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Home Buying

The Real Estate Talk

December 24, 2015

There are a number of ways to build wealth to provide for financial ‘security’. With the recent volatility in the stock markets, it’s natural to consider investing in real estate. With real estate, you can usually live in it or at least touch it, while other investments such as stocks (owning corporations) and bonds (lending money to governments and  corporations) are not as tactical.  

Home ownership is a goal for most Canadians. It’s a place to forge memories and provides a degree of permanency. On a basement pillar of our home, we have measured the growth of our children over the’s hard to believe how my daughters have grown in the past 11 years in addition to all the wonderful memories. An added benefit is that owning a principal residence is also a way to obtain tax free growth and forces one to save as you pay off the mortgage.
What is the return of owning a home? In Edmonton, the average price of a home in 1970 was approx. $21,400 and today, 45 years later, it’s $439,000...a $417,600 increase; which translates into a compound rate of return of 6.8%. A home purchased in 1980 increased 4.8%. What’s not factored are property taxes and maintenance which would lower the returns.
Beyond principal residences, owning a rental property can be a goal. The key is to have the time and ability to maintain and manage the property. It can become a nightmare if you experience renters who fail to pay rent and who damage the property. Other considerations are agricultural and commercial properties but for most of us, it’s beyond our ability. Investing in real estate generally means holding a highly concentrated investment which can sometimes be difficult to sell.
What do passive investments pay? An investment in the S&P/TSX Composite Index over the past 45 years returned 6.1% before tax. A 5 year Guaranteed Investment Certificate (GIC) or Term Deposit reinvested every five years, returned 7.2% before tax. Note that Term Deposit rates were considerably higher in the 1970’s & 1980’s.
The key is diversification. Owning real estate and paying off the mortgage, especially principal residence, can be a great way to help build wealth. Given your personal circumstances, other assets, including term deposits, stocks and bonds have their place.

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