Real Estate vs Royal Bank StockReal Estate vs Royal Bank StockEveryone knows that the GTA (and cottage country) real estate market is going bananas, as of late. I am stating the obvious that a large part of the reason why, is related to the work from home environment forced upon many due to Covid-19. Even my friend, David Rosenberg, who is self-admittedly sometimes early, is voicing his strong, bearish opinion on how bubble-like the Toronto/Vancouver real estate markets are right now: BNN Interview
But is it just this latest spike that folks are nervous about or is it over the longer term? I wrote a longer piece about this in July 2017 (unfortunately, our webmaster is still looking at how to efficiently bring old blogs to the new site). I looked at the Detached, Semi-Detached and Condo Apartment sales price over 20 years vs Royal Bank of Canada (RY) stock with dividends reinvested back in the stock and price adjusted for splits. It was sort of eye-opening.
Here is the data for the past 20 years ending Jan 31, 2021 (Feb data not out yet):
GTA Real Estate Market to RY.jpg
Some Notes over the past 20 years:
1) One needs to live somewhere – you either own a house or you rent…I exclude the cost of rent
2) But this also excludes the “cash suck” of owning a house – property taxes, repairs, upgrades, etc
3) This excludes taxes
4) The Compound Annual Growth Rate (CAGR) is up between 4.7%/ann for Condos to 8.8%/ann for Detached vs RY stock at 11.6%/ann
5) And the total return over those 20 years is about 151% for Condos to 442% for Detached vs RY stock at 800%!
This just puts it in perspective. After all, real estate is an “asset class” so why is it that a solid Canadian bank is allowed/able to climb about 12%/ann while housing is not allowed to climb 5-9%/ann? And even in the shorter-term, sure, housing has rocketed, but so has RY stock which is up about 10.5% YTD excluding the dividend. If low interest rates are driving the stock market, why can’t they drive the housing market? Are mortgage lenders over-exposed or are they being diligent in their consumer credit analysis? Is immigration driving it? Is it any different in other countries like Australia and NZ?
And what might our political leaders do to address this “outrageous” advancement in the prices of housing? Well they have tried a few different tax measures, specifically on foreign capital, and it didn’t seem to “work”. What if they institute capital gains on primary residences – if part of the problem is lack of supply, see what happens when they say they will put that tax in…there won’t be more than a handful of houses for sale across the nation until we head to the polls for the next election where there may be a hope another party would reverse the tax?
Makes you wonder. No easy answers.
NB – I had to come back in to write more. Ironically, after I saved and published this, a Bloomberg journalist published a short article about the Canadian Housing market being overextended. And she interviews an economist from what Bank? Try Royal Bank! And what does he call for? Try more policy initiatives at all levels of government including removing the capital gains exemption on primary residences. Good luck.