Is Investing in Canadian Real Estate Still a Good Idea?

Over the last few years, investors have played a significant role in the housing boom that has taken place in the Canadian real estate market, especially in the major markets such as Toronto and Vancouver.

Late last year, there was a lot of buzz when it was reported that more than one-quarter of the Ontario real estate market was controlled by investors. Teranet data highlighted that the number of people who owned more than one property in the nation’s most populous province accounted for more than 25 per cent of buyers.

What a difference a decade can make. In 2011, investors represented just a small percentage of overall residential real estate transactions.

But this trend is happening nationwide, too. In Toronto, investors have acquired more than one-third of recently completed homes, per the same Teranet report. Meanwhile in Vancouver, nearly half of new housing supply has gone to investors. In some Canadian cities, up to 92 per cent of new housing stocks went to investors. Overall, one-fifth of homes in the average Canadian city are owned by investors, according to the Bank of Canada (BoC).

Now that market conditions are starting to shift this year, be it higher interest rates or buyer exhaustion, are investment properties still a wise strategy?

Are Investment Properties a Still Good Idea in the Canadian Real Estate Market?

Canada’s annual inflation rate surged 5.1 per cent, the highest level since September 1991. Some economists contend that it would be higher if real estate prices counted. Nevertheless, the inflation rate is well beyond the central bank’s two-per-cent target. As a result, the Bank of Canada (BoC) is widely anticipated to hike interest rates a few more times throughout 2022, to help combat inflation.

Will rising interest rates crash the housing market, or might they have little to no impact on the sizzling real estate sector?

Today, interest rates remain near record lows, which has immensely lowered borrowing costs. Unless the central bank pulls the trigger on a 100-basis-point hike, a quarter-point move is unlikely to make a substantial dent in borrowing endeavours.

And this could be good news for real estate investors because now, they have a little more time to lock in lower rate mortgages and take advantage of cheap debt. Although investment properties deter investors in a rising-rate environment since they will seek out yield in more conventional assets, this is not a standard market right now.

Canadian real estate prices have skyrocketed to an all-time high of $816,720. In the sizzling markets, such as Toronto and Vancouver, the average sales price is north of $1 million. Supply is low, demand is high, and new housing construction is tepid. The BoC ending its quantitative easing (QE) program, which has become the norm, impacts the broader financial markets.

At the same time, some financial experts think it would cool down the meteoric growth, potentially preventing investors from trying to cash in on massive gains, especially if they buy near the top.

Rob Carrick of The Globe and Mail recently wrote:

Surging residential real estate prices illustrate how the housing market is virtually begging for higher rates. Without some sort of limiting force – rate hikes, taxation, tighter borrowing standards – house prices seem as if they will rise until either the last shreds of affordability disappear, or we have a recession. Higher rates could slow the market down, thereby avoiding more extreme outcomes like a full-blown correction.”

Of course, if investors purchased these homes at the beginning of the pandemic, using them as rental properties, then they are still in good shape since they maintain positive equity.

Expect the Worst in This Housing Market?

Could the Canadian real estate market plunge in 2022?

The financial markets are betting on several rate hikes over the next year, with investors doubling down on their bets when the consumer price index (CPI) climbed to a more than 30-year high. This has some market observers anticipating a crash.

If the Bank of Canada goes at least as far as what the rates market has priced in, you’re going to have arithmetically at least a 25-per-cent plunge in residential real estate values,” said David Rosenberg, an economist and founder of Rosenberg Research & Associates. “There’s a greater risk that they over-tighten, and they might over-tighten by even a couple of rate hikes.”

Leverage is also a significant issue in this country, he said in an interview with BNN Bloomberg. Indeed, mortgage debt has increased substantially, and with many investors taking on multiple mortgages, “That’s where the selling is going to initiate, but it will spread like dominoes,” Rosenberg added.

But others contend that the Canadian housing market will either stay the course of notable gains or cool down reasonably. Whatever the case may be, it should be an exciting time for investors in 2022.


2022-03-22 12:08:51

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