Is Missing the RRSP Deadline Good For Your Financial Health?

Yes, it’s over! The annual RRSP campaign has ended for this year.

I don’t know about you, but I find the annual barrage of ads extolling the virtues of maxing my RRSP contribution more than a teeny bit tiresome.

This year I thought the RRSP blitz was even worse than other years. Why? Maybe I’m just overly sensitized to it, but in the past few weeks I noticed articles popping up which all seemed to share a similar theme: they suggest smart people are turning more toward securities in preference to real estate as the most productive investment.

Generally, the articles cite two reasons. They say the recent run up of real estate values may be over. And they say that in any event, over the long haul the stock market has provided better appreciation than residential real estate.

Well, the general consensus about the residential real estate market seems to be that the double digit appreciation we have seen in the past several years in Victoria is over. The general consensus also suggests a return to a more stable, ‘normal’ real estate market is probably a good thing. What does that mean in Victoria?

If you were to go to Victoria Real Estate Board website and look up the historical statistics section, you would discover the average price of a house in Victoria in 1978 was about $64,000. For 2006, that figure was $521,000. That works out to a capital appreciation of about 8.6%, compounded annually. Not too shabby, in my books!

Admittedly, that rate wasn’t constant, year in and year out. It varied fairly widely during shorter term fluctuations in the market. But the point is that over the long haul – say, the typical amortization period of a mortgage (give or take a few years), the price trend for real estate in Victoria is going to be toward higher prices.

Even if the annual long term rate of appreciation is more modest than the above figure, the long term results can still be pretty amazing. Say for instance the long term annualized return was 6% (instead of 8.6%). At 6%, the value of a house would double approximately every 12 years. Typically mortgages are amortized over 25 year, so by the time the mortgage is totally paid, a house purchased today (and which appreciates at 6% annually) would quadruple in value.

Back to those articles I alluded to. Are returns on securities really better over the long term than for residential properties? I don’t know. But in an upcoming post, I’m going to offer some things to thing about. Keep an eye out for it.