Canadian Finance: Do Real Estate Stocks Outperform Actual Real Estate?

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Originally, Canadians used physical coins for their money – this represented real value in terms of the metal content. A paper Canadian dollar is actually an IOU supposed to represent the underlying value of a real asset. The same is true for “real estate stocks” or “real estate investment trusts” (REITs). Over the last decade, the Canadian paper real estate stocks have outperformed the physical real estate market.

Derivatives & Stock Exchanges

With the development of electronic stock exchanges, it is easier for paper real estate stocks to outperform actual real estate. A professional stock broker knows how to ride euphoria in world stock markets. Most paper stocks are rising. Since 2008, there is an increasing separation between paper financial instruments and physical assets, like real estate.

The Street has reported that REITs have outperformed actual real estate according to statistics released by Keefe, Bruyette & Woods (http://www.thestreet.com/story/10957386/1/10-top-buy-rated-real-estate-stocks-for-2011.html). With returns between 9% to 11% for REITs, this is becoming a very attractive option for investing in property. With this paper financial instrument, investors can enter and exit positions rapidly.

Central Banks Printing Money

Since 2008, central banks have become increasingly important in directing the debt-based economy. Interest rates are at record lows, allowing investors to borrow money for investment in stocks. Real estate stocks have naturally become more valuable.

The actual physical real estate market is based on loans and income. While interest rates on mortgages in Canada may be at record lows, incomes have been falling. Real Canadian income has failed to keep up with inflation (http://www.huffingtonpost.ca/2011/11/24/canada-average-weekly-payroll-earnings-september_n_1111805.html). Figures for September 2011 show wages declining 0.3% while inflation increased 3.2%. No matter how you look at it, less income will lead to lower real estate prices.

A realtor salary is based on sales of homes. The Canadian real estate market remains highly-regulated where most pricing is not shared with the general public. This has led to a market that is insulated from dramatic booms and busts.

The Canadian real estate market has increased 95.6% in the last decade (http://www.globalpropertyguide.com/North-America/Canada/price-change-10-years). In December 2008, the Canadian REIT market was worth $1.8 billion and in June 2013, the Canadian REIT market was worth $3.6 billion (http://ycharts.com/companies/CRXIF/assets). Thus, (although the years are 10 for real estate and 5 years for REITs) compared side-to-side, the Canadian REIT has outperformed the real Canadian real estate market.

The reason for this is the nature of the paper market. An investor need only invest a portion of the real value, usually on margin and is not locked into a 30-year mortgage. The Canadian REIT is a more flexible investment.