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Garry Marr – Financial Post
North American stock markets continue to reach new highs every day but don’t tell anybody in organized real estate about it.
It’s not something the industry wants to hear.
But here you go: By the end of last year real estate prices had climbed about 85% over the previous decade, according to the Teranet/National Composite Bank House Price Index.
Stocks? The TSX/Composite Index has had a total return of about 141% during that period or about 9% annually. Go back 20 years and stocks still return more than 9% annually over the period.
What does that say about housing? Even in one of the best bull runs for the sector, it still gets beat by stocks.
Comment: But that is not a fair comparison, you can live in your house. You would have to deduct housing costs from any stock profits to keep it fair. Housing is also tax-free, investment income is not. It is really an apples to oranges comparison. And a moot one to boot.
And what do you do next with just about everybody predicting the best hope for the Canadian housing market is sideways performance with price gains perhaps slightly ahead of inflation?
Comment: Yeah, predictions of 2–3% price increases nationally and 3–5% in Toronto – that is simply upwards, not sideways. The “25% price drop” kooks can safely be ignored.
Statistics Canada says half of our wealth is now tied up in property. Clearly, many of us have well exceeded the 30% to 50% range financial advisors often suggest as the appropriate portion of assets to be held in bricks and mortar.
Comment: A house is not an investment, it is a home!
No one is saying real estate prices are going to collapse soon, but the argument that it’s a stronger bet than stocks is something realtors are going to find very hard to make.
Comment: No one makes that argument. You are fighting a one sided battle here, no one is opposed.
Simon Côté, managing director of risk management solutions with National Bank, said the Teranet/National index is a good barometer of real estate prices because the methodology looks at repeat sales but removes results such as a home that sells twice in a short period and homes that sell above a maximum and below a minimum price.
“The index is not meant to calculate the price of shacks or mansions,” says Mr. Côté. “I think if you want to compare the index to another asset class, it is a good representation.”
If you slice the numbers a different way, real estate might do better. For instance, in a hot market more expensive homes trade more often and that is going to boost average price and create a better view of housing.
Comment: Not sure about that. Toronto is changing, there are more condos now, which have lower prices, which is pulling the average down for the city as a whole. Take the east side, in the C08 district, average prices are actually lower now than they were 20–25 years ago – because of all of the condos. It used to be all freehold homes then, which tend to sell for more. Add in a ton of $250–350,000 condos and it dilutes all the $900,000 Victorian house sales.
Part of the reason real estate is perceived as the stronger investment is it just doesn’t seem to go down in price – at least for a generation of Canadians.
Comment: Or ever. Toronto average price was $21,360 in 1966 and $543,838 as of May 15th. That is more than a single generation… My grandmother bought her 2-bedroom storey-and-a-half in 1956 for $5,000 – which is only $43,500 in today’s dollars. Two houses right near hers sold for $520,000 and $521,000 about 12 months ago. I now have kids, so that is 4 generations that have seen a house rise 10,410% – yes ten thousand percent.
For the past decade and a half there have been few troughs, other than the one in late 2008 that saw the Teranet index drop 8.5% in eight months. It has since recovered.
Doug Porter, chief economist with Bank of Montreal, noted any comparison with stocks will depend on the period you look at because of the volatility in that asset class.
The fact there hasn’t been those huge variation in valuations of housing might also be the very reason that people continue to believe the line that real estate is the better investment.
“Bear markets in real estate are much rarer than bear markets in equities,” said Mr. Porter. “That generally more stale backdrop tends to put them in a more stable light.”
Real estate also generates a better perception because people tend to buy and hold it, says Ted Rechtshaffen, a certified financial planner and president of TriDelta Financial.
Comment: This is why this is a silly comparison. Houses and stocks are not really the same sort of thing.
“Buy Royal Bank shares and don’t trade them for 20 years and see how you do. People don’t think of these things because it’s too easy to trade a portfolio. Over a couple of years things turn over and you don’t see that same sort of progression,” said Mr. Rechtshaffen, who acknowledges real estate comes with a major advantage of being exempt from capital gains taxes for principal residence and an ability to leverage 95% debt to 5% equity with government backing.
Comment: No one is deducting commissions, trailing commissions, management fees or any of that from non real estate investment. Or the taxes levied on investment profits. I bet if we take all of that off, the 9% return from stocks would be a lot closer to the 6.13% annual return on Toronto real estate since 1996. What are we going to end up arguing, 1%? 1.5%? Is it really THAT big a deal?
But he adds people also don’t consider the transaction costs of exiting any sort of real estate investment. They can easily add up to 10% based on real estate commissions, land transfer taxes and legal fees – a trailer fee that would lead to revolt among mutual fund investors.
Comment: NO. That is NOT right. When you sell, you pay commissions, which are in the 3.5–5% range now. When you buy, you pay land transfer tax, maybe 1.5–2%. Add in $1,600 for a lawyer and that is it. NOWHERE near 10% – but that does not suit the negative narrative… which is why you always hear these bizarre and inflated numbers. With some mutual find fees around 1.5%, buying real estate costs around the same as buying into a top fund.
The planner thinks there will have to be a major real estate crash before people turn their backs on the asset class. “Canadians are very conservative,” he says. “If something goes down, they are afraid of it. It would probably take two years of declining drops [in real estate] to get people to think stock markets are better than real estate.”
Comment: Which will never happen.
None of this is to say they people should sell their homes by any stretch, especially considering the above noted costs of doing that.
There is something to be said for the stability that real estate brings and the forced savings it creates through a mortgage – money many people would burn through even if they take what is usually the cheaper option of renting.
Comment: Renting is not cheaper, not in the long run. I can prove it, read back an article or two and I do just that. No one who as ever said renting is cheaper has been able to prove it mathematically.
But that implies viewing real estate as not just an investment but something you will live in and that makes it ultimately something you consume, making any increase in value a bonus.
But as an investment it rarely performs better than stocks. It just doesn’t over the long run. It doesn’t matter how often you are told otherwise, it won’t make it true – something that should become clearer as real estate price increases slow.
Comment: But I have shown that the difference is only around 1% or 1.5% – if you hold both for 15–20 years. A lot of people lost a lot of money dumping stocks in 2008 and 2009…
Contact the Jeffrey Team for more information – 416−388−1960
Laurin & Natalie Jeffrey are Toronto Realtors with Century 21 Regal Realty.
They did not write these articles, they just reproduce them here for people
who are interested in Toronto real estate. They do not work for any builders.