Since 2001, the S&P/TSX Composite Index has returned around 7.3 per cent annually.Tijana Martin/The Canadian Press
Many Canadians view real estate as the country’s most reliable investment. Yet, when we strip away the leverage effect of mortgages, the numbers tell a different story.
Since January, 2001, gold GCQ25 – not Canadian real estate or stocks – has been the best-performing asset with a cumulative annual growth rate (CAGR) of 10.3 per cent.
By comparison, the Canadian S&P/TSX Composite Index TXCX returned around 7.3 per cent annually while the U.S. S&P 500 Index INX returned about 8 per cent. Canadian real estate delivered between 6 per cent and 8.6 per cent, depending on rental income.
In the chart, we analyzed the investment returns of three major asset classes – gold, the TSX NTR Index, and the average Canadian home, both with and without rental income. We also analyzed the assets against growth of the total money supply, or M2, which represents all the money circulating in the economy, including cash, savings and other easily accessible funds.
For housing, we modelled three scenarios: one with no rental income – so owner-occupied homes – one with a modest rental profit of 2 per cent (defined as an annual net income equal to 2 per cent of the property’s value), and another with a rental profit of 4 per cent. Higher rental profits boost investor returns, since rental income is added to property appreciation.
For the S&P/TSX Index, we assumed full dividend reinvestment after all of the applicable withholding tax. For the S&P 500, we also assumed full dividend reinvestment but without applying any withholding tax, as no index has tracked it with withholding tax since 2000. While CPI averaged 2.2 per cent annually, the value of assets such as homes, gold and equities rose significantly faster. Why?
The disconnect between CPI and asset prices
The CPI measures the cost of consumer goods and services – not asset price inflation. For instance, the housing component of CPI tracks changes in rent and mortgage interest payments rather than home prices themselves. So when home prices rise, the impact on CPI is limited.
In contrast, asset prices appear to be more closely tied to the growth of the money supply, which has expanded sharply thanks to the Bank of Canada money printing and a prolonged period of low interest rates. As more money enters the economy, it tends to flow into assets, driving prices higher.
Gold, in particular, acts as a store of value. While central banks have increased the money supply rapidly, the global supply of gold increases by only 1 per cent to 2 per cent annually through gold mining. This scarcity has helped gold maintain its value over time and outperform other asset classes.
The long-term outlook
Gold has been the standout investment of the 21st century, outperforming stock markets in both Canada and the U.S., and surpassing Canadian real estate. Although Bitcoin has delivered even stronger returns, it was excluded from this analysis owing to its relatively recent emergence as an asset class.
That said, it’s important to consider the unique role of leverage in real estate. Because homes can be bought using mortgages, investors often only need to contribute a fraction of the property’s value up front. This can substantially boost returns on equity–making mortgaged real estate potentially more lucrative than the unleveraged figures that are presented here suggest.
Ultimately, if the money supply keeps growing at a compound rate of around 7 per cent annually, asset prices are likely to follow a similar long-term trend – while incomes, more closely tied to CPI, may lag behind. Past performance is no guarantee of future results.
Hanif Bayat, PhD, is the CEO and founder of WOWA.ca, a Canadian personal finance platform.