I have lost count of how many times I’ve heard that old gem come up in conversation with friends, relatives, or fellow stranded GO train passengers.  (I’ve also lost count of how many times I’ve been stranded on the GO train, but that rant is for another day).  It’s understandable that this perception exists, especially if you live in ‘hot’ real estate markets like Toronto or Vancouver, and December’s market swoon is still a fresh and painful memory.

As you have come to expect if you have read my previous writing, (visit our website today!) I like to argue against popular prevailing notions, and I am going to argue against the fallacy that real estate always outperforms the stock market.

I’m not an anti-real estate. I own a house, and I look forward every evening to returning to it. I recently had to get a market appraisal on it and was pleasantly surprised when the figure that came back was higher than I’d anticipated. For me, and probably a lot of you, the place where we lay our heads most nights can make up a huge chunk of our overall net worth, and it’s not uncommon to comfort ourselves with the idea that, if everything goes bad, there’s still our real estate to fall back on, to provide a financial cushion in retirement or make up for any shortfall in savings we’ve experienced over the years.

There’s no question that over the longer term, housing prices have appreciated – but so have equities, which have handily outpaced the real estate market in average annual gain, even after we take into account the dismal 2008 market. According to national price data from the Canadian Real Estate Association, price return on composite property types in aggregate selection have risen 128% between January 2005 to March 2019. Sounds fantastic! But, wait…Compare this to the total return of the S&P/TSX Composite for the same time period, which is a gratifying 148%, or the S&P500 total return of 242% (in Canadian dollar terms) and suddenly I’m feeling pretty confident in my argument.

Here’s data that compares select Canadian real estate markets’ annualized returns vs. the index, from 1993 to 2018. That pleasing blue line at the top is our old friend, the S&P/TSX Composite Total Return again, and it soars above those other lines quite impressively, don’t you think?

 

 

Source: RBC Global Asset Management

The numbers are convincing, but the belief in the superiority of returns on real estate over equities persists. Why? There are three key factors to consider when attempting to make a comparison between them:

1. Real estate purchases are usually highly leveraged (mortgaged), which can magnify gains. In comparison, equity market investments are typically not purchased with borrowed funds to the same extent.
2. Costs including commissions, taxes, maintenance and repairs, not to mention renovations, aren’t included in this data and would also negatively impact investment returns in real estate markets. Equity market investments are also subject to fees and taxes, but these costs tend to be more predictable.
3. When examining real estate, we do typically tend to take a longer view, whereas volatility in equity markets is far more noticeable and tends to focus investor attention on shorter-term returns. A lot of us pay attention at least annually to the value of our investment portfolios (and some quarterly, monthly, or – shivers – weekly), but we don’t monitor the asset value of our homes as frequently - nor should we.

I know, you can’t live in your stock portfolio. But you also can’t call a house your retirement fund, because even if you downsize, you still have to live somewhere, and a big portion of your sale proceeds will necessarily have to be diverted toward a new home.

Let’s all agree that investing in real estate can prove lucrative over time, but in the end, stocks rule.