Real Estate vs. Equities

Can You Pick a Winner Over the Long Haul?

May 17, 2018

An absolutely riveting observation, and possibly a source of surprise to many of my blog followers, though not to me deals with how investors view real estate vs stocks and bonds.

It was revealed by financial journalist Ian McGugan,1 writing for The Globe and Mail (Report on Business, April 27, 2018) – in an article called Safer than houses that: ‘most of us make a major portfolio decision every month without fully realizing it. That decision comes when we pay our mortgages. By pouring so much money into real estate, we’re signalling that we believe an investment in brick and mortar is better than one in stocks and bonds.’

69% average price rise in 10 years

To paraphrase Mr. McGugan, during the past 10 years residential real estate prices in 11 leading Canadian cities have gained an average of 69%, according to the Teranet-National Bank National Composite House Price Index. That’s a 5.4% average annual gain in return for living in your home. Wow!. My faith in real estate as an investment has been vindicated!

Beware of superficial and distracting statistics

The problem is that the statistic indicated above is a superficial and distracting stat. Why? Because when you look at the real costs of home ownership, the apparent increase in home values over time is a lot less rosy.

Mr. McGugan quotes a recent Credit Suisse Global Investment Returns Yearbook in which authors Elroy Dimson, Paul Marsh and Mike Staunton (London Business School) report home ownership data on 23 countries since 1900. Mr. McGugan writes: ‘They found homebuyers typically lost – that’s right, lost – 2% of their investment every year, once returns were adjusted to reflect all factors, including the hefty costs of maintaining a residence’.

U.S. House Prices vs. S&P 500

Let’s take a look at the cold, hard facts. According to Kim Iskyan,2 Co-Founder & Publisher, Stansberry Churchouse Research, the competition between real estate and equities is not even close – in the long run.

Supporting his point-of-view is a compelling chart, sourced from Bloomberg and The Economist, which tracked the performance of U.S. House Prices vs. S&P 500 from 1975 to 2015.

Mr. Iskyan concludes:

The only decade when housing performed better was the recent housing bubble, from 2000 to 2010. Even after accounting for the sharp decline in the last two years of that period, U.S. housing prices still outperformed the S&P 500 for the decade. So far this decade, the U.S. stock market is ahead once again. And for the past 40 years, it would have earned you almost 4 times as much as U.S. residential real estate.

Conclusion: Focus on the underlying reality

Yes, the Canadian real estate experience has been unusual – some may say weird – over the past few years. The underlying reality; however,– notwithstanding the point-of-view of the latest realtor you spoke to – points to an alternative conclusion.

Mr. McGugan writes: ‘According to AQR Capital Management, one of the most respected quantitative investors in the world, Canadian stocks [will] return about 3.9% a year over the next five to 10 years. That return is calculated with inflation stripped out, so it implies the returns from stocks you actually see on your statements will likely be 5% or a bit higher.’

To compete with that, Canadian housing prices must repeat their stellar performance during the past decade. Possible? Yes. Likely? No. Conclusion? Bet on stocks to beat houses. That’s where Mr. McGugan’s money is. Mine too.

Michael Fahy, The Michael Fahy Group, CIBC Wood Gundy, 604-691-7207.


1 http://www.globeinvestor.com/servlet/ArticleNews/story/GAM/20180427/RBMIANMCGUGAN
2 https://stansberrychurchouse.com/asia-wealth-investment-daily/which-performs-better-real-estate-or-stocks-the-answer-might-surprise-you/