10 years = 100 % : A decade of real estate in Canada

On average, Canadian homeowners have seen the value of their properties double between 1997 and 2007.  A great return on their investment!

A major Canadian realtor recently released its survey of the residential real estate market over the past decade. The conclusions are thought-provoking.  According to their estimates, the market grew considerably, in terms of both value and the number of units sold. The number of units sold is shown to have increased by 57% and, more importantly, the average value per unit by almost 100%.  That’s a compound average return of 7.1% per year.

We shouldn’t take the results of one study as gospel.  However, other sources, notably Statistics Canada’s indexes, can provide a more balanced picture. And, in this instance, they still do echo the results and raise some good questions about investment strategy.

An exceptional decade

It must be said that this performance is quite exceptional:  the past decade has been one of the best in the history of the Canadian real estate market.  It is attributable to the following three main reasons:

• Pent-up demand - Real estate was at a standstill from the late 1980s to the mid-1990s, real estate was virtually at a standstill; the demand had to be released at some point;
• Low interest rates significantly reduced the cost of mortgages;
• A long period of economic growth favoured job security, consumer confidence, and population growth.

Which is the better investment, the stock market or the house?

For many, it won’t take more than that question to reopen the ongoing debate.  Is it better to invest in your house or in the stock market?  After taking a look at their latest investment statements, many people will find themselves thinking that it might have been smarter to put their money into a bigger house!

But that is not true.

If we look at the performance of the Canadian stock market over the past 10 years (and not the past 10 months!), we discover that on January 1, 1997, the S&P/TSX index was around 6,000 points. Ten years later, it was close to 13,000 points. That’s correct, a return of more than 100% here as well.
Keep in mind that the years from 1997-2007 were no bed of roses for the markets;  among other things, this period brought us September 11, burst of the tech bubble, the SARS Crisis, Mad Cow Disease, significant weather related tragedies, forest fires and, ice storms. Even with all these factors, it resulted in a 100% return for many in the stock market.

Seeing that the stock market has now run out of steam should tempt us to put our money there rather than in real estate, which rose another 6% in the past year.  The stock market is in a downturn while real estate is at an all-time high.

The answer is:  Yes

Every time you ask the question, “the stock market or the house?” the answer is the same: yes. That is to say, yes to the house and, yes to the stock market. Both are integral parts of a single strategy, building wealth for oneself and family on a diversified basis.

However, to make this strategy work you have to consider all the variables. Such as the following:

• Capital gain on the sale of your principal residence is not taxable, but the capital gain when you sell-off securities is;
• The cost of a mortgage is not tax deductible, but the cost of an investment loan can be;
• Similarly, if you invest in the stock market within an RRSP, the contribution will be tax deductible, while the money you put into a house is not (on the other hand, funds in an RRSP will be taxed when you withdraw them);
• But above all, no one has ever managed to raise their children within an RRSP, but that’s the main purpose of a family home – which makes it a very special type of investment, and much less liquid than you might think.

In conclusion, because there are many complex factors involved, it makes sense to discuss your plan when you have the time to go into the many details and variables.

Spring is often a good time for this kind of discussion – why not put this subject on the agenda for our next meeting?

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