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 rather than stocks 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.
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.
Looking 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.
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 and that makes real estate better than stocks!
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 real estate would have been than buying stocks. 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?