A new study suggests the investors that advisors generally write off could actually represent an area for growth.
“Young professionals who are stretching themselves to buy a condo in the hopes of trading up may be disappointed,” Portfolio manager Dave Nugent told the Star Thursday. “People think that leverage in real estate is the best kind and leverage in stocks is the worst kind. But leverage is leverage. When it works against you, it hurts.”
Proponents of real estate ownership point to “forced savings” as the big advantage over stocks. The rationale: people generally are poor savers when left to their own devices; there’s nothing better for keeping one focused on saving than the monthly mortgage payment. The same, they’d argue, can’t be said for stocks.
The second big argument for condo ownership over stocks, especially in big cities such as Toronto and Vancouver, is that carrying costs aren’t much different from the rental rates one would pay for a similar apartment, but in the case of the condo owner they’re building equity.
However, Nugent provides his readers with two examples
why millennials might not be so quick to act.
First, he compared a $50,000 investment in the MLS Home Price Index for condos over the last 10 years (2005-2015) to the iShares Core S&P/TSX Capped Composite Index ETF. The XIC beat the condos by almost three per cent annually or $30,000 overall.
The second comparison takes into account the yearly cash flows of a renter and a levered condo owner providing an apples-to-apples look at the difference in equity over the life of a 25-year mortgage.
In this scenario using the same $50,000 in initial equity, the renter ended up with almost $659,000 compared to $364,000 for the condo owner.
The arguments put forth by Nugent could convince a significant number of younger people to shift their focus away from real estate ownership and toward equities.
Advisors – be ready.