THINGS YOU WONT LEARN IN SCHOOL - Advice on Finance, Investments, Savings and Technology by Marin Anthony
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Is Real Estate a Good Investment in Canada?

12/1/2014

 
Is real estate a good investment in canada yes or no?
If you had a Reese Peanut Butter Cup bar for every time someone in Vancouver told you that real estate is a good investment then you’d own the entire Reese factory by now.

Though this pitiful and borrowed cliché analogy that I will reveal shortly doesn’t just apply to Vancouver, but most major metropolitan areas of Canada – namely Calgary, Toronto and Montreal.

The most tired cliché and the grand daddy of them all – It’s different here.

Of course it’s different.

First of all, the names of the cities are different. Thank goodness or else we’d be confused more than finding out which state Clinton (26 of them) and Madison (25 of them) are located in. Imagine if there was Toronto, Alberta – the hockey fans in cowtown wouldn’t feel their boos were adequate in the arena.

What’s also different between real estate markets?

The population of cities is different, the ornate smell of the suburbs is different, the homeless wear more layers in Calgary and they get free supervised heroin injection sites in Vancouver. What I’m trying to say by padding this articles word count is that there are a lot of aspects to why a city is different.

The one thing that isn’t different is looking at any investment through they eyes of a business. Does it make money, pay you money or at least pay for itself?

Of course, we need simplicity so that all people that know how to blink both their eyes at the same time can understand.

The Rub

It’s no secret the baby boomer generation made out like bandits on their homes north of the 49th parallel, especially in and around 49 degrees north and 123 degrees west – Vancouver. It’s hard to argue their mantra to their millennial kids that “Housing is the best investment we ever made.”

That statement may be true, but what other investments had they even looked at?

The Dow Jones stock index (the 30 most significant US publicly traded companies) has gone up from about 900 in 1980 to 17,000 in October 2014. I’m talking companies like 3M (maker of post-it notes), Home Depot, Goldman Sachs, Microsoft, Nike.

That 34 year run from 900 to 17,000 is a return of about 21x your money. Every $100,000 is now $2.1 million.

Picture
This is a fancy chart of the DOW JONES, fyi.
Advantage: Dow Jones. But I’m just cherry picking.

Had you invested in a 1980 Trans Am, you probably wouldn’t have fared as well.

You should know that it is reported that only about 25% of people participated in the stock market – another form of investing your money – during 1975-1985. This is from the University of Google by the way.

This was the time that most of our baby boomer parents were plopping down payments on bungalows and taking out mortgage rates between 10-21% and thus giving them their first saying 30 years later, “In my day…interest rates on mortgages were over 20%.” Yes rates were that high, for a blip, before dropping down below 20%.

When my future kids get older, the first in my day quote I’m going to use is, “In my day, when we were kids, we didn’t have the internet. We went to play outside in the real world.”

But how did it actually perform in terms of “is real estate a good investment”?

An investment is something you plop money into and it gives you a return year after year. That is brilliantly called the annual rate of return.

According to this 2012 report, the average annual rate of return since 1980 for Vancouver was 3.5% per year. This means if you bought a house in 1980 for $100,000 it would rise 3.5% in inflation adjusted terms per year. Inflation adjusted is a fancy way of saying that it includes the price change of money and goods over that time.

But was housing the best investment?

Maybe if you factor in the fact the mortgage wasn’t really your money, then maybe. But that’s just clever accounting.

In contrast to the Dow Jones, houses in Vancouver have gone up about 9x and Toronto about 8.5x. So they still fared pretty well respectively as investments and more importantly as a place to live.

What you see every day is the nominal price change. So let’s use that quickly.

The nominal price change over that time was 6.8%. When you do the grade 10 math, that $100,000 home purchase back in 1980 equates to $936,316 in 2014. Not too shabby of a return.

Picture
In contrast, other potential investments, including stock markets like the Toronto Stock Exchange (TSX) and the S&P 500 in the USA (that holds 500 of the largest companies like Coca-Cola, Apple and Chevron) have returned between 9 and 11% per year respectively.

This easily beats the return for housing over that time.

But once again, it’s different here.

In Vancouver, for example, “The Chinese are coming over and parking their money” has been a popular sentiment and conversation every time three or more people get together with food and drink. It’s the public’s consensus for why RE prices have skyrocketed.

The money that the Chinese (from China of course, not Canadians of Chinese descent) are putting into real estate are peanuts compared to what Chinese companies are sinking into Canada’s energy companies.

Canadians Buying Real Estate in the United States

I’m sure the people in Arizona and Florida are seething at the dirty Canadians that keep buying up all their houses.

Canadians are the #1 foreign buyer of real estate in those two states and account for 23% of real estate purchase in the USA! The Chinese come second with only 12% of sales. Womp, womp, here’s the silver medal.

That said, let’s compare what is a good “investment” between a house in Vancouver, BC with a house an hour south in Bellingham, Washington and a property a short flight away in Phoenix, Arizona.

For an investment to be worth it, it has to do two main things:

·      Pay you money while it’s in your possession (a dividend or income)
·      Appreciate over time (provide a gain on your money)

Next time, we’ll go through a couple of investment scenarios. We’ll ignore the whole mortgage principal and interest so the accounting is easy.

The simple premise is to see were you can buy to have your payments covered.

Stay tuned. 

Very shortly, I'll show you some juicy pieces of real estate that are a very sound investment…

VancouverInvestor
12/1/2014 03:07:22 am

Real Estate is hands down the best investment out there. If you don't buy know you'll be priced out for a long time, if not forever.

Stocks are too scary and volatile. Houses are REAL and you can live in them. Can you live in the dow jones. no.

So what if i house doesnt make you money. It goes UP in value and heck, rent out your basement suite to make an income. There's a reason why homeowners are makign out like bandits and the RE industry is booming. Everyone wants a piece

B Riding Dirty
12/1/2014 11:36:34 pm


Sooooo....

For some people renting has been seen even in our day as for poor people and troubled families (the neighborhood kids you tell yours to avoid), moving home to home, area to area, different bedroom to different city or relocated in the same one. Your kids make best friends with the other neighborhood kids, next thing you know Ching Chung Lee moving back to Canada and he needs his home back, Or time to sell to reinvest in Florida so they sell the rental home. New home new city,and having to explain to your kids why you don't have a home like all the other kids do and have to move again and why there is no play room in the new home! Just more pressure to buy but when its coming from your kids it harder to swallow. Explain buy vs rent to a 6 year old, good luck with that!

Sooooo.... Maybe real estate is broken into two segments,

Your HOME..... which is one place you plan to live out the next 18-30 years depending if you want to watch your kids get married and make babies in your basement or kick there ass out at 18 so you can finally enjoy the good life, At that point if you even remember what the hell it was. Soooo... Buy if you can afford, but know if it drops 5% in value you are in it for the long haul as your families home. That means avoid divorce, the idea of getting up and moving when you feel like a change is out of the question, Do not look for better jobs, in better cities, stay put like a well behaved dog. And forget about starter homes, or starting off with a condo and moving your way up, those days and that ship has passed unless you want to be that last idiot who can proudly say you bought the last ticket on the titanic. If you CAN NOT stomach %5 interest- 5% drop - 5% closing fees those Dirty Agents, THEN RENT!

Soooo..... INVESTMENTS. Rental homes. Which I believe you don't live in them you rent them out. Commercial properties, condo in whistler, or Vancity or like you pointed out maybe the best "investment" in real estate is South, so sell and BUY USA, haven't believed or felt like chanting USA USA since 2001.

Dirty Debtor
12/2/2014 12:35:48 am

Damn rights B.

Life is like the game of monopoly. You are free to worry about hoarding the most colored paper, owning the most real estate, or going around the board as many times as you can. Our emotions get invested, but when the game is over we cant take any of our winnings away from the table.

Is he who wins the one who has hoarded the most paper and plastic? Or he who has had the most joy and laughter throughout the playing of the game?

There is no right answer. But we are forced into this game, so play it smart, play it tough to get what you want- whether it's that home on boardwalk, that fat stack of colored paper... or that trip to the other side of the board.

Whatever you choose, enjoy it to its fullest, cause we only get one go at this game.

Peace be with you.

The Dirty Debtor

B Riding Dirty
12/2/2014 12:56:19 am

Ohhh Dirty Debtor....Sounds like you did not get the raise you wanted and have decided to quit your job and take off to Thailand for eight months. You have found peace in the wild West.

So If you could please delete his positive post that would be great.

May the force be with you young Jedi!

Marin link
12/2/2014 03:59:13 am

B Riding Dirty - you make some great points. Liquidity vs fixed, whether it's your money or your home is entirely dependant on your lifestyle and what you want to choose for your family.

Just don't overinduldge in one asset class or you'll get whacked when the markets turn.

Oh, and Dirty Debtor....stay tuned for the post on Monopoly..


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