The actuarial profession continually evolves yet one principle remains constant: actuaries serve people, using their skills to build financially sound systems that support the greater good. Following the COVID-19 pandemic, and with rapidly shifting demographics, I strongly believe actuaries can contribute to addressing one of Canada’s most immediate challenges: a housing crisis that could fundamentally change living standards, and not for the better.
Few actuaries are familiar with the multi-family residential real-estate industry, however. While some may own small rental properties or manage units informally, understanding this market from an outsider’s perspective is no different than for a pension actuary switching to the casualty side: it’s a new world to explore and understand.
Consider a few examples of actuarial value-add that could be brought to the real-estate industry.
Asset/portfolio valuation
Asset valuation methods currently used by appraisers are often overly simplistic, creating variation and possible misinterpretation in expected value intervals. While it should be acknowledged that value is subjective – relegated to the eye of the beholder – real-estate appraisals should strive for granularity and materiality, something the current system may lack in terms of precision and nuance.
Central to any asset valuation is a strong underlying discounted cash-flow model. Any variable or assumption heavily influencing the result should be considered and explicitly modelled. Rules of thumb should only be used in concert with other valuation methods.
One thing that the real-estate and insurance portfolio have in common is that they are both very illiquid assets. Real estate requires strong analytical valuation methods, not solely relying on recent comparable sales. However, appraisers, despite using three different methods in their asset valuations, mostly rely on a comparable analysis to derive a capitalization rate. Recently sold comparable buildings are not always discernible, and subjectivity can enter appraisal reports when accounting for “comparable.”
While a separate article could explore differences in the results between a cash-flow model developed by an actuary versus those used in real-estate appraisals, it’s enough to highlight here that this is an area in which actuaries could add value.
Reserving principles
Traditional actuarial reserving methods and principles are far safer than pay-as-you-go models because they effectively capture the future instead of hoping new entrants will subsidize older ones. The absence of effective reserving puts undue pressure on real-estate and housing cost structures.
A major obstacle in the housing crisis is the lack of built infrastructure (such as water and wastewater infrastructure) to support new housing in municipalities. In Quebec, for instance, the number of cities pausing new construction is increasing each week.
“In fact, infrastructure needs and costs can be actuarially modelled well in advance, based on demographics and construction costs, among other factors.”
Investment policies applied on reserves could be managed at the provincial level by the same entities that manage national pension funds (RRQ in Quebec, CPP in other provinces). Such a reserving model would compel cities to budget an appropriate contribution, like in any pension plan. We’d be in a much better position to face the current housing crisis in Quebec as a result.
While the infrastructure crisis is immediate and reserving may not offer short-term redress, actuarial principles can aid long-term planning, putting cities on a more sustainable track. Actuaries could be key players in establishing and applying reserving principles to fund future infrastructure needs.
We could apply the same principle to condo fees for a condominium association. Currently, despite laws recently put in place in Quebec to strengthen condominium solvency, funds set aside to maintain condo buildings are insufficient and the methods to determine annual contributions are approximate at best. The CIA explored this issue in its insight statement and accompanying research on condominium reserve funds, offering actuarial approaches that would help improve financial planning and solvency in this market. The formula for condo reserving is simpler than for city infrastructure – there are fewer variables at play – but the same actuarial reserving principles could mitigate the housing crisis now taking shape.
Risk management
At the core of real-estate assets, there is a need for a niche expertise built and maintained by the actuarial profession: asset-liability matching. Depending on the specific debt structure and loan-to-value ratio, which we can identify as leverage components, a real-estate asset can be materially sensitive to movements in interest rates. Oldest trick in the actuarial playbook: duration of assets versus durations of liabilities. Any actuary in the traditional areas of life insurance and retirement has studied these dynamics, whether in theory or practice.
In a portfolio of real-estate assets, liability cash flows are incoming every month. Some smaller, some material in size. Costs arise from the need to maintain buildings, whether it be a minor water leak in an apartment or periodic roof replacement. Servicing short-, medium- and long-term debt is another concern altogether.
On the asset side, revenues from rents are monthly. There is also a liquidity component that can be used to match larger expenses or debt maturities: asset refinancing, whether in the present or future, to match a liability cash flow. The amount of refinancing available at any given time depends on the net operational profit of the building, the interest rate, amortization and the debt coverage solvency ratio (a method for measuring the provision for adverse deviation), ensuring the capacity for profit to repay debt servicing without any default. This is precisely where the leverage structure becomes critical, mirroring the dynamics of a life insurance company. The only difference is the product itself and the claim pattern. Instead of paying mortality claims, construction and interest costs on leverage are paid. Insurance companies use insurance premiums as long-term leverage the way real-estate investors use debt structure from banks and, supported by the Canada Mortgage and Housing Corporation (CMHC), to invest in housing and commercial real-estate assets.
This reality makes interest-rate movements central to the risk management of real-estate assets. With post-COVID market volatility, the need for readily available hedging products and prudent risk management is greater than ever. Who better than actuaries to reshape risk management on real-estate portfolios?
Pricing and design – funding affordable housing
In 2022, the CMHC came up with the Mortgage Loan Insurance Select program, MLI Select, the first financing product to include pricing components for the environment, social and governance impacts of a multi-family real-estate asset. The goal of MLI Select was to encourage affordability and climate compatibility. While innovative, from an actuarial perspective its design could have better supported its goals.
Actuaries are skilled at designing, pricing and evaluating complex financial products, where small details can materially affect outcomes, including claims, capital or financial sustainability. Granularity would be applied when needed; aggregation where most of the details have no material impact on the results.
There are untapped opportunities for actuaries to design and price innovative solutions to address the housing crisis. For example, housing-affordability bonds could be issued by governments and cities, which would replace some of the equity used in land development and construction. The expected return on equity on new housing construction can be as high as 15%, depending on the type of project (considering materials, parking amenities, etc.), and a portion of the resulting profit could be reinvested through targeted housing subsidies (such as affordability coupons) delivered via well-managed public or non-profit programs. These subsidies would help low- and moderate-income households access affordable housing while recycling private-sector returns back into social outcomes.
Given the CMHC’s foundational role in Canada’s housing infrastructure and its insurance-related work, there’s strong potential for greater collaboration with actuaries in areas like pricing, product development and risk analytics. Actuaries presently contribute in these areas at the CMHC; expanded involvement from the profession could further enhance this work.
“A unique opportunity is emerging in Canada’s housing ecosystem for actuaries to do what they do best: price and evaluate risk, and design sustainable financial systems. It’s time for actuaries to step in: the housing crisis is now, and stakeholders need the profession’s help.”
Philippe Foisy, FCIA, FSA, is President and Founder of Beatimo, a Quebec‑based real estate investment, development, and consulting firm that supports investors in managing portfolio performance and risk. An actuary with over 10 years of experience in insurance and investment products, Philippe brings actuarial rigor to real estate decision‑making, with a long‑term vision for improving housing systems, sustainability, and affordability across Canada.
This article reflects the opinion of the author and does not represent an official statement of the CIA.