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How does real estate really stack up?

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“Modest Vancouver home a seller’s dream” – G&M


Being from Vancouver, Zoe always reads up on articles like this. Pretty impressive headline you have to admit. The article talks about a guy who bought a modest house in Kitsilano, one of the tonier neighbourhoods of Vancouver, for $279,000 in 1983. See picture below. The house just sold for $1,875,000. Sounds amazing doesn’t it?


Being mathy types, we then wondered what the annual return was on that investment. $279,000 => $1,875,000 over 32 years is 6.1%. It doesn’t sound like all that much does it. I’ve done this exercise many times and the usual outcome is about 5%.


Real estate is an asset class like any other but owning physical property may not be as good as the headlines lead you to believe. Keep in mind that the guy in the article had to pay property taxes, interest charges on a mortgage, maintenance, etc. over that some period. An easier way to invest in real estate as an asset class may just be to buy a REIT. Good yield, easy to buy and sell and no maintenance.


The fact is, as much as physical real estate may not be a screaming investment, it is a very effective savings vehicle. For the average Canadian, their mortgage is likely their biggest if not their only form of forced savings. If it weren’t for the house, at retirement many would have no savings at all.


The observation here is that as much as the headlines are eye catching and sexy, the reality often is not nearly as interesting.


P.S. Over the same 30 year period the TSX would have returned 5.9%. The S&P 500 in C$ would have returned 10.9%! So. If the same guy had taken that $279,000 in 1983 and put it in the S&P 500, he would actually have $7,645,637 today….not kidding.