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