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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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.

space889
Guest
space889

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

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.

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. ?