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Real Estate Returns

January 25th, 2007 ·

RE/MAX Canada made news today by reporting that the average price of a home appreciated 264 per cent over a 25-year period, rising from $76,021 in 1981 to $277,000 in 2006. An executive with the real estate company had this to say:

Conventional wisdom used to be that real estate was a relatively safe, long-term investment that typically appreciates at a rate of five per cent annually. These statistics clearly tell a different tale. In the top ten markets, real estate values rose at least eight per cent or more on an annual basis. Even the worst performing market in the country experienced an increase of close to six per cent annually since 1981.

I don’t know where this executive found a compound interest calculator, but these statistics merely confirms conventional wisdom. Nationally the gain in prices works out to an uninspiring 5.31% annual growth rate and Barrie, the best real estate market in the country according to the press release, posted annual price gains of 6.40%. Meanwhile, inflation was running at 3.03% over the same period.

How did competing asset classes perform over the same period? The TSX composite would have returned 10.75%, bonds 10.9% and the S&P 500 13.5%. Granted, real estate also provides value in the form of imputed rent (less expenses such as property taxes, maintenance and insurance) that would add a few percentage points to the price gain. My guess is that total real estate returns would work out to be better than bonds but less than stocks but that doesn’t make for a breathless (and inaccurate) press release.

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Tags: Housing

9 responses so far ↓

  • 1 Homer // Jan 25, 2007 at 2:05 am

    If you look at the Globe and Mail comments section of this article, people were all over this… and understandably so.

  • 2 Enough Wealth // Jan 25, 2007 at 2:06 am

    Shock, horror! To think that someone working in the real estate industry said something untrue in order to make real estate sound better than it really is?

    Whatever next, describing a dump of a place as a real “fixer-upper”? ;)

  • 3 Canadian Capitalist // Jan 25, 2007 at 11:41 am

    If they spent good money putting out a press release, they should at least get the numbers right.

    I found the G&M story that Homer refers to. RE/MAX has corrected the growth numbers but a number of comments make the same point.

    Link

  • 4 award tour » real estate returns // Jan 25, 2007 at 5:59 pm

    [...] Canadian Capitalist » Real Estate Returns. it’s funny that the people at Remax just got the numbers completely wrong. [...]

  • 5 Rob // Jan 25, 2007 at 9:20 pm

    Although in real estates favor it can be leveraged much more than stocks or bonds, if you put down 10,000 to buy 100,000 worth of property you were effectively getting 10x the gains on your original money.

    Now that I read it I’m not sure it sounds right, but I think so.

  • 6 Canadian Capitalist // Jan 25, 2007 at 10:02 pm

    Rob: Yes, it is true that you can leverage real estate. But, then don’t forget to deduct the interest payments on the mortgage.

  • 7 Investorial // Jan 26, 2007 at 1:56 am

    I’m loving this piece.. and I’m very happy that the Globe commenters were all over that!

  • 8 Bring the Cash Flow // Oct 4, 2007 at 5:01 pm

    Comments on REI…

    The gain in real estate value over time is really only important to the average Joe who only owns their primary residence, and even in this case, most people are unlikely to use the capital appreciation in the property for any real purpose because they…

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