ORES Real Estate Index for February 2010 (Toronto)

(ORES)

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 2010, here is the Index representing average prices [the last three months] and (the highs):

Real Estate

133.54……[126.59/127.48/129.50] (133.54) GTA single family homes
136.35……[130.77/126.87/125.03] (136.35) All condos in GTA
147.44……[142.83/131.14/123.40] (147.44) Downtown Central Condos
136.99……[122.82/135.95/122.12] (136.99) East condos
122.67……[118.94/116.47/121.57] (130.60) North condos
132.79……[131.68/123.00/134.64] (134.64) West condos

Other market comparisons

259.08……[252.13/254.24/274.87] (274.87) gold (price per ounce)
181.35…….[165.72/180.60/175.59] (320.88) oil (price per barrel)
133.54…….[126.59/[127.44/129.50] (133.54) ORES Index single family homes
126.35…….[120.54/127.62/124.37] (158.90) TSX index
109.31…….[109.02/109.40/108.83] (109.40) CPI index
108.53…….[104.12/110.02/103.99] (130.99) NASDAQ index
98.43………[95.97/99.41/98.62] (132.47) Dow Jones index
93.50………[90.91/94.40/92.75] (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 January, the index stood at 133.54. That’s a 33.54% increase in 62 months. That means the increase is 0.541% monthly, or it could also be expressed as 6.49% annually. The performance here is shown without annual compounding for the sake of simplicity.

The same index was 126.59 at the end of January, 127.48 at the end of December and 129.50 at the end of November. The next number, in square brackets is the all-time high since 1 January 2005. That number is 133.54, which is the February figure and is in fact the all time high.

We are now staring into the early part of the Spring market. Prices should rise, and demand should rise as well, placing even more pressure upon prices.

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 109.31 (It has been modest and appears under control)

• 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 over the five year period, however it is now off its recent highs and that could mean that investors believe the recession is over

• Oil was the most volatile, (yes it dropped in half over our measurement period)

• Real estate was the most stable, with solid predictable returns at about 6.49% annually

• Downtown condos did extremely well this month. They are substantially off their earlier highs achieved just before the commencement of this Index

• Our own stock market posted reasonable gains, and now slightly trails single family homes over the last five years, however, don’t forget that the TSX is still well off its highs

• Two of the three US stock market indicators show negative numbers, with the NASDAQ now in 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, including CanWest Global, and many US Banks) that would have been happy with that return.

Brian Madigan LL.B., Real Estate Broker, is an author and commentator on markets, finances and the law related to real estate
www.OntarioRealEstateSource.com