The myths of real estate investing
Author: Sound Choices
June 21, 2018
The content in the below article is meant for Canadian investors only.
In this series of articles, we discuss how investing in real estate over equities is not as black and white as many people would believe. There are myths around real estate that need to be addressed when considering real estate as a home or an investment property.
Myth: Real estate always goes up
While we have seen interest rate rises three time over the last year, they are still quite low from a historical standpoint. That’s part of what’s driven prices up over the last few years. These interest rate rises have had an impact on slowing some markets, but there is still a perception that even at today’s rates, people can afford to take on a bigger mortgage. That may be true for some, but from a risk management perspective, there are concerns to keep in mind.
Reality: Real Estate Has Seen its Ups and Downs
Now let’s look at the reality. Robert Shiller, a Nobel Prize winning Economist, tracked U.S. home prices and concluded that, when housing prices from 1890 to 2010 are adjusted for inflation, real growth was barely above inflation.
The Canadian market tells a similar story. This table shows the real returns of Canadian real estate by cities after inflation.
Both Toronto and Vancouver had negative returns through the 70s – negative 4.5% and negative 3.2% real return annually respectively. So, even though real estate prices were going up in the 70s, they weren’t keeping up with the rate of inflation. If you look at the far right column, Toronto has a 0.4% real return after inflation over 40 years while Vancouver had a negative return of -0.7%.*
|Average Annual Percent Increase (after inflation)|
*Source: 2004 Clayton Research based on data from Statistics Canada and CMHC. Based on a typical newly built single/semi-detached house.
We are still experiencing price volatility today. Not all markets across Canada are booming like Vancouver. Calgary and Regina, for example, are slightly down from the year before.
Year-over-year price difference
|Greater Vancouver Area||14.3%|
|Greater Toronto Area||-5.1%|
Source: The Canadian Real Estate Association, as at April 30, 2018. MLS® HPI Benchmark prices, except for Canada, Winnipeg and Quebec CMA, which display average prices.
Myth: Real estate provides better returns than equities
The headlines tell us how real estate is hot and many cities across the country have experienced accelerated growth in their respective markets over the last few years.
But have they outperformed the equity markets?
Reality: Real estate underperforms equities
Even with major market corrections, the Canadian stock market has more than doubled the growth of the housing markets in Vancouver and Toronto.**
**Source: CREA, Morningstar Direct, and Quebec Federation of Real Estate Boards, December 31, 1980 to December 31, 2017. Based on a $100,000 initial investment into each market on December 31, 1980.
Talk to your financial advisor today about how real estate fits in your overall portfolio. And stay tuned for Part 2 in the series – Renovate or RRSP?
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