The Stock Market vs. Toronto Real Estate

UPDATE 1: Since someone asked on Reddit to show with data from 1989 and look at a 30 year analysis, here are the numbers for 30 and 35 years. Unfortunately I could not go back further than that:

30 Year Performance:
TSX: 319.35%
Toronto Real Estate: 242.85%

35 Year Performance:
TSX: 455.03%
Toronto Real Estate: 674.7%

Update 2 (2019/01/29: 10:30am): I may be wrong. I have been told this data is not a fair comparison and requires some further analysis. After sharing this post it has come to my attention that the TSX S&P Total Return Index is the better index to compare to as this index takes into consideration dividend reinvestment. Unfortunately I cannot find any historical data for this index, so I need to keep investigating. If true and I am taking this into consideration I will also need to take into consideration rental income and carrying costs on the property. This may take more time to gather, but I am going to try to figure this out so check back soon.

DISCLAIMER: When talking about any investments it is always important to note that past performance is not an indicator of future outcomes. This data is more to create a conversation.

Growing up I was always the kid who loved money. I had a paper route back when I was 10 or so, I graduated to score-keeping or umpiring baseball games by about 12 and as soon as I turned 16 and I could legally work, I got my first “real job” as a buggy boy at Dominion (now Metro) in the Yonge-Eglinton Centre. But it wasn’t always about getting money to buy things, I was a really good saver and wanted to invest for the future.

From an early age I knew I wanted to buy a car eventually and I never liked the idea of owing someone money so I would save and save to buy that car. Over time I started to accumulate a good savings so I began to look at ways to invest this money. I started with just a regular accounts manager at TD Bank, then learned that if I saved up $100,000 I would be able to get an investment advisor through TD Waterhouse so I made that my goal. I eventually achieved that goal in my mid-20s and still work with that advisor til this day.

Stock Market vs Real Estate Chart
Chart breaking down Toronto Stock Market vs. Toronto Real Estate over 25 Years

I remember always reading that real estate was the best way to really make money though, and after buying my first Toronto condo years ago I got to see that first hand. I loved real estate as investment so much that I got my real estate license, and have been working now for the last 5 years full time. I believed strongly in real estate as an investment and ended up buying my first investment property a few years back. Every year I continued meeting with my advisor at TD but I started to notice my real estate investments were well outperforming my market investments. Then came the whole “MER fee change” a few years ago where I saw what I was paying these people to essentially leave money in a fund with little involvement from my advisor. Meanwhile as a Realtor, I had been seeing just how much money I had helped my clients make and started to think, “why am I even so invested in the stock market if my real estate investments are outperforming”.

But, being someone who loves data and understanding why something is a certain way, I decided I needed to do some more research to see if this was true. Does my logic make sense, and if so can I prove it using past data? And, if I am right, maybe I should really be changing my own investment strategy. Don’t get me wrong, I am a big believer in a balanced portfolio, but I am beginning to look at my stock portfolio differently and buy into sectors I really believe in and those where I have some actual knowledge as opposed to a passive approach.

To really make this a fair comparison I wanted to try to keep things as simple as possible so I compared the Toronto Real Estate Market (the average price of real estate in the GTA that TREB publishes every month) to the Toronto Stock Exchange S&P Index which represents about 70% of the market cap of the TSX. While I can try to compare them, Real estate has a few key inherent advantages over stocks though, as you can leverage (using borrowed capital for an investment – aka a mortgage) to purchase property. So, I tried to make this as fair as possible and made the assumption that you could get investment capital at a rate exactly the same as a mortgage to buy more stocks over time. But, I had to be realistic. Nobody would give you a loan with 20% down to purchase any stocks unless you were putting up some real collateral.

Stocks vs. Real Estate Data

After days and days of analysis, here are my findings:

TSX vs TREB Data Analyzed

Before getting started, here are some things that I considered when analyzing the data:
– Property Upkeep, Insurance & Utility Costs
– Dates Used Jan 1 of Each Year (Averaged Annually)
– Most People Move Before Mortgage Maturity (if comparing personal residence)
– Using GTA Numbers (Toronto Likely Better Performing)
– Investment scenario adds additional amounts on annual basis instead of monthly to simplify
– Consideration should be taken on inflation on money invested over time using stock comparison to ongoing mortgage costs
– Some people invest in stocks where you can get a dividend which I did not include in this analysis
– Averages numbers being used. Certain areas outperform as do certain stocks, while others may also underperform.
Data source for real estate data: Toronto Real Estate Board
Data source for TSX S&P data: Yahoo Finance

25 Year Comparison

First I needed to see what the actual percentage change was of each from January 1994 to January 2019:

TSX S&P – 227.76% Gain
Average Price of Real Estate in the GTA* – 281.28% Gain
*Keep in mind, Toronto numbers would actually be even better but data is limited for this due to my ability to only search 200 properties at a time using the Toronto Real Estate Board’s search tool

First I needed to compare apples to apples and the best way to do that was to look at buying a $100,000 property to a similar amount investment (I added $5000 due to land transfer tax and legal costs) so I was comparing to a $105,000 market investment. At the end of the 25 year term, my stock investment was now worth $344,150.41 and my real estate investment was worth $409,702.87. In this scenario I assumed that the buyer was going to be living in the property so the added costs of upkeep, water, gas, home insurance, hydro and property tax were worth far less than it would cost them to rent a similar place while their money was tied up in the market. If I were to calculate the cost of rent during the similar time this would go even more in favour of the real estate investment, but I wanted to keep it simple. Assuming it would cost me 4.5%-5% to sell the property (what it will roughly cost to hire a full service broker – but this is also completely negotiable between you and your agent), the total profit (after deducting the initial $105,000 investment on both) for real estate investment would be between $257,213.67 and $259,120.05 and the stocks (assuming no management fees or transaction costs) would be $239,150.41.
Winner: Toronto Real Estate by about 0.75% annually or $20,000

The next step was to look at the leverage scenario which would bump the initial investment of each to $125,000 (assuming $25,000 in land transfer and legal fees on a $500,000 property with 20% ($100,000) down. The TSX S&P during that time would have returned you a profit of $284,702.87 at a rate of 9.11% per year. The $500,000 property during this same period would have ballooned to a value of $1,906,387.72, but after the cost of the debt service, selling commissions and intial investment you would walk away with a total profit between $918,300.42-$997,674.33 depending on whether your interest rate was averaged out at 5 or 6% (the approximate average for interest rates during this period) and whether your selling commission was 4.5% or 5% working out to an approximate annual ROI on your initial investment of 34.98-38.01%!!!

I realized after that this was not exactly a fair comparison though because with the real estate investment you are continuously adding money (principal) to the investment over time (through mortgage payments), so I said let’s just imagine someone would loan you money on similar terms to buy more stocks over time, how would that look? At 5% interest on the loan the investment grew to $1,039,515.12 which resulted in a profit of $616,589.14 after deducting the initial investment and the $297,925.98 in interest costs of the loan. This meant a healthy return of 587.23% over the entire term or 23.49% annually. At 6% the profit dropped to $453,496.18 with a total ROI of 431.90% or 17.28% per year.
Winner Again: Toronto Real Estate by approximately 14.52%-17.7%

Sure, there are so many things you can argue on either side of this but I believe I have been very generous to the stock argument here as I never really touched on the fact that you still need a place to live during this time, even though carrying the real estate does come with some cost. Also, people could move during this time, but it’s also rare for people to hold stocks this long. It is pretty clear from this data that real estate was the better investment during the last 25 years in Toronto.

Here are some advantages and disadvantages though to both scenarios and make the investment you believe makes the most sense for your situation:

Real Estate Advantages

  • Personal Residence Tax Exemptions
  • Rentable / You Can Live In It
  • Can Borrow Against Real Estate (HUGE POTENTIAL)
  • Unlikely To Become Worthless
  • Cost of living continues to grow means higher rents and less owed rent (inflation)
  • Can change use of some forms of real estate or renovate to increase value
  • Great way to build retirement income

Real Estate Disadvantages

  • Mortgage Rates Can Fluctuate (Not Predictable)
  • Transaction Costs Are High (Land Transfer Tax, Legal Fees, Sales Fees)
  • Breaking A Mortgage Can Be Costly
  • Fixed Location – More cost if you are abroad and need to hire someone to manage your properties
  • Less Liquid Than Stocks – Usually takes a few months to sell
    Subject to Government Policy Changes (though could apply to stocks also)
  • Rules favour tenants, not landlords
  • Higher barrier of entry in today’s market

Stocks Advantages

  • Great stocks outperform market (Look up what Apple was trading for in 1994 – $1.13ish)
  • TFSA/RRSP can shelter some taxes
  • Dividends can be reinvested creating a compound investment
  • Minimal trading costs and very liquid
  • Low Transaction Fees if self managed
  • Can trade easily from anywhere in the World

Stocks Disavantages

  • Higher Risk
  • Taxes on Investment Income
  • Still need to pay for Accommodation
  • Managed portfolios have Management Fees
  • Require 100% Down
  • Can’t Borrow Against
  • Can’t Change Use
  • Banks won’t even lend you money to buy their own stock but they will lend you money to buy a house

Conclusions: Stocks vs. Real Estate

Regardless of which route you decide to go with your investments, it is important to invest in SOMETHING. If you plan to retire one day at least try to invest in one of them. I think this analysis proves that real estate has been the better investment over the past 25 years, but that doesn’t necessarily mean it will continue that way in the future. Find an investment that makes sense to your own situation. If you can, invest in BOTH. Find a financial advisor, take some chances with a small percentage of your investment portfolio and work with a great realtor who will be there for life. If you are picking realtors on a per transaction basis, you are doing yourself a terrible disservice, you should be looking for a real estate consultant or advisor (shameless plug: like myself) who can continuously advise you throughout life as your situation changes. Best of all, advice is always FREE and I only get paid if you actually buy or sell something so it never hurts to ask for help, so contact me anytime! I actually talk a lot of people out of working with me initially because they come to me wanting to sell a place and I always advise to HOLD LONG when it comes to real estate.

This is for informational purposes only based on historical performance of TSX S&P and TREB GTA Averages. While I think 25 years tells a great story of a market, prices can go down and rates of return are not guaranteed as with any investment. There is risk, but consult an expert who can advise you on these risks. As mentioned, I am invested in both Real Estate and Stocks as I believe in a balanced approach to investing.