Real Estate vs. Stocks: Which Is a Better Investment?
There are many articles online comparing real estate with the stock market. Most present reasonable arguments because both can be effective investment tools. As far as I am concerned, it generally does not make sense to depend entirely on only one type of investment.
Real estate and stocks can both play an important role in building long-term wealth. Each offers distinct advantages and carries different risks. More importantly, the right investment may depend not only on market performance, but also on your financial position, personal needs, risk tolerance and stage of life.
The question is not simply whether real estate or stocks are better. The more important question is: Which investment is better suited to your circumstances at this particular stage of your life?
One of the greatest advantages of publicly traded stocks and exchange-traded funds is liquidity. They can usually be bought or sold quickly through an investment account. Real estate is much less liquid. Selling a property can take weeks or months and involves legal fees, real estate commissions and other transaction costs.
How Leverage Works in Real Estate
One of the most significant advantages of real estate is the ability to use leverage. An investor may purchase a property with a down payment and borrow the remaining amount through a mortgage.
For example, a 20% down payment allows an investor to control an asset worth approximately five times the initial down payment. The tenant’s rent may then help cover some or all of the mortgage payments and other expenses, including:
- Property taxes
- Condo or maintenance fees
- Property insurance
- Repairs and regular maintenance
- Property management expenses
- Periods of vacancy
However, rental income is not guaranteed to cover every expense. Investors must be financially prepared for unexpected repairs, vacancies, rising mortgage payments and other ownership costs.
Stocks can also be purchased with borrowed money through a margin account or a line of credit. However, this method carries considerable risk. The investor must pay the borrowing costs and may face a margin call if the value of the investments falls.
Leverage can magnify gains, but it can also magnify losses. It should never be treated as a guarantee of higher returns.
Why Leverage Can Make Real Estate Attractive
Suppose an investor uses a $100,000 down payment to purchase a $500,000 property. If the property increases in value by 5%, the property has appreciated by $25,000—even though the investor initially contributed only $100,000.
This illustrates the potential power of leverage, but the investor’s true return cannot be calculated from appreciation alone. Mortgage interest, property taxes, maintenance, insurance, vacancies, buying and selling costs, and any additional cash contributed to the property must also be considered.
Mortgage principal repayment can gradually increase the owner’s equity, but those repayments are also funded through rental income or the investor’s own money. A proper comparison must therefore examine the property’s complete cash flow, not simply its increase in market value.
Tax-Advantaged Investment Accounts in Canada
Canada offers several registered accounts through which eligible investments such as stocks, bonds, mutual funds and ETFs may be held. These include the Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP).
These accounts offer different tax benefits, contribution rules and withdrawal consequences. Someone who already owns a home and regularly contributes to registered investment accounts may decide to diversify further by purchasing an investment property. Another person may prefer the simplicity and liquidity of continuing to invest through a diversified portfolio.
The basic objective is to accumulate wealth, manage risk and prepare for future financial needs. Since I am not a licensed financial advisor, I will refrain from commenting on which registered account or investment strategy is suitable for any particular individual.
The Key Is to Remain Diversified
Real estate and stocks do not have to be competing choices. Many investors use both to create a more diversified financial foundation.
Real estate can provide shelter, rental income and long-term equity. Stocks and ETFs can offer liquidity, diversification and comparatively easy management.
An Approach for Younger Buyers
I have traditionally encouraged many of my younger and millennial clients to consider buying real estate when they are financially ready. In 2020, the GTA continued to face long-term housing supply constraints, while major transportation projects were improving connectivity throughout the region.
Properties close to reliable public transit, employment centres, schools, shopping and other amenities generally attract stronger interest from both buyers and tenants. However, location alone does not make every property a good investment. Purchase price, financing costs, condition, carrying expenses and future resale demand must all be carefully examined.
Buying a principal residence is also different from purchasing a purely financial investment. A home provides a place to live, stability and the freedom to use and improve the property. These personal benefits are real, even though they cannot always be measured as an investment return.
Homeownership can protect an owner from rent increases and provide greater housing stability. A tenant may sometimes have to move because the landlord sells the property or requires it for personal use, subject to the applicable tenancy laws.
However, buying is not automatically the best decision for everyone. Renting may make more sense for someone who:
- May relocate within a few years
- Does not yet have sufficient savings
- Has an uncertain or changing income
- Would be financially stretched by ownership costs
- Values flexibility more than long-term housing stability
The first goal should not be to buy at any cost. It should be to purchase a suitable home when your income, savings, financing and future plans make ownership reasonably sustainable.
An Approach for Downsizers
People approaching retirement may have different priorities. When downsizing later in life, some homeowners may no longer want to manage investment properties, communicate with tenants or deal with ongoing repairs.
Managing rental properties may be practical during one stage of life but less desirable during another. Some investors may eventually decide to sell one or more properties and move part of the proceeds into ETFs, fixed-income investments or other comparatively hands-off assets.
My financial advisor has discussed using diversified ETFs and other income-producing investments during retirement. We have also discussed the possibility of selling a principal residence, investing some of the released equity and moving into a rental property or smaller home.
A gain from selling a principal residence is generally exempt from tax when the property qualifies as the owner’s principal residence for the relevant years. However, the sale must still be reported, and the exemption depends on the property and owner meeting the Canada Revenue Agency’s requirements.
Downsizing is more than a real estate decision. It can affect retirement income, taxes, estate planning, housing costs and quality of life.
These decisions should be made only after consulting appropriate financial, tax and legal professionals.
Did Buying a Home Make Sense in 2020?
In 2020, qualified buyers with stable employment, sufficient savings and access to financing could still find opportunities to purchase a condo or house for personal use or as an investment.
The COVID-19 pandemic created significant uncertainty around employment, income and the economy. Nevertheless, real estate transactions continued, interest rates were historically low, and financially secure buyers remained active.
That did not mean everyone should rush to buy. Anyone facing employment or income uncertainty needed to be particularly cautious. Maintaining emergency savings and ensuring that mortgage and ownership costs remained affordable were more important than attempting to predict short-term movements in property prices.
Ontario’s population growth, immigration and continuing demand for housing contributed to the GTA’s long-term appeal. The expansion of transportation infrastructure also made well-connected communities increasingly attractive.
Can Real Estate Produce Better Returns Than Stocks?
The comparison between real estate and stocks can be summarized through three important considerations:
- Timing: When the investment is made and how long it will be held
- Need: Whether the property will provide a home as well as an investment
- Diversification: How the investment fits into the investor’s overall financial position
Investors who purchased stocks during the 2008 financial crisis—or during the sharp market decline in March 2020—and held them through the subsequent recovery may have earned returns that exceeded real estate appreciation over the same period.
Real estate, however, offers a type of long-term leverage that many people find easier to manage than borrowing to invest in stocks. A mortgage does not usually produce an immediate demand for additional collateral simply because the property’s estimated market value declines. With stocks purchased on margin, falling prices can potentially result in a margin call and forced sale.
GTA Real Estate vs. Canadian Stocks: 2005 to July 2020
Rather than relying only on opinions, the following chart compares how GTA real estate and Canadian stocks performed over the same period.
The real estate series is based on the Toronto Regional Real Estate Board’s annual average selling price. Canadian stock performance is represented by the S&P/TSX Composite Net Total Return Index, which includes reinvested dividends under its net total return methodology.
Both series have been indexed to 100 using their respective 2005 values so that their relative growth can be compared on the same scale.
Both series are indexed to 100 using their respective 2005 values.
From the 2005 baseline to July 2020, the GTA average home price index increased by approximately 167.6%, while the S&P/TSX Composite Net Total Return Index increased by approximately 119.6%.
How the Comparison Was Calculated
The real estate series uses TRREB’s annual average selling price from 2005 through 2019. Since this article reflects conditions in July 2020, the 2020 housing endpoint is based on the sales-weighted average selling price for transactions reported from January through July 2020, rather than the final full-year 2020 figure.
The stock-market series uses December month-end S&P/TSX Composite Net Total Return Index values for 2005 through 2019 and the July 2020 month-end value for the final comparison point.
Each series was divided by its respective 2005 value and multiplied by 100. This allows two datasets expressed in different original units—home prices and stock-index levels—to be compared on a common growth scale.
This chart measures changes in market values. It is not a complete calculation of the net return earned by an individual homeowner, landlord or stock investor.
The housing series does not include rental income, mortgage leverage, mortgage interest, property taxes, maintenance, insurance, periods of vacancy, transaction costs or taxes. It also reflects average selling prices, which can be affected by changes in the types and locations of properties sold.
The stock-market series includes reinvested dividends under the index’s net total return methodology, but it does not account for an individual investor’s investment-management fees, trading costs or taxes.
Download the Excel Workbook Used to Create This Chart
Sources: Toronto Regional Real Estate Board historic statistics and monthly 2020 market data; S&P/TSX Composite Index Net Total Return historical data. TRREB cautions that changes in its market area and the mix of properties sold should be considered when undertaking historical comparisons.
Why the Starting Date Can Change the Result
Over long periods, both GTA real estate and Canadian stocks have rewarded patient investors. However, the outcome of any comparison can change considerably depending on when the investment was made.
Someone who purchased an asset shortly after a major market decline may enjoy unusually strong returns during the subsequent recovery. By comparison, someone who invested near a temporary market peak may have to wait much longer before experiencing similar growth.
The same principle applies to both housing and stocks. Investors who purchased equities during the 2008–09 financial crisis or during the sharp decline in March 2020 benefited if they remained invested through the recovery. Similarly, a real estate buyer entering after a period of housing weakness may achieve a very different result from someone purchasing during a period of exceptionally rapid price growth.
The difficulty is that market bottoms and tops become obvious only in hindsight. They cannot be predicted consistently in advance.
This is why a single chart cannot prove that one investment will always outperform the other. Changing the starting date, ending date or holding period can materially change the result.
For most people, the more practical strategy is not to wait indefinitely for a perfect buying opportunity. It is to purchase or invest when the decision is financially sustainable, maintain an adequate emergency reserve, avoid excessive borrowing and remain committed to a sensible long-term plan.
For many Canadians, owning a home while investing regularly in a diversified portfolio can provide a powerful combination of housing stability, equity growth, liquidity and financial diversification.
A More Accurate Real Estate Example
Consider an investor who uses a $100,000 down payment to purchase a $500,000 Mississauga condo. If the property appreciates by 5% annually for 10 years, compounded annually, its estimated value would be approximately $814,000.
That represents approximately $314,000 in gross appreciation. However, it would be misleading to describe the entire amount as profit or as a return earned solely on the original down payment.
A complete calculation would have to account for:
- The outstanding mortgage balance
- Mortgage interest paid
- Land transfer taxes and legal fees
- Property taxes and insurance
- Condo fees, maintenance and repairs
- Vacancies and property management expenses
- Rental income received
- Income taxes and potential capital gains taxes
- Real estate commissions and selling expenses
The example demonstrates the potential benefit of controlling a larger asset with a smaller initial investment. It does not guarantee a particular return.
How Did the 2020 Stock Market Projections Compare?
FP Canada is the professional body responsible for establishing and enforcing professional standards for Certified Financial Planners in Canada. In 2020, FP Canada Standards Council and the Institut québécois de planification financière published Projection Assumption Guidelines to help financial planners prepare reasonable long-term financial projections.
The 2020 guidelines provided the following nominal return assumptions before investment fees:
- Short-term investments: 2.4%
- Fixed-income investments: 2.9%
- Canadian equities: 6.1%
- Foreign developed-market equities: 6.4%
- Emerging-market equities: 7.1%
These figures were long-term planning assumptions—not promised or guaranteed investment returns. Actual results could be considerably higher or lower, particularly over shorter periods.
Real Estate and Stocks Require Different Types of Investors
Being a landlord of an investment property may not be everyone’s cup of tea. Rental properties require active management, financial reserves and the willingness to deal with tenants, repairs and changing regulations.
Stocks and ETFs are easier to buy and sell, but their prices can fluctuate considerably. Investors who react emotionally to daily market movements may find it difficult to remain disciplined during periods of volatility.
Real estate prices also rise and fall, but the changes are less visible because properties are not priced and traded every day. That can make real estate feel more stable, even though it still carries market risk.
The most suitable investment is one that you understand, can afford and are prepared to hold through changing market conditions.
So, Is Real Estate Better Than Stocks?
The answer depends on the individual.
Real estate may be attractive to someone who wants to use responsible leverage, build equity, generate rental income and hold a tangible asset for the long term. Stocks and ETFs may be more suitable for someone who values liquidity, broad diversification, lower transaction costs and freedom from property management.
For many people, the strongest approach may be to own a principal residence while gradually building a diversified investment portfolio. Others may choose to own additional investment properties, while some may prefer to rent their home and invest their available capital in financial markets.
There is no universally correct answer. The right balance depends on your income, savings, lifestyle, investment knowledge, time horizon and tolerance for risk.
This article is intended for general information only and reflects the author’s perspective as a real estate professional in July 2020. It is not financial, investment, tax, mortgage or legal advice. Before making an investment decision, consult qualified professionals who can review your individual circumstances.
