Toronto Real Estate returns report: 10 years of ROI - Q2 2016

Tuesday Jul 26th, 2016


Last week there was a press release from the Building Industry and Land Development Asssociation (BILD) that got a fair bit of attention in the press with its headline of "Price of low-rise homes more than doubled in last decade." Adjectives like impressive and exponential were used to describe the growth. Easy there, tiger. 

Rule of 72

"Double in 10 years" is only 7.2% a year (assuming compound interest — see the handy "Rule of 72" for that quick math). Certainly 7% annual growth is a respectable amount (especially in our recent low inflation environment), but it's hardly exponential. But with the average price of a detached home in Toronto at $1.26 million now, the absolute numbers are getting big so I think people overestimate the growth percentages. If bananas went up from 60¢/pound to 75¢/pound that would be the same 25% increase if a house's price climbed from $1 million to $1,250,000. But the $250K increase seems like a larger jump.

BILD is a lobby group for land developers, home builders and renovators in the Greater GTA, so it was hard for me to get past its new construction and low-density biased viewpoints. But, the "double in 10 years" point made me curious as to what the actual average annual price increase has been over the last 10 years (for different housing types) and how that compares to the TSX return for the same time period. So I looked up the data for Toronto (specifically the 416 area), ran the calculations, and created a short SlideShare presentation with 1, 3, 5, and 10 year "returns" similar to how stocks / funds / indices are often displayed. (Update: It's now uploaded on this very site.) Here's a snippet with some of the returns:

Some observations

1) Real estate out-performed the TSX Composite Index over each time frame (but of course, past performance does not guarantee future results)

2) Detached houses significantly out-performed Condo apartments in these periods (in large part due to the relatively fixed supply of detached houses in 416 — the only new ones being created are replacing teardowns). Detached house price growth is actually accelerating, increasing 6.3% a year in the first five years from 2006-2011, and 11.4% in the last 5 years (for 8.8% over the 10 year period). For condo apartments, the 6.0% 10-year CAGR was 7.5% for the first 5 years, and slowed to 4.5% in the last 5.

3) The 1 year increase in the average 416 detached house ($207K) is larger than the 10 year increase in the average condo apartment ($198K)

Disclaimers and caveats

One note on comparing housing "returns" to investment returns, is that I have omitted transaction costs to show "paper gains", but those costs can be significant. For instance, the total land transfer tax on the average detached Toronto house in 2015 ($1,052.9K) would have been $34.3K. If you sold that house now for the average ($1,259.5K) the standard real estate commission costs of 5% would be $63K. So the $207K increase I've shown would shrink to $109K, which is still a 10.4% return for the year — but a lot less than the 19.6% on pure price appreciation. There would also be legal fees. I personally look at property taxes, maintenance costs, and mortgage interest as a cost of occupancy similar to rent and not cutting into returns, but those could be debated.


About Scott Ingram CPA, CA, MBA

Would you like to make better-informed real estate decisions? I believe knowledge is power. For that reason I invest a lot of time researching and analyzing data and trends in the Toronto real estate market. My Chartered Accountant (CPA, CA) side also compels me to perform a lot more due diligence on properties my clients are interested in purchasing. If you have better information, you should have less risk and be in a position to make better decisions for your hundreds of thousands of dollars.

Your home is the single largest investment you'll make - trust it with an accountant.

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