Personal Finance

Stock market vs real estate... Why do people say the stock market is better?

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  • Nov 5th, 2017 1:17 pm
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Aug 8, 2012
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Applesmack wrote: I've been seeing a lot of people saying that millennials should invest money in the stock market rather than real estate but I just don't see it. I looked at market data for the last 50 years and it seems real estate is a FAR better investment than the stock market. If I consider hot markets like Toronto, then this standard house bought in 1967 for $27k sold for 2.3 million today:

https://www.thestar.com/business/2017/0 ... sking.html

That's just an insane inflation adjusted gain... But maybe that is an exception because the Toronto and Vancouver real estate markets are really hot? So I took a look at Ottawa, which is my home town. For the Ottawa market, if I bought a house for 19k in 1967 it would be worth over 370k right now. Those gains are WAY above inflation (19k in 1967 would be 135k today with inflation)..

http://www.agentinottawa.com/1956-present-prices.php

In comparison the inflation adjusted rate of the S&P isn't actually that great:

http://www.simplestockinvesting.com/SP5 ... eturns.htm

$4 in 1967 becomes $7 today after inflation. That is a gain of 75%, compared to the 174% inflation-adjusted gain of the Ottawa housing market and Ottawa is by no means a hot housing market...

Infact, if we consider the power of leverage (houses are leveraged investments) the gains get even larger.

So to me it seems bad advice that the stock market is a better investment than real estate in this day and age. Can anyone point flaws in my logic here? I mean sure I didn't consider the full history of the real estate vs housing market, but I think 50 years is plenty of time and easily cover the investment time-frame of an adult up to retirement.
Well, since you asked to point out flaws:
1) Did you use that chart in the link for your comparison? It ends at 2010, not 2017.
2) Did you use the blue line (starting ~$4 in 1967)? That is the index price return excluding dividends, you need to look at the orange line for total return including dividends.

Orange line went from ~$9 to ~$600 from 1967 to 2010 when that chart ends. That's 6500% return.

Where did you get $4 to $7 from?

If I use your 135/19 = 7.1x inflation number the $9 starting dollars is $64. $600 is still over 800% inflation-adjusted gain.

That trounces your 174% inflation-adjusted return on a house.

EDIT: Oh, I see you used the 3rd chart. Blue line $4 to $7.
Orange line matters. $8 to $55 = 587% inflation-adjusted total return.

Again, that's also just til 2010.
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May 6, 2012
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Based on my experience, if you dive into your local real estate market and do your home work and math (real estate math is so much easier) right, you can start making 10-20% return after 1 or 2 years of study. But for stock, 2 years of practice, you are far from the bottom of the water, it is so deep.
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welcomelm wrote: Based on my experience, if you dive into your local real estate market and do your home work and math (real estate math is so much easier) right, you can start making 10-20% return after 1 or 2 years of study. But for stock, 2 years of practice, you are far from the bottom of the water, it is so deep.
Even if youre a somewhat knowledgeable investor you can do alright. Past performance is not a indicator of future performance. That includes real estate.

However the markets are risilient... the andex chart is a great tool to demonstrate this. If you find one... try this test. Point you finger anywhere on the time line. You won't find a 15 year period where it does down.
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Nov 2, 2013
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Because with RFD logic, interest rates will rise to infinity, everyone will lose their house, then we can jump out of our mom's basements, get a deal, and get rich during the market rebound.
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Deepwater wrote: It's not clear where you got the inflation data and S&P500 returns from the link you provided. If you estimated it from the chart, it looks like you used price return only, not total return.
month Canadian T-Bills would have returned 8.0%.
See the results here: http://www.ndir.com/cgi-bin/downside_adv.cgi?
StingyInvestor.com gives Total Return for the TSX back to 1958. Average annual total return for the TSX from 1958 to 2016 was 9.6% (nominal, not inflation adjusted). Even a 50/50 mix of TSX and 3 1=0&2=0&3=1&4=0&5=0&6=0&7=0&8=0&9=0&10=0&11=0&12=0&A1=0.00&A2=0.00&A3=0.00&A4=0.00&A5=0.00&A6=0.00&A7=0.00&A8=0.00&A9=0.00&A10=0.00&A11=0.00&A12=0.00&type=Nominal&MCarlo=Historic&StartYear=1958&StopYear=2016&StartSize=1000.00&Withdrawal=0.00&CADUSD=Canadian

This calculator shows the S&P500 did even better giving a 10.4% compound annual return since 1958 (nominal, not inflation adjusted):
http://www.moneychimp.com/features/market_cagr.htm

Running the Ottawa house price numbers from 1958 to 2016 through Excel's RATE function gives 5.6% annual return for Ottawa house prices (nominal, not inflation adjusted).
=RATE(B2,B3,-B4,B5)
Rate 5.6%
n 58
pmt 0
PV $15,564
FV $371,901

By those calculations the TSX has outperformed Ottawa house prices by 4 percentage points per year.
Good job. After we factor in 60 years worth of property tax, maintenance, renovation, house insurance, realtor and lawyer fees to sell, I would guess these costs would add up to over $100-400k, depending on renos.

So the house return would be poor, but you got a place to live.

Also going forward, the same cannot be said with expensive markets that have seen huge appreciation. As a new buyer today with fresh cash, your returns are likely to be poor since metrics / fundementals are so high.
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FirstGear wrote: Because with RFD logic, interest rates will rise to infinity, everyone will lose their house, then we can jump out of our mom's basements, get a deal, and get rich during the market rebound.
Lol thats a funny way to put it.
Im sure some are like that. Others are hard working renters where its become impossiblr to be a home owner. Its frustrating. I went through university and make way more than my parents.

But they were able to get a house in the beaches and raise 3 kids with a dual minimum wage income...

Now that is impossible. So it seems like home ownership is only meant for the upper classes of society, or the select people who are talented or lucky enough to earn a higher income.
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UrbanPoet wrote: Lol thats a funny way to put it.
Im sure some are like that. Others are hard working renters where its become impossiblr to be a home owner. Its frustrating. I went through university and make way more than my parents.

But they were able to get a house in the beaches and raise 3 kids with a dual minimum wage income...

Now that is impossible. So it seems like home ownership is only meant for the upper classes of society, or the select people who are talented or lucky enough to earn a higher income.
It's a joke on this forum...

In all seriousness, that's what places like Vancouver and Toronto are starting to become. Especially with the former where average household income is around $65K in the region, and people are happy to take $15/hour after going to school for 5 years. Home ownership is considered a luxury for the wealthy/privileged. Kind of like we speak of having a Ferrari as a dream at the back of our heads. Funny thing is if you are in Vancouver, if you're money hungry, or you talk about jobs and their wages, people give you a dirty look.
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Nov 24, 2013
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UrbanPoet wrote: Now that is impossible. So it seems like home ownership is only meant for the upper classes of society, or the select people who are talented or lucky enough to earn a higher income.
Detached home ownership, in a dense urban area. Toronto seems to be experiencing what any largest city / financial & economic centre of a nation experiences. Most denizens of NYC (incl. Brooklyn, Queens, Staten Island) don't own detached homes either. They're in apartments/condos, townhouses, etc. Detached home availability for price increases farther out, Bronx, Yonkers, NJ, CT.

People working in Toronto can likely afford condos in Toronto. There's still affordable houses (relative to income) everywhere in Canada that isn't GTA or Vancouver. The choice is lifestyle (attached, detached) versus location (dense concrete jungle, smaller city).
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May 6, 2012
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What I meant is "For most people, it is easier to get knowledgeable for real estate than stock and the return is equally sweet". Plus, more than likely, you get to become a handy man for real estate investment, which is really beneficial to your personal life as well. But what get you by stock? Math? Reading hundreds of pages dumb ass financial docs?
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Nov 13, 2007
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I think, you're asking this question at the wrong time. Housing market in Canada had gone wild for the last decade. If you asked this question 10 years ago, or even 5 years ago, the answer will be different.

I'm on the short end of the stick, left real estate investing (both rental properties and downside on primary resident) for the stock. The stock had been doing well. But it's nothing, compared to the real estate market.

I guess this is why most people buy high and sell low. Everybody that I know (friends and extended family) had bought a house or are planning to buy one or in the process of moving up.
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Oct 6, 2005
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aqnd wrote: Oh, this again?

Let me help you out:
-people who bought stocks and rent will defend their choice as best, until their last breath.
-people who bought a house in lieu of rent and stocks will defend their choice as best, until their last breath.

Sprinkle in a bit of name calling/personal bashing and ultimately going nowhere.
What about those who bought a house and invested in stocks? :D

Applesmack wrote: I've been seeing a lot of people saying that millennials should invest money in the stock market rather than real estate but I just don't see it. I looked at market data for the last 50 years and it seems real estate is a FAR better investment than the stock market. If I consider hot markets like Toronto, then this standard house bought in 1967 for $27k sold for 2.3 million today.
...

So to me it seems bad advice that the stock market is a better investment than real estate in this day and age. Can anyone point flaws in my logic here? I mean sure I didn't consider the full history of the real estate vs housing market, but I think 50 years is plenty of time and easily cover the investment time-frame of an adult up to retirement.
There are a lot of costs to owning a home, utilities, property tax, and general maintenance; those can be quite hefty.
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Feb 1, 2006
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Historical averages are useful to some degree, but it's always important to look at the past 10 years closely, as what has happened during that period is unlikely to keep happening. We bought a house 15 years ago because it was very affordable then for young couples to do so. We paid it off quick and then dumped all the extra money into equities since. Now we're in a situation where EVERYTHING is expensive-seeming, my cash has been piling up, and I'm just trickling it into equities, as I expect a pullback. Classic wrong-headed marketing timing, I know.

If I were 25 again just starting out, I certainly wouldn't buy a home in this market. I'd rent and hope for a pullback, and if it never happened, I'd be a lifelong renter. Very common in Europe to do, wouldn't bother me. I'd invest in equities, knowing I have 40 years to wait out several investment cycles. It's a tough situation for young people, though. I have kids who will be hitting the job market in 10 years or so, I'm concerned about how they will manage to become financially secure. I'll likely advise them to consider alternative housing options, like a tiny house in someone's backyard, or relocating to a cheaper locale, where they can use all the frugal powers I will bestow on them to gain wealth.
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Jan 27, 2015
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Mike15 wrote: Detached home ownership, in a dense urban area. Toronto seems to be experiencing what any largest city / financial & economic centre of a nation experiences. Most denizens of NYC (incl. Brooklyn, Queens, Staten Island) don't own detached homes either. They're in apartments/condos, townhouses, etc. Detached home availability for price increases farther out, Bronx, Yonkers, NJ, CT.

People working in Toronto can likely afford condos in Toronto. There's still affordable houses (relative to income) everywhere in Canada that isn't GTA or Vancouver. The choice is lifestyle (attached, detached) versus location (dense concrete jungle, smaller city).
That is so very true. That's why it is important to those that don't live in Toronto/Vancouver to lock-up and purchase a SFH to pass to your kids/grandkids because prices of homes won't decrease dramatically. It could, but unlikely.
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OP you need to do calculations.

Using Ottawa figures 19,000 to 370,000 over 50 yrs equates to a 6.12% rate of return....this ignores closing costs (if you sold that house, your R/E commission alone is 5% on the sale and I've haven't factored that in), maintenance costs etc like many have said.

The S&P 500 return including reinvested dividends over 50 yrs is 9.989%
[This 10% figure is no surprise...lot of people quote a 10% rate of return for stocks over a long period of time

http://www.investopedia.com/ask/answers ... sp-500.asp].

The only cost and work involved in buying/selling stock is one-time commission in and one time commission out. There are no regular maintenance costs.

Source of that 9.989% using January 1967 to January 2017

https://dqydj.com/sp-500-return-calculator/


So let's project your $20,000 investment at the two rates of return starting in 1967

Real Estate -> $20,000 @ 6.12% returns you $ 389,845

S&P500 -> $20,000 @ 9.989% returns you $ 2,336,000 (that's 2.3 million)

You are SIX TIMES more wealthy with stocks ...that's is the power of compounding and time at work.

FYI the Toronto home that's referenced in the Star article is not fair representation of house appreciation as the homeowners have obviously done a number of renovations over the 50 yrs when you look at the pics.
We're all bozos on the bus until we find a way to express ourselves...

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Nov 11, 2004
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Stocks hands down...

Even IF the house would be worth more... Which is very very doubtful, Keep in mind what a PAIN it is to sell a house, Stocks you click a button and have a cheque in 48 hours.

Houses forget about it, You want the money, good luck getting anytime soon
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Jan 13, 2017
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In Toronto houses can be sold within 24 hours too. as long as the house is in good shape, well staged, there will be buyers offering to buy within the same night with 0 conditions.


ilusa wrote: Stocks hands down...

Even IF the house would be worth more... Which is very very doubtful, Keep in mind what a PAIN it is to sell a house, Stocks you click a button and have a cheque in 48 hours.

Houses forget about it, You want the money, good luck getting anytime soon
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MMMPower wrote: In Toronto houses can be sold within 24 hours too. as long as the house is in good shape, well staged, there will be buyers offering to buy within the same night with 0 conditions.
LOL. It still takes a while to get your money :P Nobody's going to close in 24 hours.

You can sell $1M of stock for $10 commission and have your money wired to you once it settles 3 days later. You can't do that with real estate.

Anyways, OP should edit his original post to point out his own (now known) "flaws in [his] logic" so not everyone has to keep repeating the same answers as to what he calculated wrong.
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I got a 13% return last year on a mix of Canadian, US and International index funds.
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OP, curious on your thoughts. Which scenario would you recommend. Assume I have $500K cash and can qualify for a $500K primary residence mortgage.

Scenario 1:
- Purchase $1M home ($500K down-payment + $500K mortgage)

Scenario 2:
- Purchase $700K home ($200K down-payment + $500K mortgage)
- Invest $300K (100% equity, regionally diversified index ETFs)

Scenario 3:
- Purchase $700K home ($300K down-payment + $400K mortgage)
- Purchase $300K investment property ($200K downpayment + $100K mortgage)

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