Canadian Real Estate Lagged TSX Returns Over The Past 20 Years: BMO

Most Canadians believe real estate is the best-performing investment they can make. A new report from BMO makes that unclear, after concluding the country’s largest stock market outperformed housing. Despite the TSX performing poorly against US equities, it outperformed Canadian housing significantly over the past 20 years. That can mean a fundamental shift for Canadian real estate if investors chase stronger returns. 

Canadian Real Estate Prices Have Been Unusually Slow Rising

Despite its sky-high prices, Canadian real estate appreciation has been unusually tame recently. The CREA HPI slipped again in May, bringing annual growth 2.4% below last year. The bank further highlights that prices have corrected 14.4% from the early 2022 peak, with average prices making a similar move—4% annual decline, and down 15% from the record high.   

As we highlighted yesterday, appreciation over the past 3 years has trimmed to just a 2% compound annual growth rate (CAGR). That’s not exactly the high-flying returns most people expect when discussing Canadian real estate. 

“The Canadian housing market has been unusually mild-mannered this year, with extremely weak affordability reining in the usual animal spirits,” explains Douglas Porter, chief economist at BMO.  

Adding, “No doubt, prices are still incredibly lofty, having tripled in the past 20 years.” 

He notes that average annualized growth has been 5.7% per year, compared to the 2.2% average for inflation. By any measure, it’s been a solid performer for investors. 

Source: TSX; CREA; Stat Can; BMO.

Even With The TSX’s Poor Performance, It Outperformed Real Estate

Canada’s largest stock market developed a bad rap recently, especially when contrasted with the US investor boom. Even with the recent correction and lackluster performance, it’s outperformed housing—significantly. 

“But, we’ll just point out that the total return in the TSX over that same period has been much higher—an average annualized rise of over 7.9%,” says Porter. “Even with a recent mini correction…” 

Before one considers pulling out their home equity and piling into whatever Canada’s equivalent of GameStop is, the bank warns there’s more to consider. 

“We would be the first to allow that comparing equities and residential real estate returns is a tricky, if not fraught, exercise,” he caveats his research. 

Jokingly he adds, “You can’t live in your stocks, but you also don’t need to fix their roof, or pay property taxes on them, and it’s much easier to buy and sell them.”  

Canadian Investors May Have Been Piling Into The Wrong Bet

Considering buyer demographics, that point is much more interesting than he may realize. During the recent real estate boom, investors displaced first-time buyers—a point even the country’s largest bank made. Despite policymakers stating a rush to build new condos for first-time buyers, most units are now owned by investors, many of whom are negative cash flow. 

Negative cash flow real estate is a speculative play that involves buying a property that doesn’t collect enough rent to cover its carrying costs. The owner does so, betting the property’s value will rise faster than the gap between rents and carrying costs. It’s not a new issue due to high rates either. 

Nearly half of Toronto’s new condos were cashflow negative prior to 2020, when rates were close to rock bottom. Unsurprisingly, there’s now record condo inventory in Toronto after a period of stagnating price growth. 

Long story short, you can’t live on your investment. But a good portion of capital bidding up prices wasn’t planning on living in their investment either. But we digress. 

“But the point is that, over time, equities have provided very strong returns—and this is in the TSX, which has famously underperformed the S&P 500 for the past 15 years. Further words are very unnecessary,” concludes Porter.

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