Canadian Real Estate Lagged TSX Returns Over The Past 20 Years: BMO

Most Canadians believe real estate is the best-performing investment they can make. A new report from BMO makes that unclear, after concluding the country’s largest stock market outperformed housing. Despite the TSX performing poorly against US equities, it outperformed Canadian housing significantly over the past 20 years. That can mean a fundamental shift for Canadian real estate if investors chase stronger returns. 

Canadian Real Estate Prices Have Been Unusually Slow Rising

Despite its sky-high prices, Canadian real estate appreciation has been unusually tame recently. The CREA HPI slipped again in May, bringing annual growth 2.4% below last year. The bank further highlights that prices have corrected 14.4% from the early 2022 peak, with average prices making a similar move—4% annual decline, and down 15% from the record high.   

As we highlighted yesterday, appreciation over the past 3 years has trimmed to just a 2% compound annual growth rate (CAGR). That’s not exactly the high-flying returns most people expect when discussing Canadian real estate. 

“The Canadian housing market has been unusually mild-mannered this year, with extremely weak affordability reining in the usual animal spirits,” explains Douglas Porter, chief economist at BMO.  

Adding, “No doubt, prices are still incredibly lofty, having tripled in the past 20 years.” 

He notes that average annualized growth has been 5.7% per year, compared to the 2.2% average for inflation. By any measure, it’s been a solid performer for investors. 

Source: TSX; CREA; Stat Can; BMO.

Even With The TSX’s Poor Performance, It Outperformed Real Estate

Canada’s largest stock market developed a bad rap recently, especially when contrasted with the US investor boom. Even with the recent correction and lackluster performance, it’s outperformed housing—significantly. 

“But, we’ll just point out that the total return in the TSX over that same period has been much higher—an average annualized rise of over 7.9%,” says Porter. “Even with a recent mini correction…” 

Before one considers pulling out their home equity and piling into whatever Canada’s equivalent of GameStop is, the bank warns there’s more to consider. 

“We would be the first to allow that comparing equities and residential real estate returns is a tricky, if not fraught, exercise,” he caveats his research. 

Jokingly he adds, “You can’t live in your stocks, but you also don’t need to fix their roof, or pay property taxes on them, and it’s much easier to buy and sell them.”  

Canadian Investors May Have Been Piling Into The Wrong Bet

Considering buyer demographics, that point is much more interesting than he may realize. During the recent real estate boom, investors displaced first-time buyers—a point even the country’s largest bank made. Despite policymakers stating a rush to build new condos for first-time buyers, most units are now owned by investors, many of whom are negative cash flow. 

Negative cash flow real estate is a speculative play that involves buying a property that doesn’t collect enough rent to cover its carrying costs. The owner does so, betting the property’s value will rise faster than the gap between rents and carrying costs. It’s not a new issue due to high rates either. 

Nearly half of Toronto’s new condos were cashflow negative prior to 2020, when rates were close to rock bottom. Unsurprisingly, there’s now record condo inventory in Toronto after a period of stagnating price growth

Long story short, you can’t live on your investment. But a good portion of capital bidding up prices wasn’t planning on living in their investment either. But we digress. 

“But the point is that, over time, equities have provided very strong returns—and this is in the TSX, which has famously underperformed the S&P 500 for the past 15 years. Further words are very unnecessary,” concludes Porter.

17 Comments

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  • Reply
    Trader Jim 6 days ago

    The “what about leverage” crowd is going to be much quieter these days now that their 10x leverage means they’re underwater.

    • Reply
      robert christian 6 days ago

      Well, hold on a second. I’m sure the author has some data to support the story here, but it’s not like these numbers are consistent across the board.

      Secondly and more importantly, I like the stock market too, but I haven’t been able to find anyone who pays my stock purchases monthly, so the real estate investment option still rocks! That doesn’t count the money that pays down that investment either.

  • Reply
    Marley 6 days ago

    Good. I hope we finally de-financialize housing and start looking towards creating real innovation. It’s already going to be near-impossible to reboot our innovation sector, especially with the US ready to poach any of our talent.

    • Reply
      Timmie O'Toole 6 days ago

      Definancializing now that the gov said it was important to protect their investment. LOL.

    • Reply
      Mark 6 days ago

      I don’t see much evidence of “the US” specifically poaching Canadian talent en masse, but I see evidence that many Canadian residents are running for the exits. The result is the same however.

  • Reply
    Hafifz 6 days ago

    This isn’t fair. Trudeau needs to force Bank of Canada to lower rates to 0% to help homeowners and support the economy.
    Canada NEEDS higher home prices to succeed.

    • Reply
      Obi 6 days ago

      It’s true. Canada can just fund invasions of country to drum up immigration and generate rents.

      Starting to think we aren’t the good guys these days.

      • Reply
        Dar Robbins 5 days ago

        You got that right. We’re not the good guys. We’ve harbored Nazis after WW2 where the list is still secret, we’re funding Nazis in Ukraine and honoring Nazis in our House of Commons. Don’t take my word for it, look it up.

    • Reply
      Yoroshiku 6 days ago

      The Bank of Canada fuelled the housing bubble with 20 years of artificially low interest rates. Canada need to have an economy that is not so dependent on real estate bubbles to grow.

    • Reply
      Tiredofitall 5 days ago

      That is just craziness. 0 % interest rates will never return nor should they. Government should not support or prop up real estate investors any more than they prop up stock market investors.

  • Reply
    RW 6 days ago

    Why 5% per year? That’s the rate I’m getting from my GIC with no risk. Finally, a win for Canadians. Little Potato and Pee Pee both want rates to be lower though, so who knows how long the money we work for will have value.

    Their goal appears to transfer all of our lives to financing assets long-term for globalist investors.

    • Reply
      Yoroshiku 6 days ago

      I’m enjoying the 5% GICs but they won’t be around much longer. BOC will soon hack away at interest rates to re-inflate the housing bubble.

  • Reply
    Ethan Wu 6 days ago

    Who doesn’t want to move to Canada though? From Vancouver’s junkies to Toronto’s knife fights in the street to Montreal’s biker wars and Halifax’s human trafficking—there’s a little bit for every money launderer these days.

  • Reply
    M.Bury 5 days ago

    If only my savings earned a decent interest rate, I’d buy up some of this bloated real estate inventory.

  • Reply
    Dar Robbins 5 days ago

    According Douglas Porter, chief economist at BMO, if Real-Estate prices are still incredibly lofty, having tripled in the past 20 years what does that say for TSX stock valuations which has outperformed Canadian housing significantly over the past 20 years?

    • Reply
      Corky 5 days ago

      The difference is, the TSX isn’t overvalued relative to it’s earnings, while real estate doesn’t actually produce a product. It just sits there rotting away.

  • Reply
    Susan 1 day ago

    Is there data that indicates how businesses that aren’t paying taxes are impacting our ‘weak productivity’ numbers?

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