Canadian Stocks vs. Real Estate – Which Has Been the Better Investment?

A recent article in The Globe and Mail got me thinking about a longstanding debate – is it better to invest in stocks or real estate? Of course, many Canadians own both and have built wealth through a combination of their homes and investment portfolios.

The article includes the following chart, which demonstrates that the Canadian stock market has meaningfully outperformed Canadian home prices since 1980:

Along with the higher historical returns, there are additional arguments in favour of stocks as a long-term investment:

• Stocks are easy to buy and sell, whereas real estate transactions usually take months and cost 3-4% in realtor commissions, property transfer taxes and legal fees. Stocks are therefore a far more flexible investment.
  
  
• Home ownership has many ongoing costs, including repairs, maintenance and property taxes. These expenses can add up to be hundreds of thousands of dollars if a property is held for decades.
  
  
• Obtaining proper diversification is much easier in the stock market than with real estate, since most of us own one property at a time.
  

However, there are several important counterarguments, including:

• A home provides a roof over your head, a place to live and somewhere to raise your family. An investment portfolio cannot offer any of those things.
  
  
• Most homeowners use leverage (in the form of a mortgage) to purchase a home, which amplifies these positive returns over time.
  
  
• Capital gains on real estate are tax-free in Canada, assuming the property falls under the principal residence exemption.
  

Furthermore, real estate prices in B.C. have increased more quickly than the national average in recent decades, which means the above chart does not capture the experience of many British Columbians.

Both Canadian stocks and Canadian homes have generally been attractive investments over the last five decades. Real estate often appears less risky than stocks, because you do not see the price of your home fluctuating every day. Furthermore, many individuals own their home for a decade or more, which masks shorter-term movements in price. This is why some might be surprised to learn that the stock market has increased significantly faster than home prices over the last five decades.

As with most things in life, a good balance between stocks and real estate is generally the best path forward. Your RGF Financial Advisor can help discuss your real estate objectives and how these fit into your overall financial plan.