A colleague passed on this information from the Canadian Real Estate Agency which shows the 20 year annualized returns and standard deviation data for average residential properties in the following cities for the period ending March 31st, 2008. Standard Deviation is a measure of the volatility of the returns – a higher standard deviation indicates wilder swings in price essentially.
20 Years Ending March 31st, 2008
Toronto Homes: 3.3% Annualized Return, 9.5% Standard Deviation
Vancouver Homes: 7.3% Annualized Return, 12.0% Standard Devitation
Calgary Homes: 7.6% Annualized Return, 8.7% Standard Deviation
Halifax-Dartmouth: 4.5% Annualized Return, 18.6% Standard Deviation
Ottawa-Carleton: 4.1% Annualized Return, 9.6% Standard Deviation
As a comparison, I looked up the annualized return of the TSX from March 1988 to March 2008 through DFA’s Returns Software and found it earned 9.93% with an annual standard deviation of 14.03%.
As per the request of a reader, here are some other index data from March 1988 to March 2008:
Russell 3000 (CAD$): 9.60% Annualized Return, 13.02% SD
S&P500 (CAD$): 9.61% Annualized Return, 13.06% SD
CRSP 1-10 (CAD$): 9.63% Annualized Return, 13.18% SD
The above data is adjusted to Canadian dollars, and I should point out that all the annual standard deviation data shown on this entire post is calculated based on the monthly returns (which I actually think might be better than just looking at the annual returns for calculating standard deviation). The CRSP 1-10 refers to the “crisp” database, deciles one through 10. CRSP = Center for Research in Security Prices and deciles one through ten represent every US stock.
Just in case anyone is curious, here are the US index numbers in their native US currency:
Russell 3000 (US$): 10.72% Annualized Average, 13.63% SD
S&P 500 (US$): 10.73% Annualized Average, 13.57% SD
CRSP 1-10 (US$): 10.75% Annualized Average, 13.87% SD
Canadian Inflation as measured by CPI was 2.40% during this time period.
Being from Vancouver my first impression was WOW, that’s pretty compelling evidence to buy instead of rent. But really I wonder what the return would have been 4-5 years ago before the housing bubble we’re in now. Since prices have more then doubled this must also mean prices need to fall pretty steeply to return to the mean of the rest of the country.
Out of curiosity does the DFA software provide the annualized return & standard deviation of the US markets (S&P, Russell 2000 or Wilshire 5000) over the last 20 years. Was it significantly different from the TSX and is there a reason/factor why?
Curious about the result if both real estate and TSX were compared using the same time value. Doesn’t the 10 year gap in comparing these annualized returns skew results in favour of the TSX?
@Jordan – the software does indeed provide the returns you are looking for. I was downloading the updated data and the program isn’t working right now. I’ve downloaded their older program and data which IS working, but is a bit like using DOS versus XP in interface – i.e. cumbersome. I’ve got a call into tech support to get the newer program up and running, but in the meantime I’ll dig up the data and add it to the post later today.
@Stephanie – Curious as to the 10 year gap you are referring to. ?
What I find interesting is that generally housing is considered to follow inflation, but inflation from Aug 1998 to Aug 2008 according to the bank of Canada inflation calculator was running about 2.4% annually. It would seem to me, with this data, that housing is ahead of inflation generally across Canada.
@Jordan – post now shows data for the other indices as requested.
@Traciatim – I looked up the numbers for CPI from March 1988 to March 2008 and the number remains 2.40%. I’m not surprised that real estate keeps up and then some with inflation – one could argue that while we have a ways to go in Canada, we only have so much land whereas there are increasingly more people. Well, at least until the next plague. :P
Truth be told – while I put more stock into 20 year numbers versus 1 and 5 year numbers, some cycles are 20 years long (I believe currency is 17) – so the data could be looking at different phases for each index. Can’t really conclude anything based on that.
Preet: Do these returns include income from residential real estate in the form of imputed rents? If it doesn’t, it’s not an apples-to-apples comparison. Ignoring imputed rents is a bit like comparing bonds to stocks by ignoring the coupon payments from the bonds. Even if you include imputed rents in the calculation, I wouldn’t be surprised if real estate had less returns than stocks. But the return gap would be a lot narrower.
@CC – Simple price appreciation – not including rents. I agree that the gap would narrow (and you analogy is great!). I was more looking at it from the perspective of those who get big houses for themselves and don’t save externally, with the plan of downsizing in retirement and living off the built up equity. They wouldn’t be able to use any rent. Of course, they are more likely to stick to their plan than a stock market investor – so while they may earn a lower return on their “savings” they may come out further ahead than a stock investor who keeps getting in and out of the markets at the wrong times.
I know many real estate investors (buying residential with the intent of renting) who have done much better than stock market investors.
Hey Preet, do you happen to have a link to the original CREA study?
Thanks very much Preet for the additional data.
I’m trying to figure out what would cause our market’s return to be less, when comparing in the native currency.
Is our market less efficient? Could it be caused by higher taxes? Or do you think it’s caused by the US dollar being the world’s reserve currency (since the currency adjusted numbers are fairly equal)?
Thanks
@Traciatim – unfortunately no. Info was passed in printed form. I tried to access CREA’s website, but I guess you have to be a member to get access (I am not a member).
@Jordan: “Being from Vancouver my first impression was WOW, that’s pretty compelling evidence to buy instead of rent.”
My first reaction was that real estate has underperformed the stock market even in the best case. My second reaction was that the standard deviation is pretty scary when you are as highly leveraged as most home “owners” are with their huge mortgages.
Here is my opinion of buying a home.
7 words…. “You cannot live in your Stock portfolio” :)