(Ontario Real Estate Source)
By Brian Madigan LL.B.
Here is the "ORES REAL ESTATE INDEX" which tracks the average resale prices of single family homes and condominiums in the Greater Toronto Area (GTA). It also tracks certain benchmark comparisons such as the price of oil and gold, as well as the Consumer Price Index.
In addition, the stock market indices for Toronto, and the three largest US markets are also compared.
For ease of comparison, everything we look at is worth 100 points on the Index as of 1 January 2005. That time period compares favourably with the five year average used as a standard benchmark comparison in the mutual fund industry.
As of 31 May 2011, here is the Index representing average prices:
Real Estate
150.25.....GTA single family homes
140.35.....All condos in GTA
145.24.....Downtown Central Condos
134.15.....East condos
141.50.....West condos
137.33.....North condos
Other market comparisons
359.21.....gold (price per ounce)
233.62.....oil (price per barrel)
149.97.....TSX index
150.25.....ORES Index single family homes
113.77 .....CPI index
137.48.....NASDAQ index
119.82......Dow Jones index
113.88.,....S&P Index
Using the Index
Just a quick note on reading the information. Have a look at the ORES Index for Real Estate (single family homes). As of the end of May, the index stood at 150.25. That's a 50.25% increase in 77 months. That means the increase is 0.653% monthly, or it could also be expressed as 7.83% annually. The performance here is shown without annual compounding for the sake of simplicity.
The other statistics are reported in a similar fashion for the ease of comparison.
Observations (on the Index)
As we use index, there are several notable comments:
• Commodity prices are just commodity prices
• There is no other "extra return" for commodities
• The same is true for the CPI
• The CPI is a benchmark to see whether you are keeping pace with inflation, that number is 113.77; increases have been modest and inflation appears to be under control; this is significant.
• For a realistic performance goal, you should aim for CPI plus 3.5% annually
• Stocks provide dividends in cash or extra stock. This return is additional to that shown in the stock market indices
• The stock market Indexes only measure the survivors. So, in 2009, both GM and Chrysler would have been dropped due to the bankruptcies
• If you held GM and Chrysler, you lost everything, but two new companies moved in to replace them in the Indexes
• Real estate offers a return in terms of occupancy. You can rent out the property and receive income, or occupy the property and enjoy it yourself
• Actually, I should have mentioned that if you held gold bullion, you could sit in a room, count it, and enjoy that experience too. I'm not quite sure how to measure that. You'll have to ask King Midas or Goldfinger!
Comparative Observations Using the New Index
• Gold was the best performer, reaching 359.21, eclipsing earlier peak achieved in April
• Oil was the most volatile, (yes it dropped in half over our measurement period), but recent increases do not offer good news
• Real estate was the most stable, with solid predictable returns at about 7.83% annually
• single family homes continue to show a better overall return than most condos
• Our own stock market posted reasonable gains, and is now ahead of single family homes over the measurement period, however, don't forget that the TSX is still well off its highs
• All three US stock market indicators now show positive numbers, and may truly be a better overall indication of the true state of the North American economy.
Conclusion
For steady, predictable, measured gains pick real estate. It's a solid performer with lower risk (less volatility) and generally moving in a positive direction.
And remember, when it comes to real estate, it's never "wiped out" completely, like GM or Chrysler stock. So, unless you're sitting on the edge of a tsunami, you'll still own something when the storm is over.
For a benchmark of success, there's 1,000 years of history to point to a rate of return in real estate being about the equivalent of 5% per annum, simple interest (non-compounded). That means that real estate doubles in value every 20 years. There are a lot of companies (now bankrupt, including CanWest Global, and many US Banks) that would have been happy with that return.
The present rate of return is sustainable in a sought after location like the GTA. Currently, that is about 1.6% annually in excess of the longer term predictable returns.
Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through Royal LePage Innovators Realty, Brokerage 905-796-8888
www.OntarioRealEstateSource.com
