In a recent column in The Financial Post, Garry Marr pointed out that even in hottest bull market in real estate, stocks beat homes as an investment:

By the end of last year real estate prices had climbed about 85% over the previous decade, according to the Teranet/National Composite Bank House Price Index.

Stocks? The TSX/Composite Index has had a total return of about 141% during that period or about 9% annually. Go back 20 years and stocks still return more than 9% annually over the period.

One can sympathize with Mr. Marr’s intention to provide a counterpoint to the constant rah-rahs from the real estate industry (As a matter of fact, many years back, I wrote a very similar post in response to industry claims that real estate beat stocks here). However, Mr. Marr is incorrect in comparing home prices with stocks. Here’s why:

The total return from stocks includes the change in price level of the TSX index from 6,614 in 2003 to 12,433 in 2012. That’s a gain of 88 percent. The rest of the gains came from reinvested dividends (The TSX Composite yields about 3 percent per year). The return from housing was measured solely as the increase in the level of the Teranet – National Bank National Composite House Price Index and does not account for rental income from a property. It is true that owning a home entails expenses such as property taxes and maintenance but even in frothy markets like the present one, housing typically will have a positive yield net of expenses but excluding the cost of financing. Therefore the column presents an incorrect picture by comparing total returns from stocks with just the increase in price level of real estate.

Even if it turns out that stocks beat out real estate over the past decade, it still does not mean anything unless one takes risk into account. After all, if stocks beat bonds in most time periods, investors would hardly express surprise because stocks are riskier than bonds. The TSX Composite annualized returns had a standard deviation (a measure of riskiness of stocks) of 19.53% in the 2003 to 2012 period. The Teranet / National Bank National Housing Price Index, on the other hand, showed a standard deviation of just 2.6% during the same time period (assuming I did the calculations correctly with the information available from If real estate is less risky than stocks, one would expect real estate to have lower returns as well.

This article has 21 comments

  1. I’ve known a couple of people who claimed that their rental income just barely covered their expenses and that they were counting on price appreciation to make it worthwhile to be a landlord. Given the tendency toward terrible mental accounting, I assume that these two people actually lost money excluding price appreciation. Of course, their experiences may be far from typical. I’m not sure how to get real data on this.

    • Canadian Capitalist

      It’s hard to get real data on rental yields. We sold our house last year and briefly considered renting it out. We found that rental gross yield was 5.7 percent. I estimated the net yield to be about half that — 2.4 percent excluding financing costs. That was far too low for me, so we decided to sell for a price that eventually turned out be slightly below market.

      I’ve also found rental real estate investors to be fuzzy with their numbers. For example, I’m never certain what they mean by “expenses”. Often it includes financing costs, which should ideally be broken out separately.

      I recall Re-Max used to publish average rental estimates for houses in their reports. If there was some way to hook that in to the Teranet home pricing index, we might have good data for analysis. Unfortunately, today we don’t.

    • Michael’s comment meshes with and highlights the importance of CC’s “exclusing financing” proviso. If you’re only making ~2.4% on an asset, then finance most of it at 3%, you’re going to lose money.

      To jump to another topic, I think that housing is a good case for where the standard deviation doesn’t come close to adequately conveying the risk.

      • Canadian Capitalist

        @Potato: I agree with both your points. We decided against renting because we were unwilling to subsidize someone’s rents. Standard Deviation probably doesn’t come close to capturing the risk in real estate (as well as bonds) at these nose bleed levels.

  2. Ok, how about a simple but fair comparison? You’ve got it right there in your post: 88% for stocks, 85% for RE.

    • Canadian Capitalist

      @Kris: One cannot do a simple comparison because we can only compare total returns, not a subset. Example: If I bought a 10-year bond in 2003 and redeemed it in 2013, I got my principal back. Is it fair to say then that the return is 0?

      I actually think the past decade was a freak one for real estate. Low valuations coupled with plummeting interest rates resulted in increased prices. I would suspect that in most time periods that you look at real estate return will lag that of stocks. However, good data for testing this is hard to come by.

  3. I usually don’t weigh into these heady discussions, but stocks are usually compared in a non-leveraged way to a leveraged investment, so it would be difficult to compare any sort of apple to apple comparison. You can also leverage your way into a real estate investment.

    There is more work and more control in Real Estate. You can still be an armchair athlete in real estate investing, but you would need to find a partner who would do all the heavy lifting for you or a excellent property manager. If you don’t speculate (buy a condo in downtown Toronto) and look for properties that cash flow $250-350 before maintenance and vacancy costs on 20% down in the GTA you can do quite well (yes they are these properties out there, so people stop buying negative cash flow properties).

    I can tell you that our real estate portfolio has done much better than our stock portfolio over the last 2 decades of investing. Our choice of financial advisers have got us into a lot of high MER “rock star” fund managers, and I would like to try to move these into more broad based market ETFs as our backend DSC disappear.

    I have compiled stats from the MLS in the GTA(where I invest) back to 1966. The average annual increase in value over that time is 6.21% per year. On a leveraged investment and if you are in it for the long haul, the results can be great.

    • Canadian Capitalist

      @qmanrei: I agree that it is difficult to make apples-to-apples comparisons because important pieces of data are hard to come by. It is true that one can leverage into rental real estate. On the flip side, one cannot easily reinvest cash flow into more rental real estate. With financial instruments, it is easy to reinvest, so investments can truly compound.

      • Thanks for your comment.

        Actually I would say it is easier, in terms of I have cash left in my bank account at the end of the month, I can invest it in whatever I want. It is not, if you consider the ease of reinvestment of dividends back into a stock/fund by the issuer, that is truly hands off. I do like the control of the cash, but if you are not disciplined then it might not be used for what it should be.

    • Dsc’s usually disappear after 7 years, so you shouldnt be paying them, if you move your investments elsewhere. Even if you were going to be paying them, your probably better paying the DSC’s and moving elsewhere than your money sit there and either do nothing or lose money.

  4. I find that quite a few of the real estate investors I know ignore quite a few risks that can significantly affect your return on such an investment — the major culprit being vacancy risk. Having a rental be empty for just a few months every few years can have a significant impact on the income you are drawing in a rental. Furthermore, having an empty house adversely affects your house insurance payments as well.

    • I’m not sure if it is okay to respond to other peoples comments but I thought I would try to address them since I have already started in my comment.

      @Raman you are right vacancy risk can be trouble for investors that do not prepare for it.

      I use a percentage of monthly gross rents as part of my calculations when I am doing my due diligence on a property and account for that in my overall return simulationa. I can’t speak for other markets but the vacancy rate has never been higher than 4 percent in the GTA since 1973 in some areas the vacancy rate is lower than 1%, now that is not exact as I don’t have the data in front of me. (And by the way that 4% is from South Oshawa) Most vacanies can be filled in the 60 days when a tenant gives notice.

      Where I often see vacancy occur is inexperienced investors who either don’t know how to fill a property with a quality tenant quickly or just cannot commit the time to fill a vacancy and will not seek help from a professional management company.

    • Canadian Capitalist

      Agree with you on vacancy. It is quite expensive to carry a property even for a couple of months without any income from it. There are also other risks such as renters wrecking the property, finance costs increasing etc.

  5. I agree with Canadian Capitalist it is hard to get the rental yields on residential real estate. On commercial real estate it is easy because most of the lease rates are NNN. So the the only expense you have from the lease is the financing. All expenses are passed on to the tenant.

    In Calgary the commercial cap rates presently are about 6%, that is after expenses.

    I have been investing in commercial real estate for about 8 years. My average cap rate has been about 8% + capital appreciation.

    Overall I have done much better with real estate than I did with stocks. The biggest advantage is that I am in control not some CEO who only cares about his year bonus or stock option.

    • Canadian Capitalist

      @Marco: Thanks for your input. Personally, I barely have time to manage my own house, so real estate is out of question for us. However, we do have real estate exposure through REITs.

  6. There are several aspects to this discussion that are worth commenting on. My experience has been with residential rental properties. As an example, I bought two homes in 1990 for $92,000 each. At the time I had to make a larger down payment than I would have, if I had been living in the houses. This was $39,000.

    The first point is that unlike stocks, where you actually have to buy them; with a rental property you pay a down payment but the appreciation occurs on the TOTAL value of the property. In this case the houses are now worth $250,000 each, which to me means that a $39,000 investment is now worth $500,000.

    In addition, the cost of insurance, mortgage interest, property taxes, property management fee, maintenance, etc. have been completely covered by the rent since the first five years. So in addition to the appreciation in the property value the homes were a source of increasing revenue as the rent increased and the mortgage rates decreased over the years. (I think my initial rate was 12%!!!)

    Now that the houses are mortgage free, property taxes, insurance and maintenance average about $4000 per year and the rent is approx 15,000 per year. So the income each year is $11,000 and the value of the home continues to increase. This may not always be the case but I consider the rental properties as a diversification of investments (I also hold stock).

    With respect to vacancies: every time a tenant moves you lose at least a month’s rent. There is also usually a cost to repaint, carpeting, other maintenance. The key is to fill the home with long term tenants and keep them. I had a VERY good property manager who did an excellent job in screening applicants. I also valued a good tenant more than rent increases. If someone has lived in the home for five years, always paid the rent, never been a problem, etc. then I SAVE money by keeping them happy, charging less rent and keeping them in the home. A single missed month will take years to recover if you lose a tenant, even if you are able to raise the rent.

    Bottom line for me is that rental properties are part of my portfolio of investments. I wouldn’t recommend an “either or approach” but real estate offers an alternative to bonds if you want to diversify. Companies can go bankrupt (Nortel) but people will always need a place to live.

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  8. Real estate is affected mostly by unemployment rates,interest rates,the bond market which sets fixed term mortgages and speculators plus demand and supply of first time buyers and older homeowners downsizing.The problem with owning real estate is that there are so many extra taxes,fees,maintenance and repair costs,transaction costs that over a 25 year period once the mortgage is paid can add up to 100% or more of the original cost of the house or property.

    For example if you add up property taxes,home insurance,CMHC insurance premiums,utilities,maintenance and repairs,H.S.T. on all applicable costs and expenses,the transaction costs of buying and selling which are land transfer taxes,real estate commission,lawyer fees,H.S.T. on all this.A $500,000 house can easily add up to 4.00% a year or $20,000 in all these taxes,fees,costs,expenses over 25 years which equals 4%*25=100% or $500,000 in this case.

    Remember mortgage interest and other financial charges and fees are extra and not included in this $500,000 figure.People have to be careful of the total will really cost not just look at the low mortgage rate and lower monthly payments.

  9. David R Pacey

    As to the good and bad of rentals?
    Expenses = expenses, no matter the name.
    To have a successful rental property, your income must be greater than your – Expenses.
    What are expenses? maintenance / vacancy / insurance / lawyers / accountants / property managers costs / aaaaand interest on your borrowing costs.
    But then there are hidden income in any rental property too.
    Mortgage decrease as in equity increase that someone else is paying for. That is revenue that does not, should not factor into positive income calculations.
    Market appreciation which does not factor into positive income calculations.
    Depreciation, which . . . . .
    The fact that a 3% increase in value of a property is not just on the value of the property but also against the Percentage of the mortgage to down payment. In other words, a 3% on $ 1,000,000 valued property is an increase of not 3% on the down payment but an increase of approx. 7% against the down payment due to leverage factors.
    Real estate vs stocks where you have to pay 100% of your own monies vs leveraged investments for which others ( renters) pay all the costs????? Positive Income Rentals Rule !!!!

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  11. I’m not sure why it’s necessary to have a ‘which is better conversation, stock vs. real estate’. They are simply two different asset classes with quite different risk/reward profiles that are not highly correlated to each other. Most large institutional investors don’t think in terms of one is better than the other, but rather how do I fit these two asset classes together into a portfolio to make it a better portfolio to meet the objectives of the investors.

    Pension funds see fit to include 8-12% of real estate in their portfolios. They provide good yield and lower risks. Most regular investors exclude real estate from their holdings. As a purveyor of syndicated mortgages I believe there is great opportunity to create better portfolios by including some real estate. Call me biased, but in my years of auditing investment portfolios (Portfolio Audit/Weigh House) I found little exposure to real estate other than homes and cottages.

    And investors ignore this asset class at their own peril. When stock markets plummet, they do so together in a herd like fashion. Real estate is one asset class that tends not to follow that herd.

    A better comparison for a future article might be, Stocks and Real Estate: working together to improve your returns and reduce risks!