How Real Estate Has Performed Better Than A Balanced Portfolio

real-estate

Over the last decade the S&P 500 has pretty much quadrupled. The Canadian TSX has doubled in that time, while the remaining rest of the world would have returned roughly 50%. A bond index would have returned 60% compounded with interest.

Those are quite phenomenal numbers. In fact if you had held a portfolio mix of 40% bonds, 30% US and 15% Canadian and 15% in world stocks you’d have a cumulative gain that would have been slightly over 230% over 10 years. These returns are really good considering the average compounded growth is almost 8.7% a year.

Despite the gaudy numbers, most Canadians would have been better off had they bought real estate over that same period of time. That’s because real estate across the world over the last 10 years has been booming due to low interest rates.

Leverage Up!

Just my last post I wrote how 99% of Canadians would benefit from owning their own home. This is true because real estate allows many ordinary Canadians to leverage their money 20 times to buy an asset that they otherwise couldn’t afford.

If we look at the Home Price Index over the last 10 years, houses have done phenomenally well. With the combination of low interest rates and lack of supply, houses in Canada have gone up and up.

HPI-Canada-10years

Courtesy CREA

In fact, the standard home price index shows that homes across the board on average in Canada have risen over 77% in value. This means if you bought a home in Canada, on average, it would be worth a lot more.

I know most people would look at these numbers and think, hey 77% is not greater than 230%. That’s true, but what buying a house does versus buying stocks is that you can leverage. By leveraging the gains are amplified by a much greater scale.

For example, if one were to buy a house that was $400,000 in 2009, you would only have to put a down payment of 5% to buy it. That represents $20,000 of real capital. In 10 years, that home would have risen to $708,000. That means the original $20,000 that was invested in a home has now become a $708,000 asset and not $400,000. The gain of $308,000 is an appreciation of 1,540% on the original capital invested.

If someone were to put their money into the stock market, the $20,000 would only be worth $46,000 after ten years. That’s a far cry from the $708,000 that a home owner would have after 10 years. Even if a stock investor leveraged, the bank would only give you 66% more of your invested dollars, to invest. In this case, a leveraged stock investor might get $33,300 to invest and even after 10 years it would only turn out to be $76,590.

The comparison isn’t even close. If someone were to ask me if I’d rather have $308,000 or $76,4590, I know exactly which one I would pick. Buying a home would have been much better.

Lower Rates To Come

With how Trump is destroying the world wide economy the outlook looks grim for stocks, but on the contrary interest rates are going to remain low for years to come. This means owning a home is actually going to get cheaper.

In some cases, with lower interest rates, we could see additional jump in real estate prices that would help propel the home buyer into even greater heights. Even now, there are hot markets across Canada like Montreal, Halifax and to some degree Toronto. These major cities will continually lead the way to greater wealth generation for Canadians.

It’s hard to say that past performance will be replicated over the next decade, but for many ordinary Canadians with little cash flow a house still remains their best asset and investment. Not only will a house never fall to zero in value, it’s also a necessity in life to achieve shelter. What better way to spend your money on than something that accomplishes two things in life (generating wealth and shelter) and almost completely risk adverse?

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7 thoughts on “How Real Estate Has Performed Better Than A Balanced Portfolio

  1. I think you’re contradicting yourself on what you wrote in a previous article:
    https://financiallyyours.ca/2017/01/22/how-to-save-like-a-homeowner-while-renting/

    The example in this post is very simplistic. Once you take into account mortgage payments, insurance, property taxes, and maintenance, it’s easy to figure out you’ll have more money at the end of the month if you rent rather than buy. What you do with that money is the real question.

    Assuming you’re renting and saving some money – if you invested $20k on an S&P 500 ETF in January 2009 and then put another $1000 every month into the same ETF, right now you’d be sitting on around $300k – more than doubling all the money you put in. In short, you invested $144k and now you have $300k, minus capital gains tax and whatnot.

    By contrast, to those $308k you made selling your house, you need to subtract 10 years worth of interest payments, insurance, property tax, and maintenance costs – all the clogged pipes, broken appliances, wall re-paintings, and maybe even replacing the roof. I don’t know exactly how much that would leave you with, but I’m sure it’s a very significant dent…

    • You make very good points. But your second paragraph is where after many years of speaking to individuals it will never happen. When you look at the 99% of the people out there, many don’t save or don’t make enough money to even invest on a monthly.

      The arguments of investing to exceed gains in real estate only apply to those with high incomes. When you look at ultra expensive real estate markets like Hong Kong, San Francisco, New York, Toronto, Vancouver, London, Paris, Singapore the rental costs will literally leave you with nothing left over to invest.

      • Fair enough, I acknowledge that renting is definitely expensive. However, when browsing homes in, for instance, Vaughn or Richmond Hill, for sale and rent, I usually see a $900k for sale home sitting next to a $2500 comparable rental home.

        In addition to a $210k lump sum payment (20% down + closing expenses), owning that $900k home would cost, every month:
        1. $3200 mortgage
        2. $250-$350 property tax
        3. $200-$300 insurance (guessing here)
        4. $200-$300 home maintenance (average)

        Grand total monthly costs: $3950 – $4150 per month

        I’ve excluded utilities on purpose, because costs should be about the same when buying or renting.
        So for rental, you pay $2500 per month in rent, plus some $50 for renters insurance. You don’t have the flexibility to tear down walls, but you do have an extra $210k in your bank account, plus you save $1500 every month.

        If you want to live downtown it’s obviously more expensive, and the math would be different. You can still find a decent 2 bedroom condo for $2500-$2800 though.

        The math is obviously different according who you’re talking to. There isn’t much choice for affordable housing in Toronto, that’s for sure. But I’d still suggest saving all you can and investing is the best option – even $200-$300 per month on a balanced fund will be a decent money maker, without the risk and burden of buying a home you can ill afford.

        And we haven’t even talked about what happens if life throws you a lemon and you need to get money in a hurry – if you own fund shares, just sell a few and you’ll have money in your account within 2-3 days; selling your home will prove a bit more challanging, and refinancing will eat into your equity very quickly.

        It’s definitely a tricky situation, but I’ll be preaching financial responsibility, increasing savings, and investing in a somewhat diverse portfolio 🙂

  2. These are very intriguing numbers but the majority of Canadians would not be saving the difference from renting. Those numbers assume that there’s actually something left after renting as well which for many does not exist. The average savings rate is less than 1% in Canada.

    I agree that needing money is tricky, but Canadians have embraced HELOCs and the interest rates are extremely low right now and not expected to increase. This solves the need to be liquid.

    In all fairness owning is still better unless you’re in the 1% of earners or already have family wealth.

  3. The example in this post is very simplistic. Once you take into account mortgage payments, insurance, property taxes, and maintenance, it’s easy to figure out you’ll have more money at the end of the month if you rent rather than buy. What you do with that money is the real question.

    Assuming you’re renting and saving some money – if you invested $20k on an S&P 500 ETF in January 2009 and then put another $1000 every month into the same ETF, right now you’d be sitting on around $300k – more than doubling all the money you put in. In short, you invested $144k and now you have $300k, minus capital gains tax and whatnot.

    By contrast, to those $308k you made selling your house, you need to subtract 10 years worth of interest payments, insurance, property tax, and maintenance costs – all the clogged pipes, broken appliances, wall re-paintings, and maybe even replacing the roof. I don’t know exactly how much that would leave you with, but I’m sure it’s a very significant dent…sell my home austin

    • You make some valid points, but as the article states regardless of how much interest or whatnot you would throw away you’d still walk away with over $300k in gains tax free on top of the principal that was paid back over the 10 years.

      With ultra low interest rates and modest mortgage payments after 10 years the remaining mortgage is only $275k. This would mean $125k of principal in the home. Count on top the $300k+ in gains and the person would have $425k+ in net worth starting from $20k. That’s over 2000% gain on original principal in net worth.

      In the stock example, you made the assumption that people save but statistics show thatr average Canadian saves less than 2% of their pay. On top of that less than 10% of Canadians will invest in anything other than GICs and high interest savings so the likelihood of your scenario coming true is minimal. Buying a home forces savings and is easy for people to understand. Pay my mortgage and let rising prices help me to retirement.

      For 99% of the population real estate is probably their best and only investment. I don’t disagree with your argument, but with leverage from real estate and the risk averse nature of real estate it’s the best advice for the normal guy.

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