This article was reviewed by Jay Brecknell, CFP®.
Would you be surprised?
Would you be surprised to learn that the stock market has out performed real estate in Vancouver over the last decade? According to the MLS Home Price Index , which began collecting data 11 years ago, real estate prices throughout the greater Vancouver area have grown on average from 100bps in January 2005 to 187.75bps in January 2016. This growth represents a 5.89% annualized rate of return and a total return of 87.75%.
The Standard & Poor’s 500 index is widely regarded as an overall representation of the stock market. For the same time period, the S&P 500 has experienced a 7.06% annualized rate of return and a total return of 112% (dividends reinvested). Costs aside, if you were to invest $500,000 cash in Vancouver real estate in 2005, your home would be worth about $938,750 in 2016. But if you were to invest $500,000 cash in the stock market in 2005, your investment would be worth about $1,060,000 in 2016. There’s no doubt that real estate in greater Vancouver has proven a solid investment over the last decade, but on an overall average, the stock market has yielded the greater return.
There are many variables to consider when looking to purchase real estate. For example:
- Is this a principal residence or investment property?
- What type, apartment, townhouse, detached, commercial?
- Are you purchasing on cash or credit?
- What are your borrowing costs? Maintenance costs? Utility costs? Buying/Selling costs?
- Property Taxes?
- Management Costs? Taxes? Etc.
Many of these expenses are overlooked when evaluating the true cost of ownership. Stock market investing also carries variable costs, albeit a lot simpler to predict. With these variables aside, many people are surprised to learn that their money has the potential to grow more in the stock market, and in many cases with much less headache. It’s worth noting as well that the 11-year time period used for the comparison includes the 2008 financial crisis.
In conclusion, any investment decision carries costs and considerations that will have a direct impact on your bottom line. Seek qualified advice and consider all variables to determine true cost and investor suitability. With that being said, and all else equal, the stock market proves the winner in this comparison. The problem is that many investors look at the stock market with a shorter-term view than with real estate. Higher efficiency and liquidity in the stock market can cause investors to act on a feeling and easily press a button to trigger a sale or a purchase. Homes on the other hand are less easily bought and sold, and the tangibility of the physical asset gives many investors comfort and a longer-term view. As an investor, if you are disciplined enough to see the big picture and ignore the volatility along the way, stocks can out perform even the hottest real estate markets over the long run.
*The information contained here is for general information & illustration purposes only and is the opinion of the author. Past performance may not be repeated. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call your Singer Olfert Wealth Advisor to discuss your particular circumstances.