ORES Real Estate Index for October 2009

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 four year average used as a standard benchmark comparison in the mutual fund industry. Actually, it runs for 57 months or four years and nine months.

As of 31 October 2009, [the last two months] and (the highs):

Real Estate

131.08…..[125.91/120.05] (131.08) GTA single family homes (average prices)
126.68…..[126.21/125.74] (126.68) All condos in GTA (average prices)
132.27…..[131.70/131.14] (132.27) Downtown Toronto Central Condos
120.85…..[120.36/119.99] (120.85) East condos
120.72…..[119.17/130.60 ] (120.72) North condos
129.69…..[129.17/128.65] (129.69) West condos

Other market comparisons

243.13…..[232.79/223.38] (243.13) gold (price per ounce)
175.25…..[160.28/159.17] (320.88) oil (price per barrel)
131.08…..[125.91/120.05] (131.08) ORES Index single family homes
118.54…..[123.80/118.08] (158.90) TSX index
108.92…..[108.92/108.92] (109.31) CPI index
99.16…….[102.91/97.41] (130.99) NASDAQ index
92.59……..[90.65/88.76] (132.47) Dow Jones index
87.72…….[89.49/86.40] (131.16) 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 131.08. That’s a 31.08% increase in 58 months. That means the increase is 0.5358% monthly, or it could also be expressed as 6.430% annually. The performance here is shown without annual compounding for the sake of simplicity.

The same index was 125.91 at the end of September and 120.05 at the end of August. The next number, in square brackets is the all-time high since 1 January 2005. That number is 131.08, so the October figure is in fact the all time high.

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 108.92

• 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, this year 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

• Actually, I should have mentioned that if you held gold bullion, you could sit in a room, count it, and enjoy that experience too. I’m not quite sure how to measure that. You’ll have to ask King Midas or Goldfinger!

Comparative Observations Using the New Index

• Gold was the best performer

• Oil was the most volatile, (yes it dropped in half)

• Real estate was the most stable, with single family homes outperforming condos

• Downtown condos are beginning to return some performance, but they are substantially off their earlier highs achieved just before the commencement of this Index

• Our own stock market posted reasonable gains, and is close to single family homes

• Two of the three US stock market indicators show negative numbers, with the NASDAQ just returning to positive territory

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) that would have been happy with that return.

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters, Royal LePage Innovators Realty
905-796-8888
www.OntarioRealEstateSource.com