Weekend Reading: Stocks Vs. Real Estate Edition

A good percentage of Canadians would prefer to invest in real estate (either through their primary residence or by purchasing an investment property) instead of investing in the stock market. There’s even a perception that real estate is less risky than stocks. Couple that with massive gains in house prices across the country and it’s no wonder that housing seems like a safer place to park your money.

Real estate is also easier to understand. It’s a tangible asset that you can touch. The financial media reports non-stop about housing. Parents push the narrative that renting is a waste of money and that buying a home is the ticket to adulthood and to building wealth.

Meanwhile, the stock market can seem like a mysterious playground for the wealthy. Whether it’s a fear of losing money or a lack of trust in banks or investment firms, it’s clear that many Canadians would prefer to put their savings into real estate instead of stocks.

There’s a lot of psychology at work here, like FOMO, loss aversion, plus generational narratives about stocks and real estate that frame a story in your mind about which path to take.

Stocks are priced in real-time when markets are open, so it’s easy to see when prices fall. If you don’t pay attention, dedicated financial media will be there to tell you what happened every day and why (hint: they don’t know). It’s not uncommon to see big bold headlines proclaiming the “worst day ever” for stocks.

The same can’t be said of the housing market. You likely have no idea what your house is worth until you put a “For Sale” sign on your lawn. Pricing of comparable houses is kept hush-hush by the real estate industry – although they do release monthly ‘average’ data of housing sales and prices.

Stocks are not necessarily riskier than real-estate, but we need to provide some context to the term risk. If your definition of investing means putting money into meme stocks and dog-themed crypto coins, then yes, stocks are riskier than real estate.

But smart investors build a globally diversified, risk-appropriate portfolio of stocks and bonds. That’s certainly less risky than buying a single home, on a single street, in a single neighborhood, in a single city, in a single country.

Meanwhile, a globally diversified portfolio could hold upwards of 12,000 or more stocks, so you’re not relying on any one particular stock, sector, or geographic region to perform well for your money to grow.

When it comes to returns there are data on housing as an investment as far back as 1870 and surprisingly global housing has produced the best long-term returns of any asset class, including stocks. Housing beat inflation by 7.05% compared to 6.89% for equities.

But the catch is, those housing returns include both capital appreciation and rental income. When you look at the capital appreciation alone (which is the case for most people who own a primary residence), housing only beat inflation by a modest 1.72% (versus stocks beating inflation by 6.89%).

When you factor in the previous point that real estate investors aren’t diversifying globally, they’re usually concentrated in a single property in a single city, it’s sensible to assume that investing in stocks will lead to better long-term outcomes on a risk-adjusted basis.

Investing in Canadian real estate, particularly in Toronto and Vancouver, has clearly been a wise decision over the past 10-12 years. If we had a time machine and could go back to 2010, we would be foolish not to buy a home in one of those Canadian cities.

But investors must make decisions today with future expected returns in mind, and those are unknowable in advance. What we do know is that Canadian real estate is expensive by historical measures. The same could be said for stocks, particularly in the United States.

My feeling is that investors need to lower their return expectations for both asset classes. Stocks and housing can’t continue soaring forever without some reversion to the mean.

That said, a stock investor can easily diversify globally with a single all-in-one ETF and that type of diversification can offer better long-term returns than a concentrated portfolio (like a single property). If Canadian real estate crashes, corrects, or flattens over the next decade then you’d be glad to hold a globally diversified basket of stocks.

So, does this mean young Canadians should give up their home ownership dreams? And, what do they say to their parents who won’t stop telling them that buying a house is the best investment you can make?

To answer the first question, you shouldn’t buy a home as an investment. You should buy a home when you’re financially ready. When you’ve put down roots and can reasonably stay in that home for at least 10 years. Make sure you have enough room in your budget to save and invest for retirement.

To answer the second question, you can say that the 2020s are a lot different than the 1980s. Millennials came out of post-secondary with crushing student loan debt, entered a labour force reeling from the Great Financial Crisis, and then watched assets like real estate soar to record highs. Meanwhile wages haven’t kept pace with inflation and interest rates on savings accounts have plummeted to around 1%. Try saving fast enough to keep pace with double-digit increases in home prices. It’s a frustrating environment.

We can’t go back in time and replicate the strong returns of the past few decades. In fact, with housing prices so high today in certain markets it’s very likely we’ll see much lower returns in the future.

You can also tell your parents a stark reality, even for their situation: you can’t eat your house. Many Boomers are retiring with valuable, paid-off homes but very little other savings. Unlocking that equity could be a challenge, especially if they want to remain in their home throughout retirement.

I get the desire to own a home. I own one myself. But your home is not an investment. Believe me. Homeowners have unrecoverable costs like property taxes and house insurance, not to mention an ever increasing maintenance bill.

When you factor everything in, there’s no way that real estate is a better investment than stocks.

This Week’s Recap:

Last Monday I published a massive evidence-based investing guide.

I followed that up with a back-to-basics post about why you should invest in the first place.

Last Saturday I looked at when early retirees should take CPP.

And, this past Monday, I introduced the new Evermore Retirement ETFs – Canada’s first target-date ETF solution.

Promo of the Week:

I’ve gotten out of my reading funk and finished a few books already this year.

• Balance: How to Invest and Spend for Happiness, Health, and Wealth by Andrew Hallam. Andrew just might be the most interesting man in the world. More than just personal finance and investing, this book is about striking the right mix between your financial health, physical health, relationships, and sense of purpose. Andrew shares stories from his own life and the people he’s met along the way to inspire you to create your own unique and rich life.
• The Revolution That Wasn’t: GameStop, Reddit, and the Fleecing of Small Investors by Spencer Jakab. Just a wild look at the meme stock craze of early 2021 and the cast of characters involved from r/wallstreetbets and Wall Street hedge fund managers. A highly entertaining read where you’ll find out why Wall Street always wins.
• Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever by Robin Wigglesworth. I’ll admit that index funds aren’t the most exciting investment, but Wigglesworth really brings this story to life with an intriguing cast of characters spanning 50 years. An educational and entertaining read.

It was the Rational Reminder’s 22 in ’22 reading challenge that got me back into reading this year. It’s not too late to join, so sign-up, join the challenge, input any books you’ve already read this year, and draw some inspiration from what others in the community have read so far this year.

Weekend Reading:

Our friends at Credit Card Genius share 17 credit cards with extra cash back.

The lies we tell ourselves about house prices (subs):

“Unfortunately, there is no such thing as a no-lose investment. The housing market is like any other: stocks, gold, oil. What goes up will some day come down. Toronto real estate took a plunge at the end of the 1980s and didn’t recover for years. Just because it hasn’t happened in a long time doesn’t mean it can’t happen again.

The prices some buyers are paying for mediocre houses are plain crazy. Young couples are taking on crushing debt to get their foothold in the market. Others have given up even hoping to buy a home of their own.”

Andrew Hallam wonders if Warren Buffett’s view on bonds is making you think twice.

Here’s why you should be like Ulysses and stay invested during turbulent times.

Wealthsimple made a risky investing choice that might pay off due to the Ukraine crisis.

Preet Banerjee explains why you should not buy term life insurance online unless you understand the difference between renewable and non-renewable policies:

Jamie Golombek explains the four criteria that need to be satisfied for a property to qualify as your principal residence. The CRA is cracking down on perceived abuse of this exemption.

My Own Advisor Mark Seed outlines his retirement withdrawal strategy, including how and when he’ll withdraw from his RRSP and TFSA.

Michael James on Money asks how does a retiree answer the question, “What is your income?”

Morgan Housel explains why having low expectations is the key to happiness:

“Then any little improvements that happen to come along feel incredible. You appreciate them more. Low expectations don’t make you depressed – they do the opposite, making little gains feel amazing while bad news feels normal.”

Have a great weekend, everyone!