Real Estate Or Mutual Funds, Where To Invest in Post COVID world?
Saturday Dec 26th, 2020
Most investors at some point of their life get into this classic debate of real estate versus equities, which one is better investment vehicle, and which will return more yields when invested in? If you still don't know the answer and are juggling between the decision to either invest in the Canadian real estate market or the stock market, then here's your cue if your focus is Canadian market. Let's get to the basics first.
Essentially, real estate simply means land or physical property like houses and condos. In contrast, mutual funds are a type of investment vehicle that consists of a portfolio of securities like stocks, bonds, money market instruments, etc.
Real Estate Market in Canada
The real estate market throughout Canada is not equally promising. In some areas it is more promising when compared to the rest. Few areas of province like Ontario & British Columbia are quite admirable. Even with sluggish growths in both 2018 and 2019 for Canada wide real estate, these markets have managed to remain steady with notable growth.
Mutual funds market in Canada
Canada's investment fund industry represents more than a third of Canada's total personal financial wealth, as $1.6 trillion in assets, held in mutual, individual segregated, and ETFs. However, this large market also doesn’t comes without issues. You may have a exceptional performance from a fund for multiple years but that does not promises the future growth. Important are your entry and exit points, which if done correctly can reap exceptional returns but predicting these entry and exit points is not every bodies cup of tea so many end up loosing as these markets are highly volatile in nature when we compare it to real estate.
COVID19 and its impact on both
This Pandemic had far reaching economic consequences beyond the spread of the disease itself. Right at the beginning of the pandemic in March 2020, both real estate market and stock markets were severely affected as this creatred urgent need for people to have cash in hand leading to panic selling of their assets. The Investment Funds Institute of Canada reported an overwhelming figure of $14.1 billion in net redemptions, making it one of the largest single-month declines in Canadian mutual fund history.
Whereas on other hand, after a stagnated start of 2020, which lead to multiple rate cuts from bank of Canada, real estate market of Canada started picking up again and within few months it surpassed the dip it took. Main reason for that was that most businesses were forced to immediately create infrastructure to let their staff work from their own homes. This created need for more living space and houses with home offices. Demand for larger houses is now at an all-time high due to the increasing prevalence of work-from-home practices. There has also been an increased shift from urban spaces to suburban and rural areas as there is no need to live closer to work any more. This fulled rapid price increases in lot of remote areas which were previously not performing as well when compared to major metros. With historically lowest interest rates, people could easily sell their small city homes & condos and move to a bigger house fulfilling their new real estate requirements without increasing their monthly payments.
Smaller real estate products like Condos were still effected with this unplanned market shift as demand for more living space took presidence. This also lead many people to invest in renovating or adding extensions to their existing homes. MPAC found that there was a 28% increase in the number of renovation permits issued in 2020.
Also this pandemic is having a negative impact on commercial real estate as it directly impacts the demand for commercial office space because of quarantines & social distancing requirements and more and more people are working now from home. There has been many reports showing that employee productivity has been maintained well or even increased since the lockdown. Because of this and because of high cost of commercial real estate, many companies are now choosing to delay their plans to return workers to their physical premises or even continue working the same way indefinitely. Many major commercial Tenants have given lease termination notices to their Landlords. This shift has made commercial office space buildings & condos in major metros very vulnerable in the near future. Effects are also seen on retail outlets as mindset to buying online is becoming more and more prominent.
Historical Performance of Both Investment Vehicles
Average 4 Bedroom Detached Home price in Toronto 2 Decades back in year 2000 was approx.. 315,000. Today by end of 2020, 4 Bedroom detached home price of Toronto has jumped to approx.. 1.55 Million. That’s an increase of approx 500% and an appreciation of 25% annually, a return that beats the stock market with a considerable difference as during same 2 decades the S&P/TSX Composite index returned just under 5% a year.
Looking at the bigger picture, the facts and figures point towards investing in the residential real estate market in 2020. Multiple expert reports are predicting over 10% increase for Greater Toronto Area real estate market in 2021. With Canadian mortgage rates expected to remain low for residential real estate for next few years, leverageing with just 20% down, your average return will be amplified by 5-6 times if you are willing to hold the property for atleast 4-5 years. However, investing without experience can backfire even when investing in real estate. Even in appreciating market you can end up buying something which may become a nightmare later on. You need an experienced professional to help you make right choices. If you're currently not engaged with any other Realtor or Brokerage, feel free to call me if you’re thinking to invest or improve your real estate investment portfolio, I’ll be happy to be of any service.