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Residents of Toronto and Vancouver constantly hear about soaring real estate prices, and more than a good investment, simply want to get into the housing market before they’re priced out forever. On the other hand, investing in stocks can be profitable in the long run, but can be downright scary in the short term. Look no further than the 30% decline in March 2020, courtesy of the COVID-19 pandemic.

But instead of making sweeping generalizations about either asset class, this article will look at the pros and cons of investing in real estate vs stocks and let you draw your own conclusions.

Is buying a house a good investment?

Canada’s real estate market has defied all logic and sanity during the pandemic, with property prices soaring to new heights. A flurry of home sales and low inventory sent Canadian home prices up 13% in 2020, and up a further 21% so far in 2021 to an average national price of $686,656. The average cost of homes in Vancouver and Toronto is now well over $1 million.

How long can the housing party last? Canada’s top mortgage insurer, the Canada Mortgage and Housing Corporation, recently said the housing market is at risk of a sharp correction. The CMHC lists six Canadian cities as highly vulnerable to a housing correction, including Toronto, Hamilton, Ottawa, Montreal, Moncton, and Halifax.

Oxford Economics issued an even more dire warning, saying house prices in Canada are 35% higher than the borrowing capacity of median-income households. The U.K. group put Ottawa, Hamilton, Toronto, and Vancouver on its list of the top 10 least affordable cities in North America. Conversely, the group listed Edmonton, Calgary, and Winnipeg in the top 10 most affordable cities.

A crash in property prices would be bad news for existing homeowners and the equity in their homes, but a housing slowdown may actually be good news for potential home buyers. Qualified borrowers with solid incomes and hefty down payments could find plenty of opportunities to buy a house or invest in income properties in the coming months or years.

Many Canadian borrowers are leveraged to the max. The ratio of household debt-to-disposable income has reached a high of 173% and home equity lines of credit (HELOCs) are being opened at an alarming pace.

That said, Canadians have had a lot of pent-up savings on the sidelines since the pandemic began. The national savings rate used to be in the low single digits but exceeded 20% in the summer of 2020 and is still in the double digits late in 2021. If you’ve been hoarding cash and are considered a well-qualified borrower, it could be prudent to wait for a housing crash before getting into the market.

Why stocks are a better investment than real estate

In general, stocks have produced far superior average annual returns than real estate. Using the same 1982 starting point, U.S. stocks have returned an average annual growth rate of 12.11%. Even a balanced portfolio consisting of 50% bonds and 50% stocks (divided between Canada, the U.S., and International) returned an average annual growth rate of 10.12% over those 37 years.

Stocks have been the best performing asset class by far over the long term, and despite recent turbulence, there’s no reason for investors to think that outperformance won’t continue into the future.

The biggest advantage of investing in stocks vs real estate is diversification. With real estate investing, you’re picking one house, on one street, in one city, in one country. That house may or may not be representative of the national average or even the city’s own housing market average.

With stock investing, you can invest in a diversified portfolio of companies from Canada, the U.S., and abroad using index funds or ETFs. Doing so spreads the risk of any one company, industry, country, or region going through a downturn and instead aims to capture all of the returns from global stock and bond markets.

Thankfully, we have more tools available today that make it easier to buy stocks without needing much knowledge, or even hands-on involvement. I’m talking first about investing with one of the best robo advisors in Canada. These digital platforms allow investors to invest in a low-cost, globally diversified portfolio of index ETFs. Your investments are managed, monitored, and rebalanced automatically using algorithms and technology, but there’s also a human element there to guide you and help you make your investment decisions.

And, for those who prefer to take the wheel themselves, there are discount brokers available where you can build your own portfolio of stocks or ETFs. The best choice for ETFs these days is an asset allocation ETF – a single ETF that invests broadly in stocks and bonds from around the world and automatically rebalances daily for the extremely low cost of 0.25%.

READ MORE: The best ETFs for Canadian millennials

When buying a house is a bad investment

Now for a sobering reality check. Remember when your parents or grandparents told you that buying a house was the best investment they ever made? The data says that’s probably wrong. Time, leverage, and inflation make housing seem like a great investment.

Let’s say your parents bought a house worth $65,000 in 1975. They sold it for $313,000 in early 2020. The sheer size of the gain – $248,000 – makes this look like a killer investment. But over 45 years that house only appreciated by 3.55% per year – which was the exact rate of inflation over that time period.

Indeed, according to housing price data going back to 1982, Canada’s house prices had an average growth rate of 1.7% per year – a number that actually trailed the inflation rate of 2.46%.

I want to be clear: buying a house is typically a bad investment on its own. You should only buy a house when you’re financially prepared to do so, and only when it suits your lifestyle.

I’ve been over my head as a first-time homebuyer, where I barely had enough income to pay the mortgage, property taxes, insurance, and maintenance. It’s called being “house poor,” and it’s not fun.

Similarly, a home is a bad investment when you buy one without thinking about your medium-to-long-term goals. You should plan to live in your home for 10 years for the “investment” to pay off. Otherwise, all the extra costs that come with homeownership, plus the potential penalties for breaking your mortgage if you sell early, won’t pay off.

Finally, many people look at real estate investing as an alternative to the stock market and want to buy an investment property that they can rent to tenants to generate a passive income. The hope is that you can get someone else to cover the mortgage, taxes, and insurance while you own the home, plus capitalize on the appreciation of the income property when you’re ready to sell. A double benefit.

In reality, most rental properties are cash flow negative, meaning the rental income does not cover all of the expenses. Stubborn owners cover the shortfall while still expecting generous gains when they sell the home. But, as you see from the data, the gains might not be as generous as you’d hoped.

Why real estate may be a better investment than stocks

Up to this point, I’ve argued that buying real estate should be a lifestyle decision rather than an investment-driven one. There’s simply no mistaking that stocks have vastly outperformed real estate over the long term.

But one reason why real estate may be a better investment than stocks relates to leverage. In Canada, you can buy a home with just a 5% down payment. That means you can use an initial investment of $22,500 to buy a home worth $450,000. You simply cannot obtain that kind of leverage by investing in stocks.

Now imagine a $450,000 house that appreciates by 2% per year for 30 years is worth $815,000. That’s a 12.71% return on your initial $22,500 investment. Not bad!

Could you earn an annual average rate of return of 12.71% by investing in stocks? It’s possible, but not likely. The FP Standards Council anticipates future annual returns of 6.1% for Canadian stocks, 6.4% for U.S. stocks, and 7.1% for International stocks.

Of course, this is an oversimplified example that fails to account for other expenses a homeowner incurs, such as property taxes, insurance, and maintenance costs. But it highlights the power of using leverage to invest.

The last word

Deciding whether real estate vs stocks is a better investment really comes down to your personal situation and preferences.

For one, we’ve already established that buying a home is a personal decision that should be made with lifestyle in mind, first and foremost. And we’ve established a long track record of outperformance for investing in stocks. It’s also easy to get started with an online brokerage like Questrade.

With that in mind, investing in stocks seems like the logical answer. But for many Canadians, their home still represents both the single largest purchase they’ve made and the largest asset they own. Many rely on their home for retirement, either by downsizing or eventually tapping into the home equity for living expenses.

Finally, there’s a comfort in buying real estate and the pride that comes with homeownership (and even in being a landlord). Real estate is a tangible asset that you can see with your own eyes and fix up with your own sweat equity. It’s not an abstract concept of share ownership in hundreds or thousands of companies around the world. The daily ups and downs of the stock market simply make investors nervous and so many shy away from investing in stocks.

If you’re hell-bent on real estate investing and can’t afford to buy property, there’s another option: sink your money into a REIT ETF. A Real Estate Investment Trust (REIT) is a real estate company that owns and/or operates income-producing properties such as malls, hotels, apartments, and office buildings. REIT investing offers an efficient and diversified way for investors to hold one ETF representing the entire real estate market. The easiest way to add REITs to your investment portfolio is to purchase a REIT ETF through your discount brokerage account. You can purchase a REIT ETF for free using Wealthsimple Trade or Questrade.

READ MORE: What is REIT investing?

About the Author

Robb Engen

Robb Engen


Robb Engen is a leading expert in the personal finance realm of Canada and is also the co-founder of Boomer & Echo, an award-winning personal finance blog.

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