Fact: In 1970, the average price of a house in Toronto was $30,000. Forty year later, the average price of a detached home in Toronto is well over $1.2 million. For all homes including condominiums, townhouse and semi-detached houses, the average price in Toronto in 2016 is well over $600,000.
Conclusion: Based on the $600,000 figure, the average rate of increase is about 7.6% annually.
Projection: It is estimated that by 2056, the average price of a home in Toronto would cost well over $3 million assuming a 4% average increase per year. I think I will include this article in my will to be handed down to my children and my grandchildren to see if it materializes. Better yet, put it in a time capsule to be opened on December 31, 2056 long after I am gone or if I am still alive at 92 years of age.
Fact: Over the same 41 year period from 1970 to October 31, 2016, the S&P 500 returned an average 10.2% , including dividends reinvested.
So, one can conclude that it would have been better to invest in the S&P 500 instead of real estate, right? If one had rented instead of owning a home (with mortgage and interest payments, maintenance, and etc.), the math can get interesting. I have yet to figure out how to best present the analysis, but have concluded that Investing in Real Estate by purchasing a home beats renting and using the down payment and additional costs of home ownership to invest.
And the difference is due to …… leverage.
Assume you put 20% down payment or $100, 000 on a $500,000 property . If the property appreciates 7.6% per year, which is what the Toronto market experienced on average, you gained $38,000. But on a $100,000 investment. So, the true gain is 38%, which beats the 10% average return on the S&P 500.
The opposite would also hold true if the property lost 7.6% in value, and you would have lost 38% on your initial $100,000 investment or down payment. As in most financial literature, I assume no transaction costs and ceteris paribus (everything else remains equal).
See link to the Toronto Real Estate Board historical prices.