Getting in on the ground floor of Toronto’s housing boom has been seen as a sure-fire road to riches over the past decade. Buying stocks would have been a better bet.
Canada’s S&P/TSX Composite Index has returned 157 per cent, including dividends, since the end of 2008 as the economy chugged along, jobs creation surged and corporate profits rose. Despite hogging all the headlines, prices of residential property in Canada’s most populous city trailed that with a 127 per cent increase, according to the Teranet-National Bank Home Price Index.
It’s clear either of those investments have delivered a tidy return but there’s one group of investors who have done exponentially better: those who bet on the equity version of real estate.
The S&P/TSX Capped REIT Index has risen 354 per cent, dividends included, since the end of 2008 and the S&P/TSX Composite Real Estate Index, made up of real estate income trusts and other companies in the industry gained 262 per cent.
“You don’t have to worry about things like actual maintenance and keeping the property lease up,” said Jenny Ma, an analyst at BMO Capital Markets. “And also you get the diversification of many properties, across different markets and potentially across different asset types as well.”
Liquidity is also key. “You buy and sell REITs like you do any stock on the exchange rather than actually buying and selling properties themselves, which take a lot more time and also have a lot of transaction costs involved,” Ma said.
To be sure, investing in Canada’s stock market has had its ups and downs with concerns surrounding global economic growth, the U.S.-China trade war and the boom (and bust) of commodity prices.
So which investment is more risky?
“Stocks likely have more short-term volatility than home prices, but home prices may be a bit more vulnerable to change in tastes, as well as prolonged periods of under-performance,” said Douglas Porter, chief economist at Bank of Montreal, adding real estate is clearly a less liquid market.
Holding costs are much higher in the world of real estate when you add in property taxes, maintenance costs and other expenses. Meanwhile fees are being reduced or eliminated for many stock-market products.
“Overall, it’s actually quite difficult to properly evaluate real estate returns to equity market returns. And, of course, even then, there’s the issue that you can’t live in your equity portfolio,” Porter said.
--With assistance from Erik Hertzberg, Shelly Hagan and Natalie Wong.