This topic has been in my queue for the better part of a month, but I dreaded sitting down and going over stock charts.
God, it’s been a long time since I took an interest in Bollinger bands and ultimate oscillators. That really, really takes me back…
I think every young man coming out of business school thinks he is going to crack the code of the market, and I was certainly no different.
It took me several years of throwing darts at a board to realize that I actually didn’t know anything.
Remember E-Trade? That was my jam back in university.
I used to love buying shares of biotech companies before they release earnings or before they have a scheduled announcement for a new product. But if I had to guess, and add some honesty here, I’d say the results were favourable less than 40% of the time. It’s literally like gambling. I mean, what the hell did I know? Zero. Nothing. At least when you bet on Seattle versus Minnesota, you know that Kirk Cousins is 0-8 all-time on Monday Night Football, which is the worst record in NFL history.
But what 20-year-old knows whether TD Bank is going to out-appreciate Royal Bank? Or for that matter, whether either of those companies will out-appreciate the TSX Composite Index or the DOW Jones?
I think the most money I ever made on a stock was Rothman’s, back in the day. Great dividend, fantastic appreciation, and they eventually got acquired and that’s usually good for at least 3-to-2 on your money. I think it might have been 2-to-1.
Of course, I had no idea what I was doing when I bought Rothman’s in my late-teens or early-20’s. “People like to smoke,” I figured. I guess that’s like buying Lockheed Martin Corp. in 2019, right? “Americans like war.”
It took me until my mid-20’s to realize and accept that I knew nothing about equities, and that I was no different from your annoying friend who tells you “how to play” Blackjack in the cab on the way to the casino. You know that guy? I remember going to a casino up at Mount Tremblant, circa 2007, and one of my buddies had this really obnoxious friend who insisted on “practicing” with a deck of cards before we left. He knew everything. He had all the answers. He kept saying, “Nope, that’s wrong,” and telling all of us what to do, and when.
He got rinsed in the “high rollers” room that night. He was anything but a high-roller. I hope he tells the story differently today…
Today, I know even less about what a stock is going to do than I did in 1999.
Do I know what the price of real estate is going to do? No. I think I do, but nobody truly knows. At least with real estate, I can say that I’m an expert, and my opinions, predictions, and projections are based on knowledge rather than a 3-pack of darts.
There’s long been a debate about whether your money is better off in real estate or in the equities market, and we could make extremely compelling arguments either way. We could use different time periods, different markets, and different instruments, and come up with major wins and major losses in this comparison. We could do this all day, and all night.
Last month, I read an article in the Financial Post, of all places, that had a headline worthy of those stupid click-bait ads on the bottom of your browser that you just have to click. You know, the ones like, “You Wouldn’t Believe Which 90’s TV Stars Are Still Gorgeous!”
I’m a sucker for those, and I don’t know why. Twenty-five clicks later, and I’m still looking for the photo from the ad…
Here’s the article from the Financial Post:
“If You Thought Toronto Real Estate Was The Best Way To Get Rich, You’d Be Wrong – Stocks Have Done Better”
November 7th, 2019
Am I being unfair about that headline? Yes? No?
I certainly would click an ad with that headline! It honestly reminds me of click-bait, but I digress.
From the article:
Getting in on the ground floor of Toronto’s housing boom has been seen as a sure-fire road to riches over the past decade. Buying stocks would have been a better bet.
Canada’s S&P/TSX Composite Index has returned 157 per cent, including dividends, since the end of 2008 as the economy chugged along, jobs creation surged and corporate profits rose. Despite hogging all the headlines, prices of residential property in Canada’s most populous city trailed that with a 127 per cent increase, according to the Teranet-National Bank Home Price Index.
It’s clear either of those investments have delivered a tidy return but there’s one group of investors who have done exponentially better: those who bet on the equity version of real estate.
The S&P/TSX Capped REIT Index has risen 354 per cent, dividends included, since the end of 2008 and the S&P/TSX Composite Real Estate Index, made up of real estate income trusts and other companies in the industry gained 262 per cent.
“You don’t have to worry about things like actual maintenance and keeping the property lease up,” said Jenny Ma, an analyst at BMO Capital Markets. “And also you get the diversification of many properties, across different markets and potentially across different asset types as well.”
So here’s where many of you will take a stance, and yet you don’t even know where I’m going with this!
Because before we talk about the age-old subject of “stocks versus real estate,” I want to address what’s missing from this article.
I don’t want to suggest that this was an attempt to deliberately mislead, but I do think that anybody writing for the Financial Post should have mentioned it.
Some of you know what I’m talking about, but it’s okay, don’t fault yourself if you missed it, and that’s exactly why I feel it’s so important to an author, writing for the Financial Post, to point it out.
Residential real estate is a leveraged investment. Always has been, always will be.
So when we compare the 127% increase quoted above which is for “prices of residential property in Canada’s most populous city trailed that with a 127 per cent increase” with the 354% rise in the S&P/TSX Capped REIT Index and the 262% increse in the S&P/TSX Composite Real Estate Index since 2008, a straight comparison is utter garbage.
How much do you think the buyer of a 1-bed, 1-bath condo in 2008 put down? 5%? 10%? Even 20%?
Let’s say that, for sake of argument, a buyer put down 20%. Doesn’t that mean that their return of 127% is being unfairly calculated?
If they purchased a condo for $100,000 in 2008 and sold it for $227,000 in 2019 (just to keep things simple, and line the timing up), then, yes, I would agree that the asset value has increased 127%. But if they made a 20% down payment, or $20,000, then their return is actually 635%.
We are ignoring maintenance, taxes, improvements, et al.
But the article ignores this as well, so I’m keeping it apples to apples.
As for the accuracy of these numbers, let’s have a gander at that, just for fun. We’ll look at a handful of sales for houses and condos in Toronto, and then we’ll look at a few real estate investment trusts.
I wanted to pull some sales of random properties that sold in 2008 and again in 2019, and since there’s no way to really search for this in MLS, I randomly picked three buildings:
1 Shaw Street
438 King Street
230 King Street
I figured one or two in the west and east end respectively, and sort of settled on these.
Surprisingly, there are very few units that sold in both of 2008 and 2019, but I did find one for each”
So here we have a 1-bed, den, 1-bath unit that sold in 2008 for $327,500 and then again this year for $635,000
Oh what a shame! Only a 94% increase in value…
Here’s a slightly larger 1-bed, den, 2-bath at The Hudson:
Still “only” a 110% return from 2008 prices, and again, consider that we’re not looking at what month each of these properties sold in.
How about my old home; King’s Court?
Here’s a larger unit – 2-bed, den, 2-bath, and the return is still in line with the others at 110%.
Now that’s a look at condos, but what about houses?
For this section, I wanted to look at a 3-bedroom, semi-detched in Leaside, and a 3-bedroom, semi-detached in Danforth Village.
It was a lot harder to find the same property turning over in both 2008 and 2019, as I suppose house-owners stay a lot longer than condo-owners, so there are fewer houses for sale.
But here’s one that meets our criteria in Leaside:
This is a 139% return, which trumps the three condos.
If I were to have guessed coming into this, I’d have thought houses did out-appreciate condos, but that’s only because the run-up in condos is primarily 2016 onwards, whereas the housing market had out-appreciated condos in the years prior.
Now for one in Danforth Village:
I found four properties in the area that had turned over in both 2008 and 2019, but the other three were all radically different in 2019-form.
Here the return is only 109%, and I would gander that most houses in this pocket have appreciated at a far greater rate, and anybody looking for a sub-$1M house in here would know just how rare it is to find something at $930,000 with three true beds, a finished basement, and parking. Wow, this one was a steal!
So with five properties on our list, appreciating at rates of 94%, 110%, 110%, 139%, and 109%, that’s an average of 112.4%. This is highly inexact, but let’s just use this for illustrative purposes. With a 20% down payment, the return on the actual money down (again, ignoring land transfer tax, although back in 2008 it was nominal), is 562%.
With a 10% down payment, the return is 1,124%.
And with a 5% down payment, which many people made back in 2008 for their $445,000 houses or $327,500 condos, the return is 2,248%
So, yeah, I had a problem with the author of the Financial Post article ignoring the simple concept of “leverage,” and while I will happily be the first to admit that our little game here is anything but scientific, I think you get the picture.
Now at the same time, I’m not going to accept that just anybody would have put his or her money into the S&P/TSX Capped REIT Index and experienced a nice little 354% return.
While few of you will admit this as I have above, most people who run their own portfolios are merely amateur dart throwers, and they’d have been far more likely to purchase individual stocks.
Let’s give them all the benefit of the doubt, and assume that they’d have purchased real estate investment trusts.
I’d like to look at the 2008 to 2019 performance of a handful of the most well-known
This REIT was trading at $24.33 to start 2008, and is currently at $31.63.
That’s a 30% return.
However, the dividend is currently 5.70%.
Again, highly unscientific here, and if anybody wants to do me one better, now is the time, let’s assume a 5% dividend for 11 years, which is another 55%. For a time, this was a 5% dividend of a much lower price, so the return isn’t a full 55%. Let’s assume 45%, just because we can?
That’s a 75% return, and I invite those of you in finance to provide me with actual returns here. We are only estimating for the purposes of our game.
How about a well-known residential REIT?
Boardwalk REIT (ticker: BEI.UT)
Trading at $44.85 to start 2008, now trading at $48.40.
That’s a 7.9% return, with a weak dividend currently at 2.07%.
How about RioCan? That has to be among the most well-known.
Trading at $21.70 to start 2008, now trading at $27.26.
You get the picture.
And while I can swear up and down that I picked these three real estate investment trusts at random, as well as those houses and condos, you probably had your mind made up quite some time ago as to where you fall in this debate.
There are far, far better investment vehicles than these three real estate investment trusts. Those of you who have worked your very first day on Bay Street will tell me that. But just as a condo-buyer in downtown Toronto is no expert in real estate, a chump with his $10,000, $30,000, or $50,000 to put down on the purchase of real estate, who instead, decides to try his hand at stock-picking, is no expert at that either. And if he does hand it over to the local “wealth manager” working over the counter at TD, with respect, you’re not exactly giving your money to Berkshire Hathaway to invest.
I’m simply making the argument here that to look back in hindsight at an index such as the S&P/TSX Capped REIT Index as though back in 2008, you would have simply put all your money into fund that perfectly traces this index and then say, “Oh look how much the index has increased, this is a higher return than owning real estate,” is dead wrong.
It also ignores leverage, which is literally dancing on the grave of the old “dead wrong” anyhow, but that aside, the basic premise is wrong too.
And isn’t the closest thing you can get to the S&P/TSX Capped REIT Index something like the iShares S&P/TSX Capped REIT Index ETF?
Again, if we have to work this hard to find something like it, in hindsight, who would have had the foresight to purchase this in the first place?
I have this saying, and you might hate it, but here goes: “Some of the dumbest people I’ve ever met have made hundreds of thousands of dollars buying real estate.”
And it pains market bears to no end, because these folks who bought a $400,000 condo in 2016 and sold it for $650,000 in 2019 may not have “deserved” it.
But it doesn’t make the gain any less real.
I’m not convinced the folks who write for the Financial Post, and tout that “If You Thought Toronto Real Estate Was The Best Way To Get Rich, You’d Be Wrong – Stocks Have Done Better” have any clue what the hell they’re talking about…