Real estate prices have appreciated much faster than the S&P/TSX Composite in many of Canada’s hottest property markets over the past decade, but Mr. Klement highlights studies showing that real estate doesn’t outperform equities over longer time periods.
Between 1901 and 1970, four major British university endowment funds lost an average 1.5 per cent annually on the value of commercial property investments and were down 0.2 per cent per year on residential investments once inflation was take in to account. The annual yields on the investments raised the annual returns, but only to 2.1 per cent and 2.8 per cent annually.A separate study analyzing U.S.
The strategist also made a point that surprised me even though it should be obvious, “Why do people think that property investments are so much better than stocks? Because they don’t see the volatility of property prices on a daily basis. Real estate is so illiquid that people tend to have only two price points: the amount they paid for it when they bought the house and the amount they sold it for.
The illiquidity makes property investment appear less risky than it is, but it also offers advantages, as the author notes – real estate investors are more or less forced to buy and hold, unlike equity investors who are tempted to buy and sell investments at the worst times. Domestic borrowing costs are expected to remain low relative to history and population growth remains strong – Canada’s has been the strongest in the G-7 according to Statistics Canada. These two trends should help support real estate values for the near future. For the longer term, however, Canadians should be careful not to extrapolate recent strong returns from property investments too far into the future.This is the Globe Investor newsletter, published three times each week.