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 AssetsThe 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 FundsThe 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 AssetsThe 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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