My Real Estate Blog - Market Trends, Tips & Updates

According to Statistics Canada, 69 per cent of Canadians own homes, so most of us have reason to worry about the fate of the housing market. Landlords, in particular, make a conscious choice to invest in real estate that goes beyond just a place for their families to live. As a result, landlords should be paying close attention to the conflicting views and data on Canadian real estate.

One in 20 Canadians own rental real estate according to the Financial Industry Research Monitor. An Altus Group study shows that for households earning more than $100,000 per year, rental real estate ownership is twice that of the general population – about 10 per cent.

So the question is: buy or sell?

Buy

Donald Trump may very well be the next President of the United States. And the man knows a thing or two about real estate. So it may be of interest to aspiring Canadian real estate moguls to consider the opinion of Trump’s right hand-man, executive vice-president and senior counsel of The Trump Organization, George H. Ross: “I don’t agree it’s overvalued. I think it’s undervalued . . . and there is plenty of room for improvement.”

The supply and demand dynamics appear good on the surface for Canadian rental properties. Vacancy rates are below two per cent for cities like Toronto and Vancouver, according to CMHC. Rising real estate prices have likely helped to buoy demand for rentals, with price increases well in excess of the salary increases for average families in recent years. Some of those average families are now opting to rent instead of buy and that bodes well for landlords given that vacancies are often the biggest risk with a rental property.

Millennials are clearly helping to drive rental demand. Home ownership is unreasonable in many Canadian centres, so rental properties – particularly condos suitable for a single person or young couples – have got to benefit.

Beyond that, real estate is becoming a more attractive investment option for insurance companies and pension funds looking for alternatives to the crumby yields on bonds. And real estate investment trusts would be crazy not to take advantage of low interest rates to load up on more real estate. If real estate is where the smart money is going, why would anyone consider selling?

Sell

According to real estate brokerage CBRE Group, rental starts are twice their five-year average in the six biggest cities in Canada. These statistics are probably understating the actual numbers because developers often have projects registered as condos initially instead of rentals. Who is going to buy, let alone rent all of these properties? Canadian immigration is pretty steady year over year and it’s not like there was a second baby boom with a pipeline of young people looking to move out of their parents’ basements.

The Bank of Canada has expressed concerns over potential real estate corrections in certain cities, specifically singling out Toronto. “The adverse impact of the oil price shock in Alberta and continued robust price growth in Toronto . . . suggest[s] a risk of a correction,” said the Bank.

It’s no secret that stocks have been sliding lately. Global markets are mostly negative year-to-date and in particular, here in Canada, oil stocks are on sale. Isn’t the old adage to buy low and sell high? As in buy Canadians stocks and sell Canadian real estate?

If the Bank of Canada’s opinion or cheap oil stocks aren’t reason enough to consider dumping Canadian rental properties, what about the warnings from Deutsche Bank, suggesting Canada is overvalued by 63 per cent, or the International Monetary Fund’s prediction that “Canada’s overvalued housing market may be cooling off.”

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So we have reasonable arguments in favour of buying as well as in support of selling your rental property. On a case by case basis, investors have got to consider things like:

1. Their timeline for needing any potential capital from their real estate holdings. In other words, is a sale likely in the next five years to help fund retirement? If so, consider selling sooner rather than later as your timeline shortens and the risk of a real estate correction increases.
2. Their exposure to real estate. Is real estate a large component of your investable assets? If so, consider diversifying into other asset classes simply for prudent diversification.

1. Their capital gains tax. Is there a big tax bill looming if you sell that may be better deferred indefinitely?
2. Their capitalization rate. In other words, what is your rent to market value ratio? Some rental properties are yielding a 10 per cent return relative to their market value, which is a pretty nice “dividend” even if prices do go sideways or down. On the other hand, in some hot real estate markets, annual rents are becoming puny relative to what a property could be sold for – as low as three to four per cent. Maybe that money could be better invested elsewhere.