Why Wealth Managers Must Rethink the Role of Primary Residences

Jul 9

The Rationale for Classifying Primary Residences as Behavioural Alternative Investments

Most people treat their homes as investments. Most advisors treat them as consumption. This disconnect undermines trust, creates blind spots in financial planning, and ignores the largest asset on many household balance sheets.

While consumers see their homes as long-term investments with growth and income potential, wealth managers typically exclude them from asset allocation, citing liquidity and rebalancing constraints. This paper proposes a middle ground: classify the primary residence as a Behavioural Alternative Investment, which captures its strategic importance while preserving the integrity of liquid portfolio models.

The Disconnect: Consumer Beliefs vs. Advisory Practice

The persistent exclusion of primary residences from wealth planning frameworks creates a dangerous blind spot. For clients, their home is frequently their largest, most leveraged asset and a cornerstone of their financial identity. By dismissing its investment characteristics, behaviours like strategic purchasing, leveraging, and income generation, advisors fail to address the actual concentration risk clients face (exposure to local property markets and interest rates) and miss opportunities to optimize a critical wealth driver.

This disconnect erodes trust, as clients perceive their advisor is ignoring their most significant financial commitment, potentially leading to poor decisions about equity optimization, financing, up/down-sizing, and overall risk management. Ignoring this $288 trillion asset class is no longer tenable in holistic wealth management.

Consumer Reality

79% of U.S. buyers view their home as a sound investment; 39% say it outperforms stocks.
41% of Canadians cite investment potential as a key motivator; 79% believe homeownership builds long-term value.
34% of renovations add rental suites, transforming homes into income-generating assets.

Advisory Orthodoxy

Primary residences are often omitted from investment models, justified by:

Illiquidity and rebalancing challenges
Modest long-term returns (~1% real return)
Emotional attachment and behavioural biases
Risk of over-concentration in a single asset

Why Homes Function Like Investments

The conventional wealth management view often categorizes the primary residence as a form of "consumption," a necessity akin to transportation or utilities. This classification, however, fundamentally misrepresents its economic role and ignores the demonstrable financial behaviours and characteristics homeowners exhibit.

A primary residence is not merely shelter; it operates as a complex, dual-nature asset, fulfilling a fundamental human need while simultaneously functioning as a strategic tax-advantaged wealth-building vehicle.

The false dichotomy between "home" and "investment" can be broken down with three interconnected pillars of evidence: observable investment behaviours homeowners actively engage in, the core alternative asset traits inherent to residential property, the tangible financial implications that accrue to owners, and the critical risk exposure it creates.

Together, these facets reveal why excluding the primary residence from the conceptual framework of investment, despite valid operational challenges in portfolio management, constitutes a significant oversight in understanding the true dynamics of household wealth.

Observed Investor Behaviour

Timing purchases to market conditions
Maximizing leverage through mortgages
Monitoring appreciation
Using homes for income (e.g. secondary and rental suites)

Alternative Asset Traits

Inflation hedge
Tax advantages (mortgage deductibility in the U.S., tax-free gains in Canada/UK)
Low correlation with public equities

Financial Implications

Avoiding rent is a form of imputed income
Rental income supplements cash flow
Capital appreciation contributes to long-term wealth

Risk Exposure

For most, the home is the largest and most leveraged asset
Ignoring it masks the real concentration risk
Fiduciary duty demands a more holistic risk-return framework

Countering the Conventional Objections

Wealth managers' exclusion of primary residences rests on several well-established, yet ultimately incomplete, arguments. While concerns about liquidity, rebalancing complexity, modest historical returns, and emotional bias possess a superficial appeal, they fail to justify the total omission of a client's largest asset from holistic financial advice.

While these are practical challenges to be navigated within an advisory framework, they are not insurmountable barriers warranting outright neglect. By examining each objection through the lens of total wealth management and fiduciary responsibility, we reveal a path towards pragmatic reconciliation between operational realities and the imperative to acknowledge the primary residence's profound financial significance.

Illiquidity: While illiquid, residential real estate is often more liquid than commercial property, an asset class commonly included in portfolios.
Rebalancing Issues: Exclude homes from dynamic portfolio rebalancing, but include them in advisory services, net worth assessments, financial and strategic risk planning.
Lower Historical Returns: Clients tend to overestimate home returns. Advisors can help correct misperceptions and set realistic expectations with hard data. Instead of presenting a philosophy on property as an investment, show them the projected ROI.
Emotional Bias: All assets, not just homes, are subject to behavioural pitfalls. Advisors routinely help clients navigate bias in stock and bond markets. Clients would also benefit from a seasoned navigator for their property assets.

A Proposed Framework

The preceding analysis reveals an unsustainable paradox:

Consumers demonstrably treat their primary residence as a core investment and crucial wealth pillar, while traditional wealth management frameworks, constrained by legitimate operational complexities, systematically exclude it.

This disconnect undermines trust, creates planning blind spots, and ignores a client's most significant risk exposure. Merely acknowledging the problem, however, is insufficient.

Advisors need a practical, compliant framework that reconciles consumer reality with advisory practice.

We propose classifying the primary residence as a "Behavioural Alternative Investment." This innovative categorization is not a mere semantic shift, but a fundamental reorientation designed to bridge the gap. It formally recognizes the asset's investment characteristics and strategic importance to the client while pragmatically addressing the liquidity and rebalancing constraints that necessitate its exclusion from dynamic portfolio models.

The framework provides the conceptual clarity and operational mandate needed to integrate property meaningfully – and realistically – into holistic wealth management.

Making It Operational: Actions for Wealth Advisors

To implement the Behavioural Alternative Investment classification effectively, wealth advisors must translate this framework into concrete, actionable strategies across key property finance decisions.

Decision Support: Rent vs. own analysis; property ROI comparisons
Financing Optimization: HELOC vs. mortgage; tax-efficient structuring
Equity Access: Planning for downsizing, rental conversion, or reverse mortgages
Risk Management: Scenario planning for interest rate hikes or income shocks
Performance Tracking: Integrate home value and debt into dashboards

Technology and specialization are essential. Advisors can't be expected to do this alone. AI tools or dedicated property specialists can bridge the knowledge gap.

Client and Advisor Benefits

Adopting the Behavioural Alternative Investment framework creates a demonstrable win-win: clients unlock tangible value and confidence through optimized property decisions, while advisors strengthen relationships and achieve core business objectives by delivering truly holistic advice.

Clients	Advisors
Better financial outcomes More informed decisions Reduced risk and greater confidence	Stronger client relationships Differentiated service model Increased share of wallet Relevance with the next generation

The Stakes Are High

Global residential real estate is a $288 trillion market. It’s too large, too personal, and too financially impactful to be ignored. As $124 trillion in wealth transfers generationally, advisors who fail to engage with property risk falling behind.

By formally recognising the primary residence as a Behavioural Alternative Investment, advisors can close the gap between consumer belief and professional practice. The result is better planning, stronger fiduciary alignment, and a more complete picture of client wealth.