In April 2021, TD chief economist Beata Caranci wrote a paper with an interesting title.
It’s called “Canada’s Housing Market and The Big Bang Theory: Occam’s Razor and Schrodinger’s Cat”.
In the paper, Caranci makes a number of observations, and one of these is that real estate has produced higher returns than the stock market over the last 20 years.
“Canadians don’t shy away from housing debt because more and more people see it not just as an ownership opportunity and store of value, but as a path towards wealth creation that carries less volatility than investing in the stock market,” Caranci wrote.
A recent home sale on the East Side of Vancouver is a good example.
That’s 2018 Charles Street in the neighbourhood of Grandview-Woodland.
Adam Major called the Georgia Straight’s attention to the sale, noting that the history of the property shows that it has done better than the stock market.
Major is managing broker with Holywell Properties. The company, in turn, operates Zealty.ca, a real-estate information site of which he is the CEO.
The detached home at 2018 Charles Street was listed for $1,699,000 on September 8.
It sold seven days later on September 15 for $2,250,000 for an increase of $551,000 or 32.4 percent over the asking price.
Major noted that three-bedroom and two-bath house has a 2021 assessment of $1,499,000.
That means that it sold for more than 50 percent above its assessed value.
The two-storey-with-basement home sits on a 24- by 122-foot lot, which is smaller than a standard cut in Vancouver with a frontage of 33 feet.
Going into the property’s history, Major pointed out that it sold for $1,535,000 in February 2018.
Before that, the same house sold for $950,000 in June 2010.
About 14 years prior, the property sold for $231,000 in November 1996.
“This means that since 1996, the house at 2018 Charles Street has increased in price by 9.53 percent per year, compounded annually for 25 years. An almost tenfold increase,” Major said.
“That is better than the stock market. The S&P 500 returned 7.23 percent per year over the same time period. If you reinvested all dividends, you would have made 10.04 percent,” he continued.
Major also explained that since 1996, the house price to income ratio in Vancouver has “more than tripled”.
From less than four times the annual income, Major said that the ratio has gone to 12 times.
“In fairness, there have been updates to the house on Charles Street over the last quarter century,” Major said.
“Still,” Major continued, “with the S&P, you would have to pay capital gains, but not with your primary residence in Vancouver.”
In addition, he stated that one can leverage most of the purchase price of a house, which is “harder to do with stocks”.
“So comparing the two, Vancouver real estate has definitely been the better investment over the last quarter century,” Major said.
However, Major asks: “Will it be for the next 25 years?”
The question brings back to mind a phenomenon called “fear of missing out” or FOMO, which was mentioned in a May 2021 paper by TD economist Sri Thanabalasingam.
In his paper, Thanabalasingam noted that the real-estate markets in the U.S. and Canada are on a tear, but that “Canada’s is hotter”.
The TD economist noted that there are common factors driving the housing markets in the two countries.
However, there are factors unique to Canada, such as “stronger population growth, less scarring from the '08 housing crash, and greater fears of missing out”.
Thanabalasingam noted that the country will continue to outperform the U.S. because Canada’s market “may be more fertile ground for FOMO (or “fear of missing out”) and increased speculation”.