It is often said that there is no such thing as a Canadian real estate market. Provincial economies and markets vary, and so should your investment strategies.
You can simply look at your own city or town to see the performance variation across neighbourhoods. The same can be said for inventory choice: Some asset classes such as multi-family, student housing or furnished rentals do better during certain economic times in different cities. Boiled down to its most basic, real estate is based on employment — simply, people need to work and live where there are jobs. The decisions coming from the U.S. will have a huge impact on resource driven regions and we wait with bated breath to see what will happen to forestry, oil and gas and manufacturing if NAFTA meets its demise.
For more than a decade, we have been waiting for the market in BC’s largest city to “correct.” Many believe it is time for a soft landing, with gently decreasing prices and rents, and increasing, nay, some vacancy. Fatalists, pessimists and Chicken Littles are ready for the big crash.
Is the Vancouver market sustainable? If you buy now, are you the tipping point to the plunge into Alberta-like numbers? Is Vancouver overpriced and unsupportable? These are complex questions with many variables. Prices and rents in New York, London, Hong Kong and San Francisco are much higher; however, the mitigating factor is that incomes are also much higher, making purchasing and renting at these prices possible. It is conceivable that prices will continue to climb.
The BC Real Estate Association was forecasting an 8.8-per-cent decline in sales for 2017, but a 3.1-per-cent increase in average prices to $712,300, from $691,100.
BC’s economy has been the envy of the country. Employment is at a record high and it is anticipated that soon the demand for workers will surpass supply. BC is focused on pursuing Liquefied Natural Gas (LNG) investments, creating and supporting the emergence of small businesses and increasing trade with Asia. It remains to be seen how the new administration in the U.S. will affect BC’s economy, with fears that threats to crush NAFTA will significantly impact the softwood lumber trade.
Although Metro Vancouver is desirable, for a real estate investor, given how low rents are relative to expenses, it is nearly impossible to cash-flow using a standard down payment of 20 per cent. Many investors are looking to the Fraser Valley for better returns. A population explosion in the east Valley means a strong demand for housing.
If you want to speculate on increasing values, rents and housing demands, consider the following housing types and strategies:
Furnished or executive rentals
In Victoria and Vancouver, consider supplying fully furnished units for executives, people in the movie industry or others staying for extended periods but not moving permanently.
In destination locations where tourism abounds (think Wine Country, Whistler, Harrison Hot Springs, Vancouver and the Island, and eco-tourism/fishing cities such as Chilliwack and Squamish). Know that this type of rental is very demanding of your time and you must be knowledgeable of the wants and needs of travelers. It is extremely important that you know the stance your chosen city takes on Airbnb or Vacation Rental by Owner because operating against municipal policies could mean a very costly end to your investment.
Buying premium rentals
One safeguard against a tanking real estate market and a subsequent spike in vacancy rates is to buy a highly coveted unit. If the market takes a turn and vacancies hit double digits, your penthouse or corner unit or garden walk out will be the first rented. Keep cash-flow in mind always, but do what you can to make it work and know you will fetch a rental premium.
Homes with three or more bedrooms
The Fraser Valley is a magnet for families who are moving to the area for lower housing and lifestyle costs. Single-family homes or townhomes with three or more bedrooms currently have zero days on the market before they are filled with excellent tenants.
As Alberta continues to climb out of a three-year recession, many pundits believe the market is going to start making a slow recovery. U.S. government decisions will have a huge impact on the province, given that most cities are completely in bed with the oil and gas industry. The decision to move forward with the Keystone pipeline is good news, as is the increase in cost of a barrel.
Alberta is still in “proceed with caution” mode. For those people who are already in the real estate market – particularly those who bought properties between 2006 and 2015, dropping rents and values and soaring vacancies due to provincial-wide job loss and emigration will take some time to come back from. Owners with the oldest, least renovated or maintained properties, in transitional neighbourhoods are feeling it the most.
Yet, well-informed investors may stand to do very well in the medium and long term. Many economists believe the real estate market in Alberta is poised for recovery.
Purchasing at today’s prices, even with rents that are $200 to $300 lower than they were 10 years ago, makes a lot of sense if you believe rents and values will only go up in the next 10 years.
If building your portfolio in Edmonton or Calgary and the promise of an increasing market is appealing, consider the following types of properties and strategies:
People go to school when the market is good and when the market is bad. Student housing is always a good bet (just make sure there is a post-secondary institution nearby and do your homework). International students lend to the boon in tenants, and if you speak another language, try some creative marketing ideas.
Impeccably maintained properties
With a supply of vacant homes, make sure you aren’t just buying the cheapest property out there. It may be a steal of deal, especially if the market heats up, but in a down market, you may get poor tenants. With plentiful choice and relatively low rents, tenants can pick whatever home they want in whatever neighbourhood they wish. Make sure your property is coveted – think the ground floor garden condo or penthouse.
Cash-flow is king
Although the bet is on an appreciating market, Edmonton and Calgary may stay flat for some time to come. Know that you will inevitably need a new appliance, some repairs worth hundreds of dollars, and have a few weeks of vacancy with no income. Make sure that you have some income to shoulder this tough market, and then watch the dollars roll in when the economy strengthens.
Be wary of small towns
Although homes in towns outside of the two major cities are often affordable and make investing accessible, know that many of these single-industry locations have vacancies in the double digits, and even when the market heats up, they will be the last to feel the upswing. Be prepared to maintain the status quo for a longer period of time.
“Double, double, toil and trouble…” If Bank of Montreal Chief Economist, Douglas Porter is to be believed, the Greater Toronto Area real estate market is in a bubble that could burst. Although, climbing real estate prices have become a humdrum topic at cocktail parties, if you already own property in Canada’s biggest city, making double-digit growth on your asset in one year is not boring, it is nothing short of unbelievable. Most of the GTA is feeling the price explosion.
Ontario’s economy (the largest in Canada and twice that of Quebec, which is second) continues to grow. Its diversified economy is still heavily in favour of manufacturing, and much like almost all other provinces, will be at the effect of the decisions made by the Trump administration, which can heavily impact the car industry. In November, the unemployment rate fell to 5.5 per cent – the lowest since July 2000.
The GTA remains the biggest draw to people moving to Ontario, with most new people immigrating from overseas. People are flocking to Hamilton as well, a city with solid economic fundamentals that many never believed would be a draw for so many. Transit improvements and relative affordability compared to the GTA means it is a more affordable option.
No one can time the market. Perhaps we are not on the precipice of more price appreciation, but unless you have deep pockets and nerves of steel, there are high risks. If you are looking to buy a rental property, the near impossibility of generating positive cash-flow, given the high prices, makes looking outside Toronto more prudent.
Your strategies will depend on what you believe the market is going to do and what your real estate timeline is. Consider these opportunities:
If you already own a property or two in Toronto, this may be the time to execute a not often talked about real estate strategy – sell. Even if it is your own primary residence, consider cashing in on the 20 per cent equity appreciation you just made in the last year and rent. Hang on to the equity and buy two properties if the market does indeed crash.
Fix and flip (or just flip)
Depending on your time horizon and your ability to get it done, quick transactions in a market appreciating the way Toronto’s is, can net you some sweet pocket money. Know that this is a very risky strategy, especially if you don’t know what you are doing or the market makes a sudden turn. And keep in mind to factor in realtor fees upon sale.
If you can find them, multi-family buildings are a solid investment. You don’t have to deal with (or pay) strata if you own the whole building, contend with owner-occupiers and, of course, can often get the units at wholesale prices. Property management is often much cheaper and repairs and maintenance are scalable, saving money all around.
Buy near transit
This strategy makes sense for a few reasons: Students, especially those from overseas, use and seek public transportation; more and more aging baby boomers and older seniors rely on transit (particularly in lower socio-economic neighbourhoods); immigrants used to it or out of necessity seek it out; and Millennials often embrace their freedom to not own a car. Rents and values are often 15 per cent within walking distance to rapid transit, compared to similar properties outside of the transit scope.