel the need to address it? Women tend to live longer than men. They also tend to spend less time working, as we've been talking about. They also tend to have lower earnings while they're working. And because of that, they tend to have lower pension benefits. From a financial planning perspective, and this is something that financial planners have known for a long time.

I mean, I went to a CFA Wealth Management Conference, I don't know, six years ago now, and there was a talk on this. The financial planning issues specific to women that I just mentioned, that's nothing new, at least in the financial planning world. Empirically, financially savvy people are more likely to accumulate wealth, which makes sense. People with higher financial literacy are more likely to plan for retirement, and planning is a very strong predictor of wealth. Those who plan arrive at their retirement with two to three times the amount of wealth as those who do not plan. Financial literacy, it's also associated with higher returns on investments and investment in more complex assets like stocks.

I don't know how complex stocks are, but I guess relative to like a GIC or a savings account, I guess they are complex. Women tend to take less risk than men in terms of their equity exposure, and this is interesting, but that difference in risk aversion is significantly weakened when knowledge of financial markets and investments is controlled for. And that was a study that John List was a co-author of. We talked to him about that study when he was on our podcast.

More generally, so not speaking to equity exposure, but just to stock market participation in general is much lower among women than it is among men. Even in married couples, this is also very interesting and I think it probably speaks to the confidence, families with a financially sophisticated husband are more likely to participate in the stock market than those with a wife of equal financial sophistication. Interesting, right?

Cameron Passmore: That is interesting, yeah.

Ben Felix: This pattern based on the paper that I'm referring to, which is The Journal of Finance, is best explained by gender identity norms which constrain women's influence over intra household financial decision making. That's who wears the pants. Gender identity norms and intra household financial decision making in The Journal of Finance last year. As I've mentioned already, Barbara and Odean have a famous paper on overconfidence and they find that men tend to be overconfident and trade excessively.

They trade, in the Barbara and Odean, sample 45% more than women, which is kind of scary, given that men are the ones dominating household financial decisions, as we also just saw. A life cycle model simulation from one of these papers estimates that 30 to 40% of US retirement wealth inequality can be accounted for by differences in financial knowledge.

Cameron Passmore: Wow!

Ben Felix: We know from our podcast audience, because we have data on that, from, I mean, a reasonably large sample, because there are multiple tens of thousands of people that listen to our podcast, roughly 95% of our listeners are male. To the extent that we are providing financial education, we sure are not providing it proportionally to both men and women. I don't know what we could do to change that, but you can see that that financial literacy gap, if we're improving financial literacy, we're sure not helping with the gap, I guess is one way to say that. Now, I didn't come here with answers to all of these issues.

We are doing what we can, like I said, with financial education and getting women included in the community with episodes like the Rebecca Walker one that caused so much fuzz and with trying to get people involved in the goal survey and all that kind of stuff. But what I wanted to highlight is that when you look at the data, the problems that Rebecca brought up are real. She wasn't making stuff up to make an ideological or woke, as one commenter said, point. It's real stuff. All those papers I just mentioned are published in academic journals. I wasn't looking at blog posts. Anyway, I just thought that was... I thought it was worth mentioning because it caused so much fuss in the community and in the YouTube comments.

Cameron Passmore: That's good. Worthwhile bringing that data to the forefront. All right. Now you want to dig into housing?

Ben Felix: Yeah. We haven't talked about housing in a while, but there's one piece I've wanted to dive into for a bit. I had a bit of a competition between this and very long-term stock returns, like which one should I do? I think we'll do very long-term stock returns in a couple weeks or something. That is also very interesting. There's good data going back to the 1700s now for a lot of markets and there's a paper that... It was discussed in the Rational Reminder community a while ago, but it totally turns our understanding of stock and bond differences and expected returns on its head.

Cameron Passmore: And back to housing, there's so much going on now with housing. I mean, I was reading like how much the market is slowing, how many home purchases are not settling. It's big number right now too. How fast prices are dropping by home builders.

Ben Felix: I think that speaks to some of what I want to talk about in this topic, but what I called it is how much house should you optimally own. I think the thing that we haven't given proper coverage to in all the content that we've done on housing, and we've done a lot obviously, we haven't given enough coverage to the hedge property of owned homes and how that can play into the decision. We've, of course, explained that renting and owning can with I think very reasonable assumptions result in comparable wealth accumulation. We talked about in a different episode the fact that there's no or at least very mixed evidence on whether homeowners are happier than renters, whether they have a higher life satisfaction and life evaluation and all that kind of stuff.

That's mixed. Financially from a wealth accumulation perspective, non-issue. From a happiness perspective, non-issue or neutral issue. But that leaves a little bit of a puzzle, which is empirically why do people allocate such a huge portion of their wealth to owned housing? Now, while that seems like a puzzle, like why are people investing so much in this one single risky asset when renting is financially equivalent, I think that the unique properties that housing has as an investment hold the answer to the question. If you look at individual properties, they're extremely risky.

I mean, as Americans learned in 2006-2007 and as many Canadians, like you just mentioned, Cameron, are learning right now, I mean, some of the posts that you see on Reddit, Personal Finance Canada, it's got to be daily that you see posts about somebody's sale, not going through or their buyer is not able to close.

Cameron Passmore: I know cases of people did the buy side when the market was hot, then go to do the sell side for their place and they're caught in the gap. In fact, I know of some that ended upside down, smaller place, bigger mortgage.

Ben Felix: Rough. Risk, there's a lot of risk in owning individual homes, but homes can also behave like a risk-free asset. And that may seem paradoxical, but it depends on how you evaluate risk in each situation. If we take a little bit of a step back, housing can be... Or it is. It is both a consumption good and an investment if you own housing. Owning a home gives you the consumption benefit, but it also gives you the investment benefit. You're choosing to consume housing by owning the asset, and you're also choosing to invest in a home. Renting lets you separate those two properties out. When you rent, you're explicitly paying for the consumption and it frees up your capital to invest elsewhere.

Now, to understand how an owned home behaves as an investment, I think we have to think about a couple different portfolio theory perspectives, I guess. Individual homes are risky. Estimates from a couple papers that I've seen estimate individual home volatility. And that's important. Because if you look at a real estate index, it tends to be very smooth. That's for a couple reasons, like what we talked about with private real estate a couple weeks ago. There's a smoothing effect with private assets, problem number one, but nobody buys the housing index. Individual stocks are very volatile too, but it's a very easy to invest in a stock index, so that we don't care as much about individual stock volatility.

Individual homes, people don't typically buy a lot of them. They buy one. We care more about individual home volatility. That number estimates around 16% for individual home volatility, which again is going to be a lot higher than if you go and look at a real estate index. Risk as volatility, if we take that perspective, homes are risky. Whether that's the right way to think about it or not is an important question. Risk as volatility, of course, comes from Harry Markowitz's work in the 1950s on portfolio theory, where in his work, single period investors seek diversified portfolios that maximize their expected returns for a given level of variance or minimize variance for a given level of expected return.

The risk-free asset in that framework in Markowitz's portfolio theory is something like a 30 day Treasury bill, minimal volatility and low expected return. From the mean variance perspective, houses are super risky assets and they have low expected returns. I mean, we use for financial planning inflation plus 1%. In Ante Elmenen's book, he argues that that's too high. He says it should be 0% real expected return for real estate assets. You get the 16% standard deviation and the 0% real expected return, houses don't look so good as a mean variance investment. So then we're back to that puzzle of why would people invest this huge portion of their wealth in their home?

I think it requires intertemporal thinking, like we've talked in the past episode about the intertemporal capital asset pricing model from Robert Merton, where investors are thinking about multiple periods. The investors are concerned not only with their single end of period payoff, but also with the opportunities they will have to consume or invest the payoff in the next period. If we use stocks as an analogy for a second, if you invest in stocks for 30 days and they're down 10%, you might be sad from a mean variance perspective. But if you plan on holding stocks for the next 20 years, you might be happy that your expected returns have increased. You might even be happier if you're still employed and earning income and you can plow more money into cheap stocks.

That's the difference between single period mean variance thinking and intertemporal thinking. I think we have to talk a little bit more about portfolio theory for a second, but I will come back to housing. The 2001 paper from Campbell and Viceira, Who Should Buy Long-Term Bonds, and they show that the risk-free asset for a long-term investor with intertemporal consumption needs is an indexed perpetuity, which is an asset kind of like a bond that perpetually pays a steady stream of cash flows adjusted for inflation in the case of an index perpetuity. Now, the thing about perpetuities is that if you evaluate them over 30 day periods, if you give them the mean variance treatment, they're going to look extremely volatile and they're going to have low expected returns.

I mean, kind of like a long-term bond, I guess. And actually because perpetuities don't really exist readily today, an easier example to think about is probably real return bonds or long-term TIPS. Anybody can go and look at the data on that, they're extremely volatile day-to-day, but they pay a consistent stream of coupons, which in the case of the real return of the TIPS, they get periodically adjusted for inflation. For the long-term investor, those inflation adjusted coupons are about as close to an intertemporal risk-free asset as you can get, but you would never recognize that if you checked your account every day and saw the mark to market value bouncing around.

Cameron Passmore: Exactly.

Ben Felix: I think there's a very similar effect going on with housing. It's true that the value of individual properties can be volatile, but this only matters if you plan on staying in a home for a short period of time. For long-term homeowners, homes behave like a perpetual bond that's indexed to the consumption of that exact home. For a long-term homeowner, the homeowner is a risk-free asset that provides a perfect hedge against fluctuations in the cost of consuming that exact home.

Cameron Passmore: Obviously.

Ben Felix: Obvious when you say it, but not obvious to think about. I think my comment about that exact home is important because homes are heterogeneous. Every house is different based on its size, its location, access to schools, public transit. Everybody I think gets this. Every house is materially different. Even in a cookie cutter neighborhood, the house closer to the bus stop is better. The house that's not close to the busy intersection is better. They're all different in ways that can be meaningful enough to sway somebody's decision on where to live. The hypothetical perfect home, I don't think that really people can be happy anywhere, but that's not part of this discussion.

Cameron Passmore: Was that out loud?

Ben Felix: I was talking to my wife about that. In the last eight years, we've lived in three rented properties and the house that we own now. I don't think that our level of happiness has materially changed from one house to the other.

Cameron Passmore: Well, that's something Morgan household talked about I think it was with us with the average size of the house from 1950s to now has more than doubled, but people's happiness levels has not increased.

Ben Felix: Right. Yeah, that's a good one. That's a good one. Well, we've talked about before. There is stuff that I do like a lot about where we live, but I would be just as happy if we were renting. Anyway, that's not what we're talking about today. In the hypothetical perfect home to the extent that that does exist for somebody, it's not easy to replicate by switching to another home, obviously. For someone who wants to settle in a home that has been deemed perfect, owning provides a risk-free perpetual claim on that exact house where, of course, renters run the risk of having to move out and not find a comparable home. You know what? Even as a renter, like in my last house that we rented near Little Italy in Ottawa, we did really like that house.

In that case, we pushed for a three year lease, which we ended up having to break. We probably got lucky on the timing of breaking that too. But anyway, I think that there's definitely value in that stability if you find a home that you really like. But that point, so the hedging and the claim on that exact home together are really important. Because if a renter could consume housing, like I talked earlier, by paying rent and they could invest in like a Canadian residential REIT. And that looks pretty similar to consuming a home and investing in Canadian real estate, arguably even better. Because in the case of the REIT, you're diversified.

It's eliminating the idiosyncratic risk, but it does not and it cannot replace the risk-free consumption component of consuming the exact home that you want to live in. Now, these aren't really my ideas. I took them all from Sebastien Betermier's paper, which we did talk to Sebastien about briefly when he was on our podcast. It's from their 2020 paper, Why Do Homeowners Invest the Bulk of their Wealth in their Home? And that was from Barras and Sebastien Betermier. They discussed theoretically and showed empirically that households invest in housing because they value its unique investment features, which is what we've been talking about.

They find that homeowners with a licensed occupation, and Sebastien mentioned this when he was on the podcast, but I didn't really get it until I went and reread the paper, homeowners with a licensed occupation invest more in housing. Oh yeah, it was in their paper, but I had to go and read because they said motivated by this paper, we're looking at licensed occupations. I read that in his paper and I guess glossed over the motivated by. This time I went and looked at the paper that it was motivated by. The idea was that people in licensed occupations are constrained in their geographic mobility, or at least more constrained in their geographic mobility, than somebody in a different profession.

Cameron Passmore: Interesting.

Ben Felix: Right? You think about it like a... I don't know doctor.

Cameron Passmore: Doctor.

Ben Felix: I don't know if a doctor how good of an example of that is because they can presumably move around to different hospitals and stuff, but you can see how it kind of makes sense. And then the other one was kids. Homeowners with several children, in particular young children, they similarly purposely choose to invest more in housing. The theory is because they generally have limited flexibility to move, but empirically that is true. People with licensed professions and people with numerous young children tend to invest more of their wealth into housing. The other interesting point here is that less wealthy households also choose to allocate a greater proportion of their wealth to housing.

They say that's consistent with a different paper, which suggests that less wealthy households have a low tolerance for risk and therefore tend to invest in safer assets. In this case, the house being the hedge asset, it is a safe asset. As I just kind of mentioned, all of those findings support the idea that housing is treated by investors as a risk-free asset, which is why they're willing to allocate so much to it, particularly if they're risk averse or have high hedging demands because they don't want to move around for other reasons. So then there's a 2005 paper, Owner-Occupied Housing as a Hedge Against Rent Risk.

In that paper, Sinai and Souleles show that the risk of owning declines with the household's expected horizon in its house and with the correlation and housing cost and future locations. Renters are subject to fluctuations in rent, which I think people are feeling now. That can be thought of as the spot price for housing services. Owners lock in future housing services cost by paying the known upfront cost of a home. They're, again, to use the analogy, buying a housing perpetuity, which is going to deliver a guaranteed stream of housing services. You've got your volatile rents bouncing around over here, but the person who bought, they paid one upfront price and now they're kind of good.

But the trade-off, of course, and again, as we're seeing now in Canada, is that the owner faces asset price risk if they need to sell the home. But the longer that they live there, the lower that risk becomes. The price risk is also low if the owner's moving within real estate markets that are perfectly correlated. Though I think based on what we're talking about with the heterogeneity of properties, I think that's probably a pretty big assumption. Like what is a perfectly correlated real estate market? Even within Ottawa, you could probably find like detached homes versus condos or Barrhaven versus Stittsville. Prices are probably moving.... It's probably not perfectly correlated. But anyway, with a higher correlation, I guess the risk of owning decreases even if you don't have a long horizon.

I think when you take those different perspectives, there's no clear winner in terms of renting versus owning. I think all of the papers that I read for this come to the same conclusion. But households have to trade off the rent insurance and the perfect home benefits of owning against its asset price risk. I think which consideration dominates that evaluation is largely going to be a function of the expected duration of the stay in the home or the correlation, I guess, of the market between where you're currently living and where the future home is going to be. For a short stay, rent is less risky.

If you sign a one year lease, there's not a whole lot of risk for that year and even probably for the next year, even if I think I saw it's going to be a 2.5% rent increase this year or something like that. For a year, that's even not so bad. But for 25 years, if rent starts increasing at 3% a year, all of a sudden that hurts quite a bit more. I think rents are risky in the long run. Owning is safer, but it's the reverse over shorter periods of time. If rents are riskier in a given location, if there's a lot of rent volatility or if rents are rising rapidly in a given location, owning should be more attractive. I guess like holding duration of stay in a home, constant. If there's more rent risk, you'd have more of a preference to own, like all else equal.

But housing should also be more expensive if rents are more volatile because the hedging cost would be expected to be higher. I think this perspective also helps to explain why the expected return on housing is low, because houses are hedged against future housing costs and hedge assets typically have low expected returns, just kind of like with the perpetuity that we talked about earlier. But anyway, I think this hedging perspective gives us another tool to think about the rent versus buy decision. We have from the perspective of wealth accumulation, just like can you end up equivalently wealthy renting versus owning without thinking about rent risk and all the hedging stuff that we just talked about, renting and owning can be equivalent.

That's all we've been talking about for ages, and that's the 5% rule idea that we came up with. From the perspective of well-being, like I mentioned at the beginning, people are no better or worse off whether they rent their own. From the perspective of hedging, buying a home is like buying a perpetuity that's perfectly indexed to the cost of living in that exact home that you want to live in, which can be very interesting, but hedge assets are not always good because they have low expected returns. And from a mean variance perspective or just in the short term, they can be very volatile.

If you're housing liability changes, you've bought this perfect hedge asset for your current housing liability, but if you're housing liability changes because you're moving to new location or whatever, the asset can become risky. The price risk can show up and be painful, which unfortunately, I think a lot of people are going to be feeling right now. To generalize a little bit, people who are risk averse and intend on staying in one place for a long time or people who are attached to a specific home for some reason, I think that tilts the scale more toward ownership, all else equal.

Cameron Passmore: It's a really interesting perspective. Think about the perpetuity angle, because that's what the home is. It's a perfect match for the lifetime consumption. Does it demonstrate how important it is to think about what sort of house is a perpetual desire for you? You get out that hedonic treadmill of always getting a bigger home and flipping into a bigger home.

Ben Felix: Yeah.

Cameron Passmore: Just a neat way to think about it.

Ben Felix: Well, yeah.

Cameron Passmore: To keep the goal post from moving. Because owning it... I mean, the cost of switching homes is so expensive with the real estate fees and all the friction that goes on to maybe you're more inclined to stay put and stop moving your lifestyle goal post. I mean, that's been my reality. I'm in the same house now for 19 years, right? My lifestyle home cost has not changed.

Ben Felix: Right. It's been a good hedge, right? It's been a good hedge because housing costs have gone up a ton, especially recently, but you're fully hedged against that.

Cameron Passmore: Fully hedged, but it's also the same house that I've been in for 20 years, which I'm thrilled with. I have no desire to move. But it's interesting how it kind of forces you to not let it drift with... Potentially keeps you from drifting with your... If you have a rise in income.

Ben Felix: The hedge property does.

Cameron Passmore: Yeah.

Ben Felix: I don't know. I think a lot of people climb the property ladder, so to speak.

Cameron Passmore: I'm just saying in my case, in my case, I locked in that lifetime perpetuity housing cost 19 years ago and my income's gone up. If it has gone up in that period, that theoretically gives you more freed up income to save elsewhere.

Ben Felix: If you stay in the same house like you have.

Cameron Passmore: If you stay in the same house.

Ben Felix: Yep.

Cameron Passmore: It's really cool yo think of it that way.

Ben Felix: I'm pretty sure that if I were still... Well, I was in a three year lease, so I would've still been hedged. But I think the cost of renting the house that I was previously living in has probably gone up recently because I know rents have been going up a lot.

Cameron Passmore: Well, especially when you break the lease, they get a chance to reset it, right? You're not bound by rent controls.

Ben Felix: Yeah, oh, yeah. Yeah, exactly.

Cameron Passmore: I'm not an expert in tenant law.

Ben Felix: Well, either way. I guess we'd be coming up on our third year in that lease pretty soon here. Anyway, I don't mind being hedged even though from a mean variance perspective, my hedge may not have paid off. I don't know. I don't know what real estate prices have done where I live, because I'm not checking, because I'm not moving.

Cameron Passmore: I'm not moving. Doesn't matter. Awesome. That was great. Okay, last call. Anything?

Ben Felix: No, I think we covered off everything that we wanted to cover off.

Cameron Passmore: Cool. All right. Well, have a good vacation. Everybody, thanks for listening.


Referenced:

Women and Financial Literacy

The gender pay gap

Social pressure and the pay gap

Gender, Financial Literacy, and Financial Planning

Racial Inequality


Participate in our Community Discussion about this Episode:

https://community.rationalreminder.ca/t/episode-209-optimal-allocations-to-owned-housing-gender-equality-in-financial-planning-discussion-thread/18051

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Deep Work: Rules for Focused Success in a Distracted Worldhttps://amzn.to/3IBvXcW

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Benjamin on Twitter — https://twitter.com/benjaminwfelix

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'Foundations of Portfolio Theory'https://www.jstor.org/stable/2328831

'Who Should Buy Long-Term Bonds?'https://www.aeaweb.org/articles?id=10.1257/aer.91.1.99 

'Why Do Homeowners Invest the Bulk of their Wealth in their Home?' — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2776350

'Owner-Occupied Housing as a Hedge Against Rent Risk' https://academic.oup.com/qje/article-abstract/120/2/763/1933972

'Twin Picks: Disentangling the Determinants of Risk-Taking in Household Portfolios' — https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12125