Real Estate vs Stocks

Chart 1)

The chart above displays Vancouver, Toronto, Calgary, and Montreal home prices vs. the TSX index.

The purpose for this measure is to understand the relative performance of two regional asset classes. Both asset classes should, over the long term, be correlated to fundamental Canadian economic characteristics; Such as, interest rates, wages, GDP growth, productivity, and even themes such as Chinese growth, global inflation, energy demand etc.

Over the long run you should expect equity markets to outperform real estate for a number of reasons, but most importantly these two points:

1) A higher return for equities is necessary to compensate investors for the higher risk profile
2) Over the long run no asset should be worth more than the present value of their future generated cash flows.

I re-based both measures to the late 90s when each market appeared to have reached their relative lows simultaneously. This time period is also significant because it marked a period of calm before a few very important changes to the Canadian economic landscape, including:

Interest rate cuts – Post 911
Energy Bull market and resulting “economic multiplier”
Chinese growth demand of commodities
Canadian currency bull run – related to a couple of points above

What I would have liked have done is to look at the ratio of total Canadian Real Estate values in nominal terms vs total Canadian equity index market capitalization. I leave that to someone else if they have the time, resources, and interest.

I used a moving three month average for both the price index and the tsx in order to smooth out the volatility. I didn’t bother looking at a “Total Return” measures for either asset class since their ability to generate future cash flows should be, at least partly, reflected in the price of the asset. All other notes are on the chart!

Image 2)

I hear a lot of different stories about sales volume – so to clean out the noise, I took the data from Teranet National Bank House Price index on “Sales Pairs” used for calculating their price index. It isn’t total sales volume but it does give us an idea of trend. I took the average sales volume each year and in each season in the 1990’s and compared it to the corresponding season over the last decade. Other than that initial quick burst during the 2009 recovery, sales volume has not recovered to what it was prior to the recession.

Keep in mind, since there are obviously more homes now than there were in the 1990s you should expect some level of inflation in the volume percentage. However, we really aren’t seeing it. Sales are pretty similar to 2001 at best.

Sort by:   newest | oldest | most voted
vomitingdog
Guest
vomitingdog

Just wondering how many people would put house money into equities? Therefore how realistic is it as a comparison and how wise an investment strategy?

I'm presuming the money you have outside equities would, of course, under-perform housing. ?

Devore
Member
Devore

@vomitingdog: You also don't normally leverage equities 20:1 either. It's like comparing own vs rent costs… very few people will rent the same kind of property they would buy. It's just an analysis comparison to show a point.

space889
Guest
space889

@Best place on meth: Well I believe Garth Turner is advocating similar strategies a while back.

Lilypad
Guest
Lilypad

What goes around comes around:

http://www.cmhc-schl.gc.ca/en/corp/about/cogo/cog

CRASH JPMorgan-Chase
Guest
CRASH JPMorgan-Chase

Existing-Home Sales Plunge, Setback for Housing Recovery

Sales of previously owned U.S. homes fell unexpectedly sharply in February and prices touched their lowest level in nearly nine years, implying a housing market recovery was still a long off.

I must laugh at all the idiots from BC that bought houses in the US thinking they are a deal

http://www.cnbc.com/id/42192395

space889
Guest
space889

@Anonymous: No a few months back, he was quite explicit about withdraing home equity to invest in the market for those who don't want to sell or want to convert non-deductible mortgage interest payments into a tax deductible one. The last few months he has really been talking about selling as the #1 option, as he thinks the housing market is on its last leg, and invest the proceeds in the market.

Devore
Member
Devore

@Anonymous: No, he does say to take out and invest your equity, which is "dead money" doing nothing, because money is cheap today. Of course he also says to do it in moderation, and that it is not for everyone, which is true.

patriotz
Member

@Devore:

Getting away from what Garth did or did not say, calling taking out a loan "withdrawing your equity" is complete nonsense. Equity is not an asset, it's just a bookkeeping entry. A loan is a loan and you have to pay it back with interest.

This is just another aspect of the fallacy that unrealized capital gains on RE represent real wealth.

You genuinely reduce your equity in an asset by reducing your exposure, i.e. selling it. Or in the case of the stock market, selling a call option. No stock market investor would call taking out a loan against his stock holdings "withdrawing equity".

jesse
Member

@real_professional: "Total market capitalization to total real-estate value would be an interesting plot."

Comparing P/E ratios of stocks to real estate would be interesting but one should be selective: many stocks have justifiably high P/E ratios due to how they are investing their capital.

Marginal buyers currently seem to think housing is more akin to a growth stock, when the fundamentals indicate it's more akin to a value stock, and likely not even as good as that.

patriotz
Member

@jesse:

Marginal buyers currently seem to think housing is more akin to a growth stock

A growth stock is one which the buyer thinks will see a significant increase in earnings.

Earnings for RE are rental value. I doubt many RE buyers today are expecting a big increase in rental value – rather they think they're going to be able to sell later for a higher price "just because".

You're right about which stocks RE should be compared to, namely dividend stocks (utilities, etc.), preferred shares and income trusts which are expected to have stable earnings going forward.

observer
Guest
observer

RE is a peculiar beast because banks are willing to lend you large sums of money assuming you qualify and with very little down payment, whereas no bank will do that for you to invest in the stock market.

I suspect it is simply a matter of time before we follow the US in a RE crash, though it will be less dramatic, except for Vancouver of course.

Steve
Guest
Steve

@observer: people love leverage on the way up, but it can be cruel on the way down.

jesse
Member

@patriotz: Future earnings increases include "running out of land", "rich foreign buyers", and Vancouver becoming a "world class" city with higher future salaries. Few have run the numbers on these effects because the effects are too abstract to quantify.

space889
Guest
space889

@observer: Well, aside from regulatory issues that forbids banks from doing exactly that, stock markets are also fairly fast moving. 20% equity can be wiped out in less than a week whereas RE rarely ever declines more than 20% in a year. Thus the risk of losses to banks are fairly small. With smaller downpayments like the 5% down, CHMC covers the bank so it's not too bad as well.

I think you can do 20:1 or even 100:1 leverage in futures and FX trading though in those cases the brokerage firm can sell your holdings without your permission if you don't meet margin calls.

mflat
Member
mflat

The Aussies are taking action, and I think we should start something like this here too.

http://www.prosper.org.au/2011/03/15/prosper-call

Aleks
Guest
Aleks

If the government guaranteed margin accounts, you can be damn sure the banks would happily lend you twenty times your cash to invest in stocks. If you took away the CMHC guarantee, you can be just as sure banks wouldn't give out 95% mortgages anymore.

AG Sage
Member

> Anonymous Says:

March 21st, 2011 at 11:13 am

“Well I believe Garth Turner is advocating similar strategies a while back.”

>not really. he said sell then invest. them mortgage brokers said get a home equity loan and invest. >in one scheme you still have a mortgage. big difference.

GT was definitely advocating this, arguing that it made fiscal sense with crazy low interest rates to borrow cheap money at ~4% (hence the HELOC) to earn money at 9%. I noted it because it seemed in contrast to his usual conservative, "fail proof" investment model. He otherwise has little faith in the investment skills of his audience. That's his schtick, in fact.

patriotz
Member
@space889: 20% equity can be wiped out in less than a week whereas RE rarely ever declines more than 20% in a year. Thus the risk of losses to banks are fairly small. But the bank can't call a mortgage like a margin loan. The latter can be called and the stocks liquidated by the bank any time the margin becomes excessive. Mortgages can be called only at the end of term, and then the bank has to foreclose to get title and eventually sell. During this process the value of the RE can fall far more than stocks are likely to fall during the very brief time it takes to liquidate on a margin call. Thus the fact that RE markets move slowly does not reduce the potential for loss compared to margin lending, something which has been made… Read more »
Yalie
Guest
Yalie
@jesse: Future earnings increases include “running out of land”, “rich foreign buyers”, and Vancouver becoming a “world class” city with higher future salaries. Few have run the numbers on these effects because the effects are too abstract to quantify. Although it's true those effects are too abstract to quantify, that's not why they don't run the numbers. The real reason they don't run the numbers because is because it never occurs to them to run the numbers. Most people don't even know what "running the numbers" means. They have never heard of fundamental analysis, or any kind of analysis for that matter. When it comes to making the biggest purchase of their lives, most people's idea of "research" involves comparing the wood grain on the IKEA dining set with the one from the Brick to see which one most closely… Read more »
Best place on meth
Member
Best place on meth

According to the mortgage broker chat on Friday, home owners should pull all the equity they can out of their property and put it into the stock market.

Then they have the best of both worlds.

Nothing can possibly go wrong.

Boombust
Guest
Boombust

La la la…here I am in Palm Springs. Ugly weather, should've stayed at home.

At any rate, BULLS should visit this area to see what Vancouver will look like in a few short years. The place is like a ghost town with anything and everything on sale.

Houses galore, at fire sale prices.

Don't say you weren't warned, chumps. Adios.

Ag
Guest
Ag

Measure the stock market(s), real estate and oil in gold and/or silver and you will see cycles that occur every 10-20 or so years. For example, if one had sold their home in either 1971 or 2000 and bought gold/silver, it makes the recent run-up in real-estate laughable. When this commodity cycle then finishes (i.e 1980, 201-??), the amount of R/E or high yielding equities that can be purchased is astonishing. I have made over 100% on my commodity interests in the past 18 months alone and am waiting diligently for some panicking Vancouver RE owners to flog their properties for cents on the dollar, when they eventually wake up that is…. and the dream is over.

wpDiscuz