Someone who bought a house in Canada in the past three years has proved a more astute investor than the stock market gurus of Bay Street, home of the Toronto Stock Exchange. And, studies have found, investors in virtually any type of Canadian real estate would have seen their appreciation outstrip most of the TSE equity plays since 2000.
“With losses in the stock market in the past few years, many pension funds, as well as private investors in Canada, have taken some comfort in the diversification offered by their real estate investments,” notes Patricia Arsenault, senior vice president of Clayton Research Associates Ltd., Toronto. Arsenault represents Investment Property Databank in Canada.
Canada-wide, returns to direct investment in real estate property have averaged close to 10 percent per year in the past three years. This compares with about 8 percent for bonds and an average loss of 11 percent per year for equities, according to data from the IPD Canadian Property Index, Arsenault explained.
Over the longer-term, property investment in Canada has not compared quite as favourably to other assets, with an average return of just under 8 percent per year over the past 15 years, compared to about 10 percent for bonds and equities. As an inflation hedge, however, property has done its job, with real returns averaging just over 5 percent per year.
Regionally, property investment in British Columbia has underperformed the other three larger provinces in recent years. However, over the longer term, B.C. has been the clear winner, recording higher property returns on average than Alberta, Ontario or Quebec.
In the past year, the average price of a detached house in Greater Vancouver, B.C., has increased 12.2 percent to $339,700, the highest price in the country. In Toronto, the typical house price increased 9 percent to $304,800 and, in Montreal, average house prices shot up 19 percent to $177,700. Across all of Canada, the average house price in October was $233,100, up 12.2 percent from a year earlier.
If any stockbroker had that kind of year-to-year performance on their picks, he or she would be a Bay Street star.
Of course, buying a house offers advantages not seen in stock market plays. First of all, a buyer can borrow virtually the entire cost of the property at the lowest mortgage rate in 47 years. As well, when the buyer sells the house the gain in appreciation is tax-free.
And other real estate has also been a solid investment. Total returns to property owners are comprised of two components: an income return (based on cash flow) and capital growth (i.e. appreciation in value). Returns to property in recent years have been driven primarily by the income return – which Canada-wide in the past three years has averaged 8.9 percent, and capital growth of only 1 percent.
The performance of commercial real estate property returns over the past 15 years is even more impressive when risk is taken into consideration. An analysis of returns in each of the four largest provinces shows British Columbia had the lowest risk in terms of returns and lower risk means a win/win situation for investors.
An examination of the various market segments in each of the four major provinces shows a mixed performance.
The office sector in B.C. has been the poorest performing market segment over the past three years, along with the residential rental housing sectors in Alberta and Quebec. Top returns since 2000 went to investors in the Ontario and Quebec industrial real estate markets.
With thanks to Patricia Arsenault, Clayton Research Associates Ltd.
Frank O’Brien can be reached at fobrien@dccnet.com.
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