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.

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qqq
Guest
qqq

crash jpmorgan buy silver.

that is all.

Satisficer
Guest
Satisficer
@real_professional and @patriotz (early posts) Since stock market indexes have inherent survivorship bias comparing RE with Total Market Capitalization, would be better. Stocks as a whole do not outperform in the long run; rather, a slowly-rotating group of the biggest equities in countries which haven't suffered invasion, has outperformed in the long run. http://en.wikipedia.org/wiki/Historical_component… But then, constraining ourselves to the very bubbliest Canadian RE markets (vaguely analogous to survivorship bias), should do a pretty good job of cancelling out those distortions. So in the end, the comparison is probably valid after all. 🙂 @Ag27, if you made 100% on your commodities (silver, I assume, from your handle) in the past 18 months, you were late to the game. If you bought in at the market nadir one year before that, you'd've had a 400% return. And if you'd timed that… Read more »
patriotz
Member

@jesse:

Good comments, and I think the government needs to be cognizant this is going on in a big way. (I think they are, even though it may not seem like it, and it probably pisses them off that people can’t save themselves from themselves.)

RE buyers have been doing exactly what the government wanted all along. The Cons wanted to juice the economy by inducing a US-style RE and consumer spending bubble and the fools have gladly obliged.

The warnings from Flaherty and Carney are just "I told you so's" to be repeated in the near future when the fools will be hung out to dry.

jesse
Member

Am I the only one who noticed major banks have reduced their amortizations on low ratio loans to 30 years? Does anyone know why they are doing this? Can I still get a 35 (or 40) year amortization from another lender? I need to good stuff and I'm sweating…

The "March 18th deadline effect" may be extending into low-ratio mortgages as well "behind the scenes", making the effect significantly more pronounced than just at the high-ratio end of the market.

jesse
Member

@Yalie: "They have never heard of fundamental analysis, or any kind of analysis for that matter."

Good comments, and I think the government needs to be cognizant this is going on in a big way. (I think they are, even though it may not seem like it, and it probably pisses them off that people can't save themselves from themselves.)

and so it begins...
Member
and so it begins...
re: VCI_SUCKS and other weathered bulls… Saw an interesting discussion outlined on the yatter matters blog. Outlines a discussion held by several RE professionals over coffee this weekend. Here are Larry's napkin notes: •March 18th’s end of the 35 year amortization may have a greater affect than previously thought •Sales have slowed! •Early outlook, expect March numbers to retrench •Happened fast prompting the question – was the spring market over before spring arrived? •buyers are indecisive •interest rates are not an issue •listing inventory is becoming a factor in slowing the market •seeing solid buys on condo’s as some sellers are getting anxious Yikes!! I'd have to say that for a group of REA's, there isn't much sunshine and lollipops in this assessment! When the "pros" are acknowledging "a wobble in the orbit" of Vancouver RE, even the bulls need… Read more »
Renting
Guest
Renting

Tough rental market? Not only is the cap rate at about 2% they are offering a Free LCD TV to the tenant.

http://vancouver.en.craigslist.ca/van/apa/2271426

Drachen
Member

@Anonymous:

The 'benefits' of real estate agents are a fairy tale aren't they?

Anonymous
Guest
Anonymous

What's with this ad?

Realtors hope an Old Woman will polish their image

http://www.theglobeandmail.com/report-on-business

The Canadian Real Estate Association is relying on humour in its latest advertising campaign, opting to conscript a fairy tale character to its cause rather than hammer consumers with another set of television spots earnestly espousing the benefits of real estate agents.

The Leak
Guest
The Leak

I have changed my mind on Vancouver real estate. I think prices will continue to go up forever without any real correction even if the economy and real estate around the world collapses…

Anonymous
Guest
Anonymous

Eddie: nice house in West Palm Beach

Nearly 20% of Florida homes are vacant

http://finance.yahoo.com/news/Nearly-20-of-Florid

During the housing boom, Florida was among the hottest real estate markets in the nation. Homes were snapped up by the state's growing population as well as hordes of investors confident that prices would continue to soar.

Eddie
Guest
Eddie

What should I do? I can live in half of this in Richmond:

http://tinyurl.com/5srfpua

Or get this place in West Palm Beach:

http://tinyurl.com/67b52fu

Steve
Guest
Steve

@vci_sucks: Wait… You mean housing markets don't change overnight? Where can I find out more about your intriguing ideas?

itwillneverpop
Guest
itwillneverpop

I guess there are a lot of home owners in here.

they give out fault message and tell people not to buy as people will not rent their basements if people choose to buy.

Boombust
Guest
Boombust

"March 21st, 2011 at 5:37 pm

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."

BULLS, just got back from having Mexican fare beside the Sonny Bono statue on N. Palm Drive.

I forgot to mention, did you know that California is the world's EIGHTH largest economy? Well, you'd never know it, what with the "spending freeze".

You see, when the "wealth effect" from housing wore off…

Don’t say you weren’t warned, chumps…

Adios.

painted turtle
Guest
painted turtle

This lot is only $269,000!

http://www.realtor.ca/propertyDetails.aspx?proper

I thought a "lot" was "a parcel of LAND having fixed boundaries.

Best place on meth
Member
Best place on meth

@vci_sucks:

All of those sales took place last week, moron.

VHB
Member
VHB

@vci_sucks: hey newbie, guess what. It takes a week or so for sales to go through the system. We have said that all along. Check back next week . . .

And if you're going to get horny about a 177 sales day, then good luck with that. See you at the next inventory party, chumpy.

VHB
Member
VHB

March 2011 month-end projections

Days elapsed so far 9

Days missing 6

Days remaining 8

5 Day Moving Average: Sales 160

5 Day Moving Average: Listings 276

SALES

Sales so far 1494

Projection for rest of month (using 5day MA) 2235

Projected month end total 3729 +/- 492

NEW LISTINGS

Listings so far 2741

Projection for rest of month (using 5day MA) 3869

Projected month end total 6610 +/- 132

Sell-list so far 54.5%

Projected month-end sell-list 56.4%

vci_sucks
Guest
vci_sucks

oh my god.

what happened to your crystal balls?

People still buying despite the new Mortgage Rule.

VHB
Member
VHB

Dailies – List | Sold

Vancouver East & West*

New Listings – 103

Back On Market Listings -0

Price Changes -21

Sold Listings – 55

Vancouver All Areas*

New Listings – 282

Back On Market Listings – 4

Price Changes – 101

Sold Listings – 177

*Attached & Detached – Date: 03/21/2011 Time:19:41 Pacific YatterMatters.com:Courtesy REBGV. Data believed to be accurate but is not guaranteed.

Anonymous
Guest
Anonymous

“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.

Anonymous
Guest
Anonymous

"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%."

well, i suppose i may have misunderstood what he was saying. in any case it's not what i understand to be his preference over selling in the first place. but sure, i could be wrong.

patriotz
Member

@Ag:

I have made over 100% on my commodity interests in the past 18 months alone

You mean you've already sold?

No? Well remember, commodity prices move a LOT faster than house prices.

patriotz
Member
There’s a problem with comparing a house price index with the TSX index. A given house always represents the same amount of real capital, so a quality adjusted house price index always represents the same amount of real capital per unit. But corporations use retained earnings to buy capital, so the real capital represented by a unit of the TSX index grows over time. In addition, comparing prices only ignores earnings (rental value in the case of RE). What would be interesting would be: 1. Comparing total returns of RE versus the TSX from a given starting point. A high total return for RE indicates overvaluation since stocks historically have higher return as noted above, or 2. Comparing earnings yield of RE versus the TSX. A low earnings yield for RE indicates overvaluation as we all know. BTW #2, you’re… Read more »