• The Canadian housing market remains among the most expensive in the world and has put up strong returns over the past 20 years.
• It may surprise many to learn that the TSX has outperformed house prices over that same time period.
• There are stark differences in the investment merits between the two, from the amount of leverage available to tax treatment and liquidity.
• Since the COVID peak in 2021 house prices and stocks have diverged as interest rates have weighed more heavily on home prices.
• Interest rate relief from the Bank of Canada should benefit both of these markets, and we expect more to come after last week’s initial rate cut.

Interest rate cuts have arrived…

The financial media had been building in anticipation of an eventual interest rate cut from the Bank of Canada, and last week that came to fruition. The sharp rise in the Bank of Canada rate and government bond yields has created a headwind to Canadian economic growth, the desired outcome so long as inflation falls at the same time, which thankfully it has. While price levels are still nowhere near 2019 levels, that is unlikely to happen on a broad basis, but the pace of price increases has slowed enough for the Bank of Canada to feel comfortable offering interest rate relief.

… a welcome development for real estate

One sector that has been waiting with bated breath for interest rate relief has been the real estate sector. After ultra-low interest rates fueled cheap mortgages and high sales volumes, things have slowed in most of the country, pressing pause on what has been an incredible story of price appreciation over the past 20 years. The Canadian housing market has been so strong that some investors have wondered if it is worthwhile looking elsewhere for returns. We believe it is. As seen below, the TSX’s total return has exceeded that of the Canadian housing market going back to 2005, but we know this doesn’t tell the whole story.

Housing benefits from tax advantages and leverage…

Homeowners see significant benefits not afforded to stock investors, such as the ability to gain as much as 20:1 leverage at very competitive interest rates via 5% down payments in some cases. The granddaddy of them all is of course the principal residence capital gains exemption, which is a tailwind stock investors can only dream of. While homes are not a liquid asset, some may see this as a sort of advantage – it is a lot easier to think long term when you are not seeing the price of your home fluctuate day to day.

…while stocks allow for easy diversification and liquidity

On the stock investors’ side of the ledger, advantages include liquidity. The acid test is that when you try and find liquidity on a home it can prove to be fleeting, whereas the equity market is essentially instantaneous. With that liquidity comes volatility, in both directions. While most don’t like volatility of the downside variety, such situations also provide opportunities to pick up bargains when securities are trading below their long-term fundamental value. Stock investors also have the ability to broadly diversify even with a minimal level of assets. Costs for stock investors tend to be lower as homeowners/real estate investors have to contend with property taxes and maintenance expenses.

Both should be better off as the Bank of Canada cuts interest rates further

While we surely have left some pertinent points out of this debate, the one thing that holds true for both stocks and housing is that lower interest rates from the Bank of Canada should benefit both. Stocks have withstood this rate hiking cycle better than most housing markets, but lower borrowing costs will both improve the relative standing of dividend payments and make it easier to finance a home, something all of us can get behind.

The Harbour Group

416-842-2300

Putting you first, every time, to help you navigate the complexities of managing your wealth. All of our team members, all of our resources, all of our collective insight: ALL FOR ONE: YOU™.

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