ORES Real Estate Index for May 2012
By Brian Madigan LL.B.
Here is the “ORES REAL ESTATE INDEX” which tracks the average resale prices of single family homes and condominiums in the Greater Toronto Area (GTA). It also tracks certain benchmark comparisons such as the price of oil and gold, as well as the Consumer Price Index
In addition, the stock market indices for Toronto, and the three largest US markets are also compared.
For ease of comparison, everything we look at is worth 100 points on the Index as of 1 January 2005. That time period compares favourably with the five year average used as a standard benchmark comparison in the mutual fund industry. In fact, it tracks over 7 years.
As of 31 May 2012, here is the Index representing average prices with the April 30th, March 31st, February 29th, and January 31st numbers appearing in brackets for comparison:
159.93…..160.16…..156.01…..(155.51)…..(143.45)…..GTA single family
Other market comparisons
364.23…..(386.03)…..(386.66)…..(431.79)…..(407.76)…..gold (per ounce)
199.70…..(230.60)…..(234.37)…..(242.47)…..(223.98)…..oil (per barrel)
159.93…..(160.16),,,,,(156.01)…..(155.51)……(143.45)…..ORES sgl fam
118.15…..(125.96),,,,,(125.95)…..(123.47)…..(120.43)…..Dow Jones index
Using the Index
Just a quick note on reading the information. Have a look at the ORES Index for Real Estate (single family homes). As of the end of May, the index stood at159.93. That’s a 59.93% increase in 89 months. That means the increase is 0.673% monthly, or it could also be expressed as 8.08% annually.
Performance can always be difficult to interpret but the longer the period, the more accurate the number becomes. There can, of course, be many short term swings.
The other statistics are reported in a similar fashion for the ease of comparison.
Observations (on the Index)
As we use index, there are several notable comments:
· Commodity prices are just commodity prices
· There is no other “extra return” for commodities
· The same is true for the CPI
· The CPI is a benchmark to see whether you are keeping pace with inflation, that number is 116.05; increases have been modest and inflation appears to be under control; this is significant.
· For a realistic performance goal, you should aim for CPI plus 3.5% annually
· Stocks provide dividends in cash or extra stock. This return is additional to that shown in the stock market indices
· The stock market Indexes only measure the survivors. So, in 2009, both GM and Chrysler would have been dropped due to the bankruptcies
· If you held GM and Chrysler, you lost everything, but two new companies moved in to replace them in the Indexes
· Real estate offers a return in terms of occupancy. You can rent out the property and receive income, or occupy the property and enjoy it yourself
Comparative Observations Using the New Index
· Gold overall is still the best performer, reaching 364.23, nothing else comes close, however, it is well off its highs (425.72 in September 2011). To some extent gold seems to be losing its favour, and it’s almost in free fall
· Oil has been the most volatile, (it rose to 320.88 in July 2008 and it has declined to 199.70) we are seeing downward trend this past month which is quite inconsistent with what we see at the pumps
· Real estate was the most stable, with solid predictable returns at about 8.08 % annually
· Our own stock market posted reasonable gains, but still falls behind single family homes over the measurement period, however, don’t forget that the TSX is still well off its highs and is substantially resource based
· All three US stock market indicators now show positive numbers, and may truly be a better overall indication of the true state of the North American economy. The S&P matches inflation, the Dow is now measurably under the Nasdaq which now exceeds our own TSX. This is very positive for the US economic recovery.
For steady, predictable, measured gains pick real estate. It’s a solid performer with lower risk (less volatility) and generally moving in a positive direction.
And remember, when it comes to real estate, it’s never “wiped out” completely, like GM or Chrysler stock. So, unless you’re sitting on the edge of a tsunami, you’ll still own something when the storm is over.
For a benchmark of success, there’s 1,000 years of history to point to a rate of return in real estate being about the equivalent of 5% per annum, simple interest (non-compounded). That means that real estate doubles in value every 20 years. There are a lot of companies (now bankrupt, including CanWest Global, and many US Banks) that would have been happy with that return.
The present rate of return although high by historical standards appears to be sustainable in sought after locations like the GTA. At the moment, over our measurement period we are looking at a 3.08% annual premium over the benchmark 5%.
Brian Madigan LL.B., Broker is an author and commentator on real estate matters.