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Folks with cash to invest have plenty of choices, yet most still park their money in four walls and a roof.
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But if you’re neutral on the rent-versus-buy debate, the real question becomes whether homeownership delivers the biggest bang for your buck.
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There are lots of ways to measure returns, but let’s keep it simple and look at relative returns versus inflation.
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Inflation matters because it’s a sneaky thief. When you sell that house, stock or other asset, your money isn’t worth what it was when you bought it. You have to bake that erosion into any math on what your investments truly earned.
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Now, investment options abound, but let’s concentrate on the two crowd favourites that historically outpace inflation: real estate and equities.
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We’ll make a few basic assumptions to keep this article under 100 pages:
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- We’ll rely on Statistics Canada’s consumer price index for inflation, and before you conspiracy theorists start typing, using alternative measures won’t alter our conclusions.
- For average home values, we’ll use price data from the Canadian Real Estate Association (CREA).
- For our stock proxies, we’ll use the S&P 500, the most invested-in stock index on the planet, and the TSX Composite, Canada’s primary stock index.
- Currency fluctuations for S&P 500 investments won’t factor into our calculations. One could argue that Canada’s loonie may appreciate versus the U.S. dollar over time, if the U.S. loses its reserve currency appeal — but there are counterarguments too, so I won’t go down that rabbit hole.
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Regardless, here’s what the numbers reveal since January 1980, the earliest point for reliable national housing data.
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The best mortgage rates in Canada right now
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Mortgage lenders, like central bankers and bond traders, watch and wait
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On an absolute gain basis:
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- S&P 500: 5,079 per cent
- TSX Composite: 1,191 per cent
- Average home: 1,011 per cent
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Compared to the tech-fuelled U.S. stock index, Canadian home appreciation was left in the dust.
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But now we factor in inflation, the financial grim reaper that slowly murders your purchasing power.
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Adjusted for inflation, annualized returns look like this:
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- S&P 500: 6.0 per cent
- TSX Composite: 2.7 per cent
- Average Home: 2.4 per cent
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Despite napping through most of the 1990s, real home values held up impressively versus Canadian stocks.
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Following 44 years of inflation adjustments and dividend reinvestment, however, S&P 500 investing would have quadrupled your wealth compared to homeownership — before the taxman takes his nibble.
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But wait, there’s more to chew on:
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Naturally, inflation and appreciation don’t tell the complete story.
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As noted, Ottawa loves dipping its beak into your investment gains when you liquidate assets outside of a tax-deferred account. That’s where home ownership narrows the gap due to Canada’s primary residence tax exemption.
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