Real Estate Is A Good Investment

A new study by TD Canada Trust says many Canadians do not realize they’re living in their single biggest investment, with land and buildings representing an average of a third of household wealth in Canada. Another 23 per cent of household wealth is in insurance policies, and 18 per cent is invested in stocks and bonds.

The bank’s report says real estate has also been one of the better performing financial assets in a household portfolio, helping offset losses on the stock markets. “For many Canadians who have modest financial market investments, their home is the single biggest asset on their balance sheet” the TD report notes. "The increase in home prices has virtually offset the negative wealth effects from declining equity values — although the net impact on individual balance sheets depends on the household's exposure to the equity market".

While the property asset will continue to grow in value, the report also says, it may not grow at the rate in the recent years. "The fundamentals driving housing markets will remain positive," says Craig Alexander, a senior economist at TD Bank and author of the report called “Profiting from Home Ownership”.

The report predicts that for 2004, growth in home prices will slow down to a 3.5-per-cent advance from this year's 7-per-cent projected growth. “Sales will be supported by rising personal income, high levels of affordability and the relative attractiveness of owning rather than renting.”

Despite the projected smaller increase in prices, the report highlights another benefit as the lack of capital gains taxes on rising property values. That makes the 3.2-per-cent figure equivalent to a pre-tax return of 5.8 per cent in relation to other capital investments, Alexander said.

The TD Economist also believes that investors have been paying too little attention to real estate prices, especially considering that a higher percentage of Canadians own homes than own equities. On average, 35 per cent of Canadian household assets comprise real estate, while bonds and equities make up only 18 per cent.

Geographically, the TD report says Montreal is poised to register the largest property gains in 2003, with the bank report projecting a 19.4 per cent rise in resale home prices. Toronto is seen posting a 5.6 per cent gain, and Vancouver 4.3 per cent.

According to a forecast by the bank, over the next 10 years Canadian equities will likely deliver an average return of 7.75 per cent, while a basket of bonds will yield 5.75 per cent, and money market funds 4.6 per cent.

In contrast, Canadian home prices are expected to rise at an average annual rate of 3.2 per cent. "Over the long haul, the risks associated with investing in financial instruments such as bonds and equities demand a risk premium that ensures a long run return greater than that of real estate," said Craig Alexander, TD Bank senior economist, in his report released yesterday.

Since 2000, real estate has been trouncing the equities market. Last year, for example, house prices increased about 7 per cent nationally, versus a 12.4 per cent fall in the S&P/ TSX composite stock index.

Housing Affordable for Most Canadians

A new study by the BMO Financial Group says the average monthly carrying cost of new home ownership is now 30.5 per cent of household income, well below the 60 to 70 per cent level of the early 1990s. This is seen as a strong indicator that the real estate market will continue to be robust for the rest of the year in spite of recent higher interest rates and higher housing prices.

The report from the BMO Financial Group Economics Department notes that the national average sale price for housing during the first quarter of 2003 rose 8.5 per cent from a year ago to $198,418. Over the same period, the monthly cost of a variable rate mortgage rose 17.8 per cent to $1,001 (based on a 10 per cent down-payment and a 25- year amortization period).

“Despite these increases, the carrying cost of homes continues to be affordable for most Canadians” says Michael Gregory, Assistant Chief Economist, BMO Financial Group. "Housing affordability has been and will remain favourable across the Canadian market in the near term."

"Payments are only one side of the affordability coin: the other is income," says Gregory. "In the first quarter, average income advanced at a 2.5 per cent year-over-year rate and job growth was 3.4 per cent. In other words, Canadians are working and earning more, and this provides a partial
offset to higher mortgage payments."

The report also notes that monthly housing mortgage payments have historically averaged 43.6 per cent of household income, and when the national average reaches that point, demand would probably begin to soften noticeably.

"Given the current high level of affordability, with monthly payments still at the historically modest level of 30.5 per cent of total household income, the housing market should be able to weather still higher prices and interest rates, rather than dropping under the weight of mounting mortgage payments," says Gregory. "The economic indicators all point to Canada's housing boom landing softly, rather than with a thud, which is good news for existing homeowners and those just about to buy."

The BMO study shows highest monthly carrying were in Vancouver, at $1,587, and in Toronto-Oshawa, at $1,462. The lowest carrying cost locations in the country were Saint John, at $489, and Regina, at $506. Saint John also saw the lowest change in year-over-year carrying costs with an increase of only two per cent, while Montreal and Quebec City saw the highest spikes at more than 26per cent.

Note: Article provided by CREA. The comments contained on this site are for information purposes only and do not constitute legal advice.

The Canadian Real Estate Association website:


Mobile: 613.331.1239

All information provided is deemed reliable but is not guaranteed and should be independently verified.
Copyright 2004-2014 © All Rights Reserved