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Page 14 THE HERALD Wednesday October Money Matters Investing in your home provides psychological benefits By BRIAN So often these days when people leam that I am an Investment Ex I am asked to prove why investing in stocks is more pro fitable than investing in real estate I find this a difficult task because a house deposit has reaped massive returns in the Toronto Housing market over the past few years However let me try and make things a little clearer Firstly I think an investment in your own house is one of the best investments you can make You generally only require a deposit of per cent of the house value and some cases even less This gives you the power of leverage If you buy a house for for per cent down and the value of the house increases by a conservative five per cent a year you are mak ing a 20 per cent return on your down payment This is a reasonable return by anyone standards On top of that you get a tax exemption when you sell it boosting your overall return to an enviable level Secondly I think that people nor spend a lot of time choosing their houses People rarely buy based on a rumour that the is going up or a newspaper report that a particular house has become hot No wonder people make money in the real estate market and lose money in the stock market They spend months ing their homes and minutes choosing their stocks er this is a time w hen people start get earned away with their superior per formance in real estate They start telling me that I made so much money in real estate you can t show me a comparable in vestment in the stock market or 1 11 never invest in but real estate These people then go out and buy a property with their life savings Thev another house and put 75 down The price goes up five per tent and they make 20 per cent return on investment However ii w thev have the added of finding tenants rent their new n t to mention managing those tenants Also if it is house thev would not dream of Brian Slessor Dollars and Sense living in themselves they probably have not spent as much time as they should researching their in vestment On top of that when they sell it they are faced with a capita gains tax liability albeit subject of a lifetime ex and a possible capital cost allowance recapture ask your accountant about this There may be additional problems of cumulative net investment losses All these factors and more add up to the fact that real estate in vestments outside your own home can become messy and are often more sophisticated than you think I will not even touch upon the pro blems associated with commercial real estate investments There is also one other factor which should be made clear The power of leverage works both ways If you have four to one leverage factor on the way up then you also have a similar leverage factor on the wav down is if the value of the house falls per cent your initial investment of suddenh becomes i a 20 per cent loss on your own down payment Compared with stocks it is also much harder to sell on the va down Put real estate on the market during a decline in prices and may be carrying it for a long time before the next maverick real estate in vtstor turns up to bin vou out in other words liquidity in the market place is important especially during bad times Let jnci reinforce thest points with simple historical facts Firstly investing in stocks is more profitable than investing in bonds In fact- since common stocks have recorded gains of 10 per cent a year on average as compared to five per cent for corporate bonds per cent for government bonds and 3 per cent for Treasury Bills The long term inflation rate as measured by the Consumer Price Index CPU is three per cent which gives common stock a real return of seven per cent corporate bonds two per cent government bonds I per cent and Treasury Bills 5 per cent If in you invested in the stock market you would have 1 000 in This is in spite of the Great Stock Market Crash World War Pearl Har bor the Korean War Bay of Pigs Cuban Missile Crisis Assassma tion of President Kennedy Six day Middle East War Vietnam War resignation of President Nixon Collapse of Oil Prices and of course the much remembered Stock Market Crash of 1987 Unfortunately there are few statistics giving the average return on real estate investments over the same period This is main ly because real estate investing is primarily a regional selection and it is difficult to gather this partial information into a representative whole However the Canadian Real Estate Association does supp ly an average Canadian residential house prices and it appears that the average yearly increase from 1956 to is 1 per cent If we assume that this average holds for the to then a 20 investment in 1927 would now be worth adjusted to infhtion In conclusion what I am trying to say is that real estate in mm Mo thai one rJKTII quarter 27796 of i population a vestments are not always as pro fitable as stock market in vestments for a number of reasons Since the stock market has evolved such a way as to ac tually help toe process of invest ment through methods such as quid markets daily pnce quotes accessible research etc it is easy for me to say that the stock market is a better investment than real estate However having said that I must also add that you should in vest in your own house before con templating an investment stocks This is a recommendation which has more to do with psychology than with economics or investment research Brian is an Investment Executive with Questions should be directed towards Brian who can be reached at 8632825 Call collect if out side Toronto OFFICE MAGIC 136CGuelphSt Georgetown GIC RATE 11 MONEY CONCEPTS 3210uptlStOnami CALLUS AND WELL TELL YOU ABOUT THE BEST HOMEOWNERS INSURANCE WEVE EVER OFFERED It s our Homeowners Insurance Policy It covers most things you know about your home some things you never thought about your home and many things you never dreamed about your home Liberty Mutual Insurance Company Queen St East Brampton Ontario 4548680 CANADA IN LIBERTY MUTUAL INSURANCE liberty MUTUAL THE PROPOSED GST FUND OUT WHATS GOING ON AND COMING 0FE whether bill will go up Thinking how much to we for that new cir Asking if your bank senice will be just plain confusedThe is as clost is your Callus your GST Consumtr Information Office On January 1991 the proposed GST is scheduled to replace the Ftdenl Sales Tax in the marketplace To understand what it means and what it means to you you need information c in you the facts Ask us for your fret copy of The Consumers Guide to the GST and Prices Full of helpful inform it also features a Key List showing how of with GST should affect prices rt here to help you know whit expect what to ask and where to turn Because more you know the better you shop Our lints are optn from to p m day And they re toll free from For impaired call I 7735 A The answer is to call Your GST Consumer Information Office 18006682122 ll Government of Canada du Canada 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