I’m a fan of The Globe & Mail, but I truly think they blew this story (Note: this page was updated at 3:14pm to hide the Globe’s earlier errors; see below).  They’re reporting that the average price of a house in Canada is up by 264 percent over the past 25 years (from 1981 to 2006).  The rise is apparently highest in Barrie, where the prices have gone up to $244,000 from $51,655-that’s a rise of 372% according to ReMax.

Michael Polzler, their EVP and regional director for Ontario and Atlantic Canada is positively beaming about these results: Conventional wisdom used to be that real estate was a relatively safe, long-term investment that typically appreciates at a rate of five percent annually.  These statistics clearly tell a different tale.  In the top 10 markets, real estate values rose at least 8 percent or more on an annual basis.  Even the worst performing market in the country experienced an increase of close to six percent annually since 1981.”

Sounds good, right?  Too bad it’s completely wrong.  My guess is that ReMax said, “wow, 372%: if I divide that by 25 I’ll get an annual return of 14.9%.  What a deal!”  However, they’ve neglected to take compounding in to effect.  If you adjust for compounding, the average annual return for Barrie is 6.4%.  (Solve the equation $244 = $51(1 + Annual Return)^25)

That’s the best market in Canada and your return was only 6.4%?  Doesn’t sound much better that the traditional return of 5%.  But that doesn’t mean much in isolation; let’s see how it compares to other investments.

Well, the S&P 500 in the U.S. closed 1981 at 121.55 and had risen to 1,418.30 by December 29, 2006 (the last trading day).  That’s an annual return of 10.3%.  To put that into perspective, if you’d put $51,655 into the market in 1981, it would have been worth $602,734 by the end of 2006 - or you in other words, more than twice the value of an average house in Barrie.

So there you go.  Today’s lesson: don’t take what real estate agents or The Globe and Mail says at face value and put your money in the market for the best long period returns.

Update:

Remax has re-released the survey, admitting that the average return was actually only 5.3% and the Globe has updated their article.  Interestingly, they have used the same web address as the original, meaning that they have effectively erased any indication that they made a mistake.  Not sure how ethical that is; I would have been more impressed if they copped to making a mistake.  Also, still no mention of whether 5.3% is an acceptable rate of return.