This is a question my friends and I have long discussed and debated over. In this article, I will attempt to once and for all solve this age old mystery.

If you compare rate of growth in the S&P 500 to dwelling values in Toronto, it is clear who the winner is – the S&P 500, but not by that much.

But this tells us only part of the story. A number of factors have to be taken into account before we know the final answer. For instance, the S&P 500 is based in USD, so we have to account for the conversion rate.

So with the money accounting for the conversion rate, the S&P 500 still comes out as the better investment.

Timing also plays a big role. Both the S&P 500 and Toronto house prices went through an astonishing growth period since 1996.

The next few charts compare indexed rate of growth between the S&P 500 (in both US and CAD) and Toronto average resale dwelling prices at 5 different starting time periods – 1996, 2000, 2003, 2007, and 2009. I decided to pick S&P 500 ups and downs as they provide a general sentiment of the economy as opposed to Toronto house prices, which have experienced an astounding level of consistency since 1996.

A few key takeaways from the charts above:

- unbelievable how close both the S&P 500 and Toronto house prices finished off once you start at 1996
- Toronto housing performs substantially better if you bought during the 2000s dot-com bubble
- Fascinatingly, the S&P 500 in CAD performs better than Toronto house prices if you bought at the peak of the market in 2007
- The S&P 500 performs substantially better if you bought at the bottom of the market in 2009

As is often said –

timing is everything.

The table immediately below shows how $50,000 invested in 1996 in real estate and the S&P 500 performs by May 2019 (assuming sale of shares and property in May 2019).

So in this case, $50,000 performs much better in the S&P 500 (in terms of rate of return). But you come out with much more cash in your pocket investing in housing.

This analysis however isn’t particularly fair because it should treat the Toronto dwellings as a rental/income property (since it’s an investment). The next table accounts for that.

If you were to invest $50,000 in a rental/income property in Toronto in 1996, you would have crushed it in terms of rate of return – **almost four times higher than the return of the S&P 500!** This assumes you have 95% occupancy of your unit, with sale of the property in May 2019. Interestingly, after about 23 years of holding the property, rental income would have resulted in a loss of about $26,000. Below I show my assumptions for every year by month (assuming mortgage refinancing every 5 years at the BoC benchmark 5-year mortgage rate; rate of inflation applies to utilities, maintenance and insurance; rents based off CMHC and bumped up to account for higher values in Toronto; property taxes at 0.075% of house price).

Finally, I decided to look at what the returns would be if you were to reinvest continually into the S&P 500 or housing in Toronto.

In the table above, real estate once again performs significantly better than investing in the S&P 500. My assumptions include using remaining savings (after paying for housing and personal expenses) for monthly purchases of the S&P 500 all the way to April, 2019 or buying 2 more additional rental properties in Toronto in 2003 and 2014 (once you have saved up enough from your remaining savings to invest as a downpayment).

Detailed assumptions shown below (same assumptions apply as the analysis without recurring investment shown above ):

On the bottom right you will see the calculations/assumptions for a downpayment, with $72,151 used as a downpayment for the unit purchased in 2003, and $124,879 used as a downpayment for the unit purchased in 2014. The downpayment is essentially your remaining savings after paying for your own housing, living and personal expenses. Net annual salary was assumed at $50,000 in 1996, reaching approximately $76,000 by 2019 (growing at the rate of inflation). Personal costs were assumed at about $1,250 in 1996 and growing at the rate of inflation to $1,918 by 2019 (personal costs includes things like food, personal care items, entertainment, etc.). I am assuming that the Toronto dwelling investor is an owner and pays a mortgage (as shown under *dwelling costs*).

And here are my assumptions for continual reinvestment into the S&P 500:

I am assuming same salary and that the S&P 500 investor is a renter, not an owner (but paying the same rents that the Toronto dwelling investor charges). The remaining monthly savings get converted into USD, and then purchase shares of the S&P 500 every month.

Since 1996, it is very clear what the better investment was – * real estate*.

But there are a number of very important caveats to consider:

*Timing is everything*. I replicated the analysis if it began in 2009, and although real estate performs better once again, its rate of return is reduced significantly (maybe the next blog post will explore different starting periods)- What Toronto house prices went through since 1996 was a golden dynasty
- What the S&P 500 went through since 2009 was astounding
- The vast majority of profit made in real estate is from capital appreciation, not from rents. In fact, you generally lose money on rents (reminds me of that Ben Tal and Shaun Hilderbrand analysis)
- Real estate is always the better investment if you can get someone else to pay your entire mortgage off – because your only investment is the downpayment
- Although real estate shows much higher returns, the responsibility involved with it is much higher than just owning shares of the S&P 500
- Real estate is not as liquid as stocks/equities

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