Real Estate vs Equities: Which is the Better Investment?

Apr 10, 2023

People of all ages frequently face conundrums when thinking about investment decision-making concerns. One common example could be the relative investment virtues of investing in real estate versus investing in equities (stocks).

Both investments typically deliver capital appreciation and (potential) income, but they are significantly different as far as their overall characteristics are concerned.

Think about it. The fact is that most of us make a major portfolio decision every month without fully realising it. That decision comes when we pay down our mortgages.

By pouring so much money into real estate, we’re signalling that we believe an investment in bricks and mortar is better than one in stocks and bonds. Or at least, an investment worth making for the lifestyle benefits, if not the returns.

In any case, real estate is where a lot of Canadians are putting their money—even if some regions are currently experiencing a downward trend in transactions. A recent story in the Vancouver Sun was somewhat pessimistic about the B.C. housing market, stating: “Sales in 2023 are expected to be down seven per cent – from nearly 81,000 units in 2022 to just over 75,000 – as households adjust to a slowing economy and struggle with higher mortgage rates.”

But the news wasn’t all bad, with a 24% sales surge predicted for 2024.

Pretty much the same story prevails in most major Canadian markets right now, yo-yoing real estate prices being the source of most of the confusion.

Most investment experts, including those working for credit unions, agree that in the discussion about real estate vs. equities there are really five key issues to consider: returns, volatility, liquidity, investment size and taxation. Let’s look at these issues one-by-one.

1. Returns

The tricky part with comparing long-term returns between real estate and the stock market has to do with the fact each asset class suffers from a range of potential risks and rewards.

The easiest comparison is the relative rates of appreciation between a home and the S&P 500. This is a no-brainer since, over the long haul, the S&P 500 has returned about 10% annually to investors on average vs. just 3% or 4% for real estate.

Both these performance numbers are rough averages – and are subject to significant annual fluctuations – but they give you a good idea of relative performance.

2. Volatility

Stock market returns, in general, outperform those of real estate investments by a significant margin over the long run, but there’s a catch. Volatility.

Think about it this way. While the value of your home might decline by double digits in a terrible year, the stock market can decline by 10% in a matter of days.

Stocks lose 36% on average in a bear market. By contrast, stocks gain 114% on average during a bull market.

In some cases, bear markets have seen stocks drop by 50% or more. This type of volatility simply doesn’t happen in real estate, and it’s one of the most reassuring aspects about investing in bricks and mortar.

3. Liquidity

Stocks are liquid. You can buy or sell a stock year-round, day or night. And you can check fair market stock pricing with a few strokes on the keys of your laptop. Real estate is
much more complicated and time-consuming. It can potentially take months to unload a home, unless you live in an ultra-hot real estate market and remember, it isn’t always clear what the “true” or “fair” value of your property is, as you’re subject to whatever a single investor is willing to pay you for it.

4. Investment Size

Buying a home generally costs more than investing in stocks. Much more. Nowadays close to a million dollars is the price of entry for a decent property, certainly in and around the greater Vancouver area, but you don’t need anywhere near that amount of money to build a basic financial portfolio.

5. Taxation

Owning a home in Canada can be very expensive and very rewarding at the same time. There are some Federal and Provincial tax deductions and tax credits which, as a homeowner and depending on your situation, may be available for you to claim. Such deductions and credits can be tricky to follow or understand, so if you’re in any doubt, contact your credit union financial advisor for expert help and advice.

Benefits of a Diversified Portfolio

In conclusion, both stocks and real estate are valid investment assets that offer different characteristics. For this reason, they can greatly complement one another as parts of a diversified portfolio.

  • In addition to providing a place to live, residential real estate can offer a variety of tax benefits and the potential for long-term capital appreciation.
  • Owning rental real estate can provide passive income in the form of monthly rent payments that typically increase annually, in addition to capital appreciation.
  • Stocks are owned for their growth potential, but many stocks also pay dividends that also increase regularly – providing income as well.

All in all, a balanced, diversified portfolio containing both asset classes is probably what most investors should aim for. As always, we strongly recommend getting personalized advice from one of our partners: Coastal Community Credit Union, Coastal Community Private Wealth Group or Interior Savings. Their advisors are top notch and here to help.



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