ORES Real Estate Index for July 2010 (Toronto)

By Brian Madigan LL.B.

(Ontario Real Estate Source)

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:

Real Estate

130.12…..GTA single family homes
132.64…..All condos in GTA
134.41…..Downtown Central Condos
129.70…..East condos
129.78…..North condos
135.76…..West condos

Other market comparisons

273.29…..gold (price per ounce)
179.37…..oil (price per barrel)
130.12…..ORES Index single family homes
127.26…..TSX index
110.35…..CPI index
109.32…..NASDAQ index
99.77……Dow Jones index
93.26.…..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 April, the index stood at 130.12. That’s a 30.12% increase in 67 months. That means the increase is 0.449% monthly, or it could also be expressed as 5.39% 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 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

• 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 5.39% annually

• condos showing a higher overall return than single family homes, which is quite unusual

• 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 still show negative numbers, with the NASDAQ approximating our CPI.

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., 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