RE/MAX Canada made news today by reporting that the average price of a home appreciated 264 per cent over a 25-year period, rising from $76,021 in 1981 to $277,000 in 2006. An executive with the real estate company had this to say:
Conventional wisdom used to be that real estate was a relatively safe, long-term investment that typically appreciates at a rate of five per cent annually. These statistics clearly tell a different tale. In the top ten markets, real estate values rose at least eight per cent or more on an annual basis. Even the worst performing market in the country experienced an increase of close to six per cent annually since 1981.
I don’t know where this executive found a compound interest calculator, but these statistics merely confirms conventional wisdom. Nationally the gain in prices works out to an uninspiring 5.31% annual growth rate and Barrie, the best real estate market in the country according to the press release, posted annual price gains of 6.40%. Meanwhile, inflation was running at 3.03% over the same period.
How did competing asset classes perform over the same period? The TSX composite would have returned 10.75%, bonds 10.9% and the S&P 500 13.5%. Granted, real estate also provides value in the form of imputed rent (less expenses such as property taxes, maintenance and insurance) that would add a few percentage points to the price gain. My guess is that total real estate returns would work out to be better than bonds but less than stocks but that doesn’t make for a breathless (and inaccurate) press release.
