Toronto Real Estate Returns in January 2012

ORES Real Estate Index for January 2012

 Ontario Real Estate Source

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.

As of 31 January 2012, here is the Index representing average prices with the December 31st, November 30^th, October 31^st, and September 30^th, numbers appearing in brackets for comparison:

Real Estate

143.45…..(139.70)…..(148.67)…..(147.97)…..(144.01)…..GTA single family

Other market comparisons

407.76…..(357.92)…..(408.18)…..(402.57)…..(378.73)…..gold (per ounce)
223.98…..(224.82)…..(228.30)…..(211.99)…..(186.24)…..oil (per barrel)
135.29…..(129.89)…..(132.60)…..(133.12)…..(126.29)…..TSX index
143.45…..(139.70)…..(148.67)…..(147.97)…..(144.01)…..ORES sgl family
114.15…..(114.81)…..(114.72)…..(114.53)…..(114.25)….CPI index
136.43…..(126.32)…..(127.05)…..(130.16)…..(117.12)…..NASDAQ index
120.43…..(116.49)…..(114.83)…..(113.97)…..(104.04)…..Dow Jones index
111.10…..(106.46)…..(105.56)…..(106.10)…..(95.78)……S&P 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 January, the index stood at 143.45. That’s a 43.45% increase in 85 months. That means the increase is 0.511% monthly, or it could also be expressed as 6.13% annually. The performance here is shown without annual compounding for the sake of simplicity. It is noteworthy that the annual percentage was 7.01% as at the end of October. Both numbers were calculated using 1 January 2005 as the starting point.

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 114.15; increases have been modest and inflation appears to be under control; this is significant. There was even a slight decline since December.
· 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 407.76, increasing this past month by almost 9%, but just making up the ground it lost in December; note the peak for gold was in August 2011 at 423.96
· Oil was the most volatile, (it dropped in half over our measurement period), also declining this past month
· Real estate was the most stable, with solid predictable returns at about 6.13% 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

Conclusion

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 1.13% annual premium over the benchmark 5%.

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through RE/MAX West Realty Inc., Brokerage 416-745-2300
http://www.ontariorealestatesource.com%20/

TREB Predictions for 2012

TREB Review of 2011 and Predictions for 2012

Ontario Real Estate Source

By Brian Madigan LL.B.

The Toronto Real Estate Board just released its most recent Marketwatch, on 5 January 2012.

In essence, it says:

2011 was up 8%

2012 will be up 4%

Now, the prediction for 2012 is all guesswork. Everyone would agree with that. And, rarely would anyone be held responsible for a bad prediction.

But, let’s look at the 8% increase in 2011. It certainly doesn’t work on the January to December numbers. That would be 4.02%. So, if you want a better number, you had better use a different calculation. Have a look at the TREB report in full (below) and note the explanation for the 8%. That only works if you take all of the 2011 numbers, average them, and compare that to the similar average number for 2010.

What is the actual increase (my calculations) if you start with $411,931 at the start of 2010 and end with $451,436 at the end of 2011? It works out to 10.46%. Divide it in two (without annual compounding) and that’s 5.23% per year over that last two years.
Here’s the TREB report:

"Second-Best Year on Record for Sales

Toronto, January 5, 2012— Greater Toronto REALTORS® reported 4,718 transactions through the Toronto MLS® system in December 2011. The December result capped off the second-best year on record under the current Toronto Real Estate Board (TREB) boundaries. Total sales for 2011 amounted to 89,347 – up four per cent in comparison to 2010.

“Low borrowing costs kept Buyers confident in their ability to comfortably cover their mortgage payments along with other major housing costs,” said TREB President Richard Silver.

“If Buyers had not been constrained by a shortage of listings over the past 12 months, we would have been flirting with a new sales record in the Greater Toronto Area,” added Silver.

The average selling price in December was $451,436 – up four per cent compared to December 2010. For all of 2011, the average selling price was $465,412, an increase of eight per cent in comparison to the average of $431,276 in 2010.

“Months of inventory remained below the pre-recession norm in 2011. Very tight market conditions meant substantial competition between Buyers and strong upward pressure on selling prices,” said Jason Mercer, TREB’s Senior Manager of Market Analysis.

“TREB’s baseline forecast for 2012 is for an average price of $485,000, representing a more moderate four per cent annual rate of price growth. This baseline view is subject to a heightened degree of risk given the uncertain global economic outlook,” continued Mercer."

COMMENT

Look at the numbers and follow the trends. Prices in the GTA are increasing at about 5% per annum, year after year, and that appears to be continuing.

The ORES Real Estate Index documents that level of return over the last 7 years. Historical data also supports 5% returns in real estate over the longer term.

So, this year’s prediction by TREB at 4%, seems both conservative and realistic.


Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through Royal LePage Innovators Realty, Brokerage 905-796-8888
www.OntarioRealEstateSource.com