Canada

Everything’s A Bubble, and Canadian Real Estate Was One of The Worst Returns

Canadians are scrambling to buy a home and catch that huge wage of profits… but is it really that profitable? It depends what you’re comparing it to. When central banks flood the market with cheap money, almost everything soars. It’s not just real estate that is profitable. Real estate is just the only investment many Canadians understand. So, out of morbid curiosity, I ran the numbers on Canadian real estate compared to other places Millennials parked cash, over the past year. Here’s how a downpayment would have performed in some assets that have drummed up a lot of media coverage lately.

About the Returns

First of all, this isn’t investment advice, and historic returns aren’t indicative of future returns. This is just a comparison of how $200,000 would have performed over the past year in various investments. The amount chosen is the minimum downpayment for a benchmark home in Vancouver. For Toronto and the aggregate home price, the minimum downpayment can be smaller than the one used. However, then you’d also have to add in the cost of high-ratio mortgage insurance for those two cities. Yeah, we’re saving money. Fun already, eh? Just a quick overview to avoid some questions later.

For the real estate nerds, we’re using the return on the downpayment for a benchmark home. This means we’re factoring in the “benefits” of leverage, as opposed to an all cash purchase. The only deductions made are for interest, and property taxes. Interest is using a 25-year amortization, with a rate of 2%. Property taxes are estimated using the cities’ rates, and the aggregate is the Canadian average. It’s far from a comprehensive account of costs, but gives us a decent idea of what kind of returns people have seen. Some notable costs would be acquisition and disposal, maintenance, and insurance.

The return on equities and crypto is for selected indexes and assets popular with Millennials. The TSX 60 and NASDAQ 100 use two popular ETFs that replicate the makeup. FAANG is short for Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX); and Alphabet (GOOG). They’re America’s big tech conglomerates, and commonly traded as a group. We didn’t include acquisition or disposal costs here either. They’re way lower than Realtor fees though, and in some cases can be free. Leverage also wasn’t used, but could come in various forms like margin or options. 

Remember, we’re just estimating these returns, and trying to get an idea of how they did. We’re doing napkin math on returns, not building a portfolio. If you are building a portfolio, do a lot more reading, especially on diversification and risk. The other, and easier option, is to find some professional help. Phew! That took forever, now let’s get on with the numbers.

Canadian Real Estate Made Big Gains

Canadian real estate did provide a “modest” return across most of the country. The urban aggregate index would have returned 33.7% (+$67,400) from a year ago. In Greater Toronto, a benchmark home was a little better at a 41.2% (+$82,400) return over the past year. In Vancouver, it works out to a return of 22.9% (+$45,831) over the period. Remember, this is after accounting for the cost of interest and carrying taxes only. However, a hefty fee to dispose of the asset would drop the return value. Nothing to sneeze at, but let’s see how it compares.

Canadian Real Estate Gains Compared To Other Assets

The estimated percent return on a $200,000 investment if invested in selected Canadian real estate markets, compared to other assets popular with Millennials, over the past year.
Source: CREA, Better Dwelling.

The NASDAQ Outperformed, While The TSX Sucked

Investing in US equity markets greatly outperformed Canadian equity markets. The cash put into the NASDAQ 100 (QQQ) would have generated a 44.6% (+$89,200) return over the past year. The same cash in the TSX 60 (XIU.TO) would have returned around 2.97% (+$5,940) over the same period. The NASDAQ is largely tech focused, whereas the TSX is largely into financials and mining. Where did you think your mortgage interest went? Not exactly a mystery why Canadians have been sinking record cash into US equities.

Canadian Investment In US Equities and Funds

The net dollar amount Canadian investors have sunk into US equity markets.
Source: Stat Can, Better Dwelling.

FAANG Returned Almost Double Vancouver Real Estate

FAANG  (a.k.a. big tech) had a huge year too, which isn’t surprising considering it’s a large part of the NASDAQ. The downpayment cash put into the stocks would have returned around 45.8% (+$91,000) over the past year. That’s just a little under double the return on Vancouver real estate, so you have a little rent money too.

Canadian Real Estate Gains Compared To Other Assets

The estimated dollar return on a $200,000 investment if invested in selected Canadian real estate markets, compared to other assets popular with Millennials, over the past year.
Source: CREA, Better Dwelling.

Bitcoin Would Have Made Over A Million In Returns

Bitcoin, which recently crossed a $1 trillion market cap, ripped much higher over the past year. A downpayment invested would have returned around 530.97% (+$1,061,900). Tesla, which made more profit on bitcoin in a few weeks than selling cars, also saw a big spike. An investment with Tesla over the same period would have produced an estimated return of 337% (+$673,900). Not enough to live, but it’s a start.

I know, but what about rent? You still have to pay that, so checkmate. If your rent was $56,000/month, and you replaced it with a typical Canadian home, you’re right. Bitcoin investors didn’t make much at all.

GameStop Would Have Made You 33x More Money Than A Home

Unless you’ve been living under a rock, you’ve probably heard about the piles of cash made in GameStop. If invested a year ago, one would be sitting on a profit of around  926.20% (+$1,852,000) today. That’s today. If sold at peak, the return is actually closer to 8,707.1% ($17,414,000). It’s somewhat absurd, but really puts into perspective what “huge gains” looks like in 2021.

I know, it was a total fluke, right? Not exactly. Michael Burry, the Big Short dude, had been discussing GameStop since 2019. Sure, the 926% gain you would have made still holding today, isn’t as good as Burry’s 1,500%. However, he also sold before the infamous Reddit short squeeze, calling it “unnatural.” Yeah, one of Wall Street’s greatest investors thought 1,500% was totally natural.

Again, this isn’t investment advice, just trying to put things into perspective. Sure Canadian real estate is making huge gains… if it’s not being compared to anything else. If you’re watching other asset classes, almost everything has been ripping higher. Central banks flooded the system with the cheap money. This is providing a huge jetstream to propel mild performance. Will that be the case for the next year? Who knows, but investors in stocks and crypto can get off whenever they want for a small fee. Not so much the case for real estate. 

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34 Comments

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  • Reply
    Trader Jim 4 days ago

    I, for one, am excited to check in on these comments tomorrow. I’m guessing you’re going to trigger some “bubble envy”

    • Reply
      Pete 4 days ago

      Today will be forever know as The Great Triggering. Already a comment right below yours promoting Toronto real estate as a “place you can also live.”

      I mean, a condo DOES have the 100 most important tech companies in it. I’m sure it’ll outperform the NASDAQ, which won’t even produce enough profits to cover rent. Oh wait, I think I’m getting mixed up

  • Reply
    BDMan 4 days ago

    So basically you’re saying stocks are a bubble and housing is a bubble. However housing is less of a bubble if compared to stocks.

    You also can’t live in GME but you can live in a house in the YYZ.

    It’s easy to criticize but difficult to offer solutions. Would be good if BD wrote some articles on solutions instead of just doom and gloom.

    For example,

    -Go back to school for a higher paying career
    -Move out of Vancouver and Toronto
    -Live in a condo
    -Rent and be ok

    • Reply
      Jay Chen 4 days ago

      He’s not saying anything. The Shiller investment thesis is your primary residence will always underperform the stock market, because you need to ride the downturns with a home. You’re never going to be able to switch to renting, and getting in and out like a stock.

      Robert Shiller, one of the most prominent investors and professors, has said this.

    • Reply
      Obi 4 days ago

      “you can’t live in GME but you can live in a house in the YYZ.”

      Yes, the $1.8 million gain on GME can’t afford rent. I’m guessing you didn’t read the article, because he literally makes a joke about people like you saying that. Even QQQ, which isn’t even considered risky would have paid 4 year of average GTA rent.

    • Reply
      SH 3 days ago

      If work-from-home were guaranteed to be a permanent shift, I think you’d see plenty more Millennials ditching Toronto and Vancouver. But will the selfish Boomers in charge of everything permit that to happen? Remember, they care far more about their houses than they do about their kids. If forcing Millennials to stay in the expensive cities will prop up Boomer houses, then the Boomers will lean on policymakers and CEOs (mostly of their own cohort) to stamp out work from home.

      Assuming that occurs, what would be your next suggestion? Not everyone can move to Kapuskasing and work at Tim Hortons.

    • Reply
      Erg 2 days ago

      all four of your suggestions are naive, uninformed and offensive to those of us that did go to university and got a career, we’re born here, have children, and are currently in the rental market.

      Just a couple points of the many I could make…
      1) in order to afford a typical house in metro Vancouver your income needs to be $220,000/yr or more, how many people can actually go back to school to obtain a career that is in this range? How do they afford to leave the work force and go back to school, do you know of a surplus of jobs that pay this kind of money? Never mind repaying student loans.
      2) so people born and raised here should be forced to move away from their communities, rip their kids from their schools, their friends, their support systems, driven out because of the greed and selfishness of others?
      3) even condo’s (if you find one big enough for your family) are out of reach now for the majority of us
      4) renting has become almost as unaffordable and is subject to the whim of your landlord. Very difficult to even find suitable housing, never mind to find something you can afford and then actually be accepted to rent it. Mean while 50-90% of your income goes towards a rented condo or basement suite adds to the pockets of discriminatory landlords that barely maintain their properties, like pouring money down the drain, so you can have a roof over your head and perpetually never quite get ahead. Society is broken.

  • Reply
    Hodlr 4 days ago

    So… Sell my and buy Bitcoin. Got it

    • Reply
      Old Bittie 4 days ago

      Old folks gettin bubble envy. 💀

    • Reply
      Paul 4 days ago

      Actually I think the take away is don’t buy a house in an asset bubble because it’s almost impossible to track the real value.

  • Reply
    Waj 4 days ago

    This doesn’t make sense. My bungalow in Hamilton is going to replace the entire electrical system. How can it underperform Tesla?

  • Reply
    Ben 3 days ago

    What an awful article that encourages fomo because what we need more of is people fueling the bubbles. This would have been a much better article if the author had compared these investment options a year ago and is now following up on it. Any monkey could have written this article. Author does not speak to risk tolerance and volatility that goes hand in hand with investing. High risk is high reward and that’s exactly what GME and BTC are. Investing is all about risk tolerance and diversifying. That is unless we had a crystal ball like the author, then we would have put all our eggs into GME and BTC basket.

    All in all, an unnecessary article that adds zero value and could cause more harm than good to readers. But don’t forget, this is not investment advice from the author, lol.

    • Reply
      Ian 2 days ago

      “encourages fomo because what we need more of is people fueling the bubbles”

      NASDAQ 100, which is the world’s most influential technology companies, is not stable like a bungalow in the country rising by $75k/month. That makes sense, because a bungalow determines the borders of technology, and the 100 biggest tech companies in the US are just for the shelter of one person in the country.

    • Reply
      Paul 2 days ago

      Ben,

      This entire blog was created to help people make better choices when it comes to real estate.

      If you fail to see the utility in this article the fault is on you.

      Nowhere in the text did they suggest buying anything. The exact opposite. I’ll help you out. The article is attempting to dispel the myth that real estate is a great investment. If the market dips you are locked in and under water. If you get into trouble you will lose money not gain money.

  • Reply
    Sam 3 days ago

    I’m trying to understand how the government & BOC have allowed housing (which is a basic human need….shelter….like water and clothing) to go so unregulated for so long.

    Foreign investment, crass domestic speculation, low interest rates, over-borrrowing…..as far as I can tell these are the drivers…..with the government stoking by keeping rates low and infusing the market with cheap money to keep the lenders going.

    Can someone from BD explain how this all could have been prevented, what the Government can do better moving forward so our grandkids can inherit a more sustainable housing market?

    • Reply
      SH 3 days ago

      For starters, Canadians will need to elect a government that puts the interests of Canadians citizens ahead of the interests of foreign money-launderers. Millennials are largely responsible for electing the Trudeau Liberals (and particular their reelection; only age cohort that the Liberals won). Hopefully they will vote more responsibly next time but I doubt it.

      • Reply
        Paul 2 days ago

        SH

        The last conservative government didn’t do anything about money laundering. It’s a narrow mind that believes switching governments is the solution to everything. Policy needs to be created at both federal and provincial levels and simply changing the leader won’t effect the kind of change you are suggesting.

        Every post you make seems to be fixated on the liberals running the country.

    • Reply
      Trevor Hare 2 days ago

      Hi Sam, it’s actually extremely regulated, but all the regulations are set up to push prices higher. It even has a crown corporation, CMHC to make sure prices never fall and that credit for bidding up prices is always available. If the market was unregulated and unsupported by CMHC then everyone would need a 20% downpayment and prices would be low.

  • Reply
    Gabe 3 days ago

    Thanks for making me feel better about renting and investing my boat loads of savings that I’m going to buy a boat with. Live on a boat rent free? Maybe…

  • Reply
    Ray 3 days ago

    Real estate vs stock market has been a heated debate for a long time. Most stock investors don’t realize the power of leverage that goes inherently with real estate and the tax exemption for the primary residence. For example, $200k stock portfolio gives you a 50% return last year, versus a 25% real estate return, which investment would give you a higher return? Let do the math. 50% of $200k is $100k. ( minus 20%capital gains tax) equals $80k. A $200k down payment for a $1 million house (20% conventional mortgage), 1 year later, 25% if $1 million is $250k profit. Plus The real estate investor gets to live in the house and the stock investor has to pay rent. So $250k vs $80k return, the answer is quite obvious.

    • Reply
      Theodus 2 days ago

      You understand the article literally say the stock market without leverage, versus Canadian real estate with leverage. I’m starting to think most home owners stop being able to do math, unless it involves them trying to justify their home as an investment.

    • Reply
      Paul 2 days ago

      Ray,

      You missed the point. Housing shouldn’t be an investment tool. It’s a home. While your house may appreciate and you will not pay tax when you sell compared to stocks the math isn’t there. If you sell where are you going to live? That means you’re likely to reinvest in another home right? Well? Unless you downsize in some significant way it’s still going to cost you and you aren’t liable to make any actual gains.

  • Reply
    Jon Silver 3 days ago

    OK, so one stock went up 33x more than housing. What’s the point? Hindsight is 20/20 and nobody is ever going to time everything perfectly in the market. All of this leads me to wonder how much GME the author owns or owned. Did they strike or rich, before the stock crashed? I doubt it. Meanwhile, millions of Canadians have benefitted from housing… (Their kids and society not so much, but as selfish individuals they have benefitted).

  • Reply
    straw walker 3 days ago

    Homes are not supposed to be investments…that’s why they’re call homes

    • Reply
      Rick 3 days ago

      In capitalistic society, anything is an investment. You can buy a piece of rock if you believe the value will go up in the future (much like bitcoin 15 years ago).

      • Reply
        MF 2 days ago

        In capitalist theory, land is the only thing that isn’t suppose to an investment. Please read almost any capitalist theory written over the past 300 years.

  • Reply
    Rick 3 days ago

    Hindsight is always 20/20. Sure, some people have been talking about GME. Lots more people were talking about Enbridge. If you bought Enbridge a year ago with $200,000, you would have about $170,000 now. Lots more people were talking about pot stocks. If you bought them, you would also be suffering.

    A portfolio needs to be diversified, and the whole point of that is you don’t know what’s going to go up. Yes, if you bought bitcoins 10 years ago, you would be a millionaire. Or, you might have lost all of them if you put them in Quadriga.

    Would’ve, could’ve is the worst thing you can do in long-term investment. Real estate has a very reliable long-term return. If you put in $200,000 into a GTA suburb 3 years ago for downpayment, your money would have doubled by now, while you earn rent payment. The chance of house price going up would be much higher than the chance of GME going up. You would have to put your money into 100 GME-like stocks to hope for an astronomical increase. I would rather put my money into real estate or TSX index fund which provide long-term stable returns.

    • Reply
      MF 2 days ago

      One of the world’s greatest investors, Michael Burry aka the big short, told everyone he was buying GameStop. A Boomer with a detached home he bought for $10,000 said buy housing.

      *1 year later*

      My investment that made 4000% is luck, but your investment is skill. haha, good one.

  • Reply
    Jimmy 1 day ago

    Wow, based on these comments we are big trouble.

    The psychology of the current state of the world is almost irresistible for investors to not buy so called assets.

    Also, cash is most likely not the answer either. Currency will most likely lose value.

    This whole situation is a complete CF especially in Canada. Seriously look at our balance sheet and projected deficit. It could work out sure it just never has with this type of outright stupidity.

    So housing and land is not totally illogical. The wealthy are buying housing as a hedge in case the economy and currency completely implodes and because the government is pumping asset values. I for one have to admit I was naïve to lengths the Canadian Government would go to keep this bubble going jeopardizing the future economic viability of our country.

    If you think that it is a fundamentally sound investment to buy real estate will rent at less than 3% percent of market value a feel bad for you. You are not in on the joke that is the current state if affairs.

    Good luck to everyone out there. Better to be lucky than good. There will most likely be some extremely luck and unlucky amongst us. 🙂

    • Reply
      Mortgage Guy 1 day ago

      “The wealthy are buying housing as a hedge in case the economy”

      This is incorrect. Homes above $2 million are falling, because the mortgage boost isn’t the same past that level. These aren’t wealthy people. These are who poor people think are wealthy, which is still the middle class.

      You aren’t finding high paid executives buying $2 million run down bungalows.

      • Reply
        Jimmy 1 day ago

        Your right.
        Most of the upswing is because of average people purchasing homes because of low rates and a false signal sent by the gov’t pumping the **** out of the credit market and providing more in hand outs than the economy lost in wages.

        The average person is thinking that if a pandemic can’t bring down the housing market nothing can. Not realizing that the gov’t just crippled the economic prospects of our country to make it so.

        Now global rates are on the rise and we will most likely be one of the last developed economies to come out of the pandemic. What will be done to keep this going next will probably blow our minds.

        My point is, based on how bad things are purchasing real estate is not totally illogical if you need to park some cash. But, it is not a time to take on a huge mortgage that you cannot afford to pay.

        It is really not a great situation all around.

        When/if prices spike and currency losses it’s value in Canada. I might really need to take a media break because I can’t handle everyone being super surprised. It also might not be the worst thing ever to own a house.
        https://financialpost.com/pmn/business-pmn/brazil-markets-plunge-as-bolsonaro-shakes-up-petrobras-to-cut-energy-costs
        Hmmmmm, could it be that huge amounts of fiscal stimulus caused inflation in Brazil. Nope we need to inject a general into management to sort this out.

        But hey we are all geniuses because were are making more off of our houses than our employment or entrepreneurial efforts. I can sell you a house then you can sell me the same house for 20 percent more to infinity.

        Yahooooo! Merry Christmas! 🙂

  • Reply
    Jason 20 hours ago

    People are so naïve if they think home prices will go up forever. They never have and never will. The boom and bust is built into the system. Before every crash everyone is so happy and think they are genius’s all because they bought something that everyone else was buying. The same thing happens over and over again. It’s really sad. Prices go up and that brings in more buyers. It continues for years until people are in so much debt they don’t have much money to spend to fuel the economy. Then the economy suffer and if the economy suffers how do people pay mortgages. They can’t pay the mortgages then people have to sell bringing house prices down. This continues until prices are what they were before the boom. Sheeple gonna sheep.

    • Reply
      GS 18 hours ago

      The thing is, what’s it going to take to set off this chain reaction of fear that spurs a massive real estate sell off? Wave of crime in a wealthy Toronto neighbourhood? 3rd, 4th, 5th lockdown? Public pushback and change of government? War between Taiwan-China? Probably not.

      My prediction is a huge crackdown of foreign money laundering by the NDP or Green party (the only parties with a moral compass) will result in a massive exodus of foreign money to the next safe haven. Either that, or Tim Hortons goes independent again and makes only donuts and coffee.

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