ORES Real Estate Index for September 2011

ORES Real Estate Index for September 2011

Ontario Real Estate Source

By Brian Madigan LL.B.

The Toronto Real Estate Board made a few changes to the method that it uses to report and track statistics in July.

I used to have subdivisions for condos, being downtown, east, west and north. That was not always that helpful. Now the reports from TREB are quite specific. The old numbers are no longer available. Consequently, since July, I will not be tracking individual condo performance by areas.

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 30 September 2011, here is the Index representing average prices with the August 31^st, July 31^st. June 30^th and May 31^st numbers appearing in brackets for comparison:

Real Estate

144.01…….(139.77)…..(142.08)...(147.42)...(150.25).....GTA single family

Other market comparisons

378.73…..(423.96)…..(380.71)...(351.96)...(359.21).....gold (per ounce)
186.24…..(198.52)…..(217.65)...(216.79)...(233.62).....oil (per barrel)
126.29…..(158.73)…..(140.65)...(144.51)...(149.97).....TSX index
144.01…..(139.77)…..(142.08)...(147.42)....(150.25).....ORES single family
114.25…..(115.96)…..(113.77)...(114.53)...(113.77) .....CPI index
117.12…..(125.07)…..(133.65)...(134.48)...(137.48).....NASDAQ index
104.04…..(110.71)…..(115.76)...(118.35)...(119.82)......Dow Jones index
95.78……(103.18)…..(109.40)...(111.80)...(113.880.,....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 September, the index stood at 144.01. That's a 44.01% increase in 81 months. That means the increase is 0.543% monthly, or it could also be expressed as 6.52% annually. The performance here is shown without annual compounding for the sake of simplicity.

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 114.25; 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 was the best performer, reaching 378.73 overall, but declined this past month

· Oil was the most volatile, (it dropped in half over our measurement period), but the good news for the economy is that oil has declined slightly this past month

· Real estate was the most stable, with solid predictable returns at about 6.52% annually

· Our own stock market posted reasonable gains, and is now ahead of 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.

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 0.96% 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 Royal LePage Innovators Realty, Brokerage 905-796-8888
www.OntarioRealEstateSource.com