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It-s-Your-Life

Real estate vs stocks - a tie

In this corner, real estate. In the other corner, stocks

This is always a lively debate. I’ve been in the investment business since 1993, so my default has been to argue in defence of the stock market. There have been times when it’s been an uphill battle: The tech crash of 2000, the great recession of 2008, and 2011, which was just plain bad. 

While the markets have come back considerably, the beginning of this year was a disaster for stock owners, particularly if you were in energy or metals. 

Moves in the equity markets, as we like to call stocks, tend to be faster and more volatile. Watching house prices is a bit like watching paint dry. There’s nowhere to get daily values. Unlike your stock account where you can check at all hours of the day and get an up to the minute valuation, you must order an appraisal to determine the value of your property. Alternatively, you can apply the rule of thumb method using your assessed value, or the guesstimate: Comparing your house to the most recent sale in your neighbourhood, and adding or subtracting where you think you’re better or worse.

At best, real estate vs stocks is not an easy comparison to make, as they often serve different purposes. A stock portfolio can be for investment purposes or a means to generate income. A home, while also an investment, is a place to live, a vehicle to generate income, or a means to grow your investment dollars.

That said, let’s try comparing some of the obvious differences between the two. I’ll stick to the ones we can measure, and leave the intangibles to someone else.

Liquidity
Stocks win this one hands down. You can liquidate a position immediately, and have the cash in three days. Selling your house is a whole different process. Unless you’re in a market like Vancouver, you’ll need to hire an agent, get an appraisal, list it, market it, show it, and after all that hope that someone agrees with you on the price you’re asking. It’s all trial and error really, because if you set a price and get an offer right away, you’re concerned that you listed it too low, if you get no showings you’ve probably listed too high. 

Stock market - 1
Real estate - 0

Taxation
Here’s where real estate starts to blossom. If it’s your primary residence, you don’t pay any tax on potential gains (assuming you’ve lived there longer than 12 months). If it’s an investment property for which you’re collecting rent, it gets more complicated. While repairs, taxes, interest, maintenance, and utilities may be tax deductible, rents and capital gains are usually taxable. 

With stocks, unless you’ve purchased the investments in a registered account, all deemed dispositions other than at your cost base are considered gains or losses for tax purposes. Most equity distributions are taxable unless they are returns of capital (dividends, interest, or in the case of some mutual funds, capital gains). 

Interest on loans for investment purposes is generally deductible whether it’s real estate or stocks. If we’re simply assuming that your choice is to put your capital into a stock portfolio or your principal residence, real estate takes the round. 

Stock market - 0
Real estate - 1

Utility
Let’s face it, while stocks represent a proportionate ownership in a company, there’s not much else you can do with your share certificates other than follow the price and vote at the annual general meeting. If you doubt that statement, think about the box your old Nortel certificates are in. Real estate on the other hand is a tangible investment. You can live in it, grow vegetables in your back yard, raise your kids in it or rent it out. One way or the other it exists in a form that can be used for something other than investing. Stocks for the average investor simply represent the opportunity to grow their initial investment, to earn a dividend from the company, or both. 

Stock market - 0
Real estate - 1 

Ease of ownership
Owning stocks cost you nothing once you’ve made the initial purchase. No property purchase tax, no strata fees, no property tax, no new roof, and no insurance. You don’t have to get up at three in the morning to fix your tenants plugged toilet, and nobody’s going to set up a grow-op in your stock portfolio. 

Stock market - 1
Real estate - 0 

Rate of return
So let’s look at the bottom line. What are the real rates of return, all other issues aside? Let’s leave out the specifics of anomalies like the current Vancouver real estate insanity, the US meltdown in 2007 and 2008, the dot.com bubble leading up to 2000, and all the other deviations from the long term rates of return that we’ve experienced.

“National price data from the Canadian Real Estate Association shows an average annual gain of 5.4 per cent nationally from 2004 through 2013 for resale homes. The comparable average return from stocks was just under 8 per cent. If we go back 20 years, we get an 8.3 per cent gain from Canadian stocks and an increase of 4.5 per cent in the average national house price. Over 30 years, stocks made 8.5 per cent and houses 5.5 per cent.” ~ Rob Carrick, Globe and Mail, Friday, Apr. 04, 2014 

The difference is timing. Depending on the period over which you choose to measure your returns, you could make a case for either investment. For those of us not arguing the relative value of these two investments, the advice is always the same: The best way to protect your investments is to diversify them. 

So the answer, as convenient as it might sound, is that if you’re able: Own both.

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About the Author

Jeff Stathopulos, CIM, CFP, Portfolio Manager

Jeff is an advisor and partner with The Navigation Team at Scotia Wealth Management.

He lives in Kelowna with his wife Tanya, their two university bound daughters and their canine kids.

You can contact Jeff by email at [email protected]

Website:  www.yourlifeyourplan.ca

The Navigation Team

Scotia Wealth Management

This column is for information purposes only. It is recommended that individuals consult with their financial advisor before acting on any information contained in this article. The opinions stated are those of the author and not necessarily those of Scotia Capital Inc. or The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member Canadian Investor Protection Fund.



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