The skyrocketing house prices in Canada for 12 years is impressive. Since September 2005, the index Teranet which measures the average change in the price of residential real estate transactions in Canada increased by over 100%. During this period, the yield offered by your property is possibly better that a balanced portfolio of stocks and bonds. Should we conclude that your home remains your best investment? Nothing is less sure and see why.
A little history
The economist Robert Shiller, who won a Nobel Prize in 2013 is a source of reference when it comes to this type of analysis. His research has helped raise enough information to establish the price trend since 1890 to date. And the results are interesting. From 1890 to 2010, when comparing the evolution of house prices to inflation shows that price growth was insignificant, barely more than inflation. Yet over the same period, taking into account inflation, the MoneyChimp calculatorshows that the S & P 500 multiplied your capital by 1577. This is a little known fact that many forget when watching the evolution of their RRSP vs. the price of their home for 10 years. Although our investment horizon is not as long, it is still important to remember that in the long term (over 10 years), stocks have generally outperformed most other asset classes.
The last 15 years
The low interest rates set by central banks for nearly 15 years are no strangers to the property market exuberance phenomenon. The prices are inversely related to interest rates, low rate that lasts for a long time causes some property markets have become unaffordable today. But a rate hike could come shake vigorously embellished this.
The rate hike
For the second time since July, the Bank of Canada has made up its key rate by 0.25% bringing it to 1.00%. This increase follows a strengthening of the Canadian economy in recent months and the Bank of Canada does not exclude the possibility of further tightening by the end of the year if economic conditions warrant.
Such a scenario, if it continues, will force central banks to adopt less accommodative monetary policies. This does not happen unnoticed in the markets that quickly adjust to a new economic environment. The price of some assets could then drop and property would not be spared.
The inflation component will be important to watch in the coming months as it remains a key economic data that will telegraph the next actions of central banks.
What the future holds
Historically, house prices evolved at about the same rate as inflation. Some periods were punctuated by rapid increases but there is also gloomy periods marked by stagnation or even declines. You can bet that these phenomena occur again in the future which certainly contains more dark days for home owners in Canada.
At this stage, it remains important to adjust its expectations vis-Ã -vis real estate.Historically, the stock market has enriched patient investors in a much more important than those who bet on their residence. And nothing indicates that it should be otherwise in the future.
National Bank Financial is an indirect wholly owned by the National Bank of Canada.National Bank of Canada is a public company listed on the Toronto Stock Exchange (NA: TSX). The views expressed here do not necessarily reflect those of National Bank Financial. The information contained herein was obtained from sources believed to be reliable; However, we make no warranty with regard to this information and could be incomplete. Securities or sectors mentioned in this column do not cater to all types of investors and should in no way be considered a recommendation. Please consult your financial advisor to see if this title or industry suits you and for complete information, including the main risk factors.