Analysis of Canadian Housing Investment Opportunities
Analysis of Canadian housing investment opportunities
Executive Summary
The Canadian Housing market has historically offered enough returns with significant volatility over the last two decades. It is the most stable of housing markets around the world and is favored by the changing demographics. From well-regulated financial markets to encouraging immigration policies, Canada’s housing market is poised for surges in demand, given stable supply, and is supported by reliable financial regulation. Investors with a medium to long-term horizons, as well as people simply wish to enjoy Canada’s peaceful lifestyle, would all benefit from the diverse investment choices. We suggest starting with investing in residential real estate i.e. detached homes and condos.
Also discussed in this paper are the various existing investment opportunities available in the Canadian real estate industries. Various forms of real estate investments such as REITs, private real estate investments i.e. homes and condos, public real estate such as business real estates, hotels, and retail premise have been discussed as opportunities in the Canadian real estate industry. The population demographics of the three major cities of Canada: Vancouver, Toronto and Calgary have been critiqued with their impacts on the real estate business being discussed at length.
In today’s low rate environment and amidst market uncertainty i.e. U.S. Debt Ceiling, Euro zone instability, Middle Eastern political strife, few investments offer reliable returns with comparative low risk. The Canadian Housing Market is a dark horse amongst investment vehicles, historically offered double-digit returns and was hit a little compared to the US during the credit crunch. Besides, Canadian housing market is on the ropes especially in major cities like Toronto and Vancouver (Pett, 2013). The market seems to be softening an aspect that could make investors opt to invest their money within the rebounding market in the United States. The housing prices in the Canadian market are expected to grow to almost 15 percent by the year 2014 (Pett, 2013). This expectation and trend follow the several years of declining market in the housing sector in Canada, giving the US market a great opportunity for investors.
John (2013) father says that the economist for the Canadian Imperial Bank of Commerce, Benjamin Tal believes that the market strength lies on the eagerness of homebuyers to lock in the lowest mortgage rates before any future possibility of rising. By September 2013, sales in the Canadian real estate business were 19 per cent higher than in the previous year. Given this trend and the fact that the growth of sales in Canada remains strong, Canada is a great place and a market for real estate investment. Investors, especially Americans, are also looking towards the investment opportunities in Canada because of the Canadian Dollar strength. The major problem with the US market is that the future of its currency could be worse (Pett, 2013). The Canadian market is also favored by the fact that anyone can own property despite his or her citizenship.
Using the United States as a comparison, between 2008 to 2010, the US housing market saw a 40% decline in valuation while Canada only saw a lower decline over the same period (Figure 1). The Canadian housing market also exhibits tremendous resilience in that immediately after the ’09 decline; the housing index recovered above pre-crisis levels within half a year. The U.S continued to sink even further.
Figure 1: United States vs Canada housing prices over the last decade
Canada as a vast population of about There are three key success factors that drive the tenacity of housing markets, and the Canadian housing market has historically shown strength in each of these three areas are described below as follows:
Low and regulated mortgage rates
The Canadian housing market is highly affected by the low rates and increased regulations in the mortgage market. There are new rules insured via the Canadian Mortgage and Housing Corporation as well as other insurance providers in the private sector. The rules have some effect on homebuyers since it requires the buyer to make less than 20 percent as down payment in order to succeed in their processes. The maximum amortization period has reduced to 25 years. Canadians are also able to borrow a maximum of 80% based on the home value (Leong, 2013). The maximum gross debt service ratio (GDS ratio)is now limited to 39 percent while the total debt service ratio is set at 44 per cent. Besides, government-backed mortgage has been established.
Stable employment rates
With stable employment rates in Canada, people are able to purchase houses and pay rent in a timely manner. Canada being a developed country has stable employment rate, which makes people have confidence in acquiring mortgages. The mortgage firms also find it secure to issue loans to both investors and house buyers. This aspect increases not only the supply of houses in Canada but also the demand of houses in the business. The market is also influenced by society. This makes Toronto have better investment opportunities than other cities.
Encouraging immigration policy
Immigration is highly encouraged in Canada. Investors from the United States are highly encouraged to invest in the housing industry in Canada. Canada does not require any citizenship for one to own property. The only condition is to follow the legal immigration requirements. This aspect attracts investors from the US and beyond (Leong, 2013). The increased number of illegal immigrants in to major cities in Canada poses a threat as far as housing is concerned. The more people migrate into Canada, the more constricted the housing resource will become. The government and local authorities in Canada should come up with a way of controlling real estate ownership and more importantly the number of illegal immigrants filtering into its urban settings. Policies that work towards reducing the number of immigration cases should be put in place to control the number of foreigners that negatively affect the housing sector of the Canadian economy. Strict laws should be drafter in a bid to deter the rampant cases of illegal immigrants in major cities in Canada.
Comparative Investment Vehicles
The Canadian housing industry is full of opportunities initiated by several factors. According to John (2013), recent reports show that the Canadian market in real estate investment is still sound with cities like Toronto, Vancouver, and Calgary indicating solid annual increases. The market stocks are very attractive mainly due to the growing strength of the Canadian Dollar. The high prices in the housing market are caused by high population and high immigration rate. Stocks are volatile to a great extent, but the returns are high. High returns are caused by the high demand and the low costs of investment as compared to the same investment business in other countries like the United States. The laws and regulations in this type of investment are favorable but pose some risks such as the risk of facing mortgage development rates. People thus increase their present house purchase to avoid the risk of facing future high prices. Bond rates are low with better returns thereby pushing investors to opt for housing investment.
The Canadian city of Toronto has a vast population of 2.70 million people. The Great Toronto Area (GTA) is ranked as one of the cities with wide multicultural characteristics. The city has over 140 different language dialects with more than 30% of the population speaking another language besides English. In 2006, the city of Toronto held about 8% of the entire Canadian population, 30% of all recent immigrants to Canada and 20% of all immigrants that have come to Canada over the years. By 2006, half of the Toronto’s population had lived in Canada for less than 15 years thus an increased demand on housing. More than 50%of these population constituents were adults above the age of 25; the age at which most adults settle independent of their families. The city has registered 10% rise in population since 2001 and a 31% since 1996. This increase in population puts pressure on the city’s housing resources.
On the other hand Vancouver ranks as the 8th largest city in Canada holding a population of about 603 502 people according to the recent 2011 census. About 50% of the populations in this city speak English with 2% speaking Chinese as their first language. The 2011 national census revealed that about 2650 individuals in this city are homeless. The process of counting homeless people is conducted every 3 years done in a span of 24 hours of survey. The latest count reveals that the number of homeless people in Vancouver has doubled from 1121 persons to 2174 between 2005 and 2008. The study revealed that Vancouver residents pay at least 50% of their incomes as rent. The main housing model designed by CMHC uses a spending rate threshold of household at 30% of their income to shelter costs and lighting. The study reveals that about 8% of homeowners in this city and 28% of renters exceed the 30% threshold.
As of 2011, the city of Calgary housed a population of 1096 833 people representing a 30% of the entire population in the Alberta area. The city was recorded to hold 1 214 839 people within the Calgary metropolitan. Between the year 2006 and 2011, the city’s population experienced a 10.9% growth with a 12.6% growth in the metropolitan population. The 2011 national census revealed that the city’s median age is 36.4 years for both the city of Calgary and its metropolitan areas population. The largest group residing in this city was found to be between the ages of 25- 29 which is the house acquiring age bracket.
Diverse Investment Choices
The Canadian housing sector has several options to invest in. One can choose to invest in condos, houses such as detached houses, apartments, bungalows, or vocational homes. Each of the options has different benefits in terms of risks, costs, and returns. Due to risk of uncertainties, people may choose to invest in houses whose demand would not change with time. An example is the investment in rental houses in which investors may not be ready to withstand any future uncertainties. The best choice in this case could be condominium investment. Many individuals would be able to afford it (Canada Mortgage and Housing Corporation, 2013). Canada has an increasing rate of immigrants as well as upcoming families. New employees can only afford relatively cheap houses. Investing in a single family in Canada, would include the purchase of fixer uppers, foreclosures, or even other properties, that are considered undervalued due to their locations. This is done in order for the investors to buy undervalued houses, fix them up and then sell them for quick profits. Investors can as well rent them out to single tenants or single families.
Mortgages in a bid to own sizeable fraction of their net worth tied up to a hard asset. However, several alternative ways of investing in real estate exist in Canada exists. Some of these include secondary properties, unit trusts, and real estate limited partnership. The key consideration is that no a single asset category should take up more than 50% of the investment portfolio. A particular time when Condos sales in the city of Toronto had fallen by 18% in 3 subsequent years, many investors had their fair share of doubts on whether residential properties such as vacation place, second home and primary residents were actual investments. David Kuaufman, the CEO of West court Capital, a Toronto based real estate firm is of the opinion that people should not regard private residents as investments. He argues that if one is living in appreciating areas, unless that person has the will to exit the market and move to a different location, it is not easy to make cash from such property. He further argues that most house owners have a misconception that real estate values will always appreciate disregarding the effect caused by inflationary forces present in the market.
As far as vacation properties go, Wayman Cosby, a real estate manager in Vancouver believes that despite prices of real estate skyrocketing in the last ten or so years. The increased levels of expenses should be an important ingredient to consider. According to Crosby, vocational properties related costs are usually more than those of a primary home. He adds that the costs in these particular properties are done in after tax dollars. His point is that the increased costs have overshadowed the kind of investment opportunities these properties offered to an investor in the past periods.
Risks of Your Investment
The risk of investing in Condos includes the rising ownership costs in Canada. This high cost of ownership may discourage buyers or tenants. Besides being small properties that lower the cost of investment to the investors, some of the buyers may overlook such houses. Condos may also be limited to particular areas implying that the investor may lack the perceived number of buyers or tenants for rental investments. Again, there are many economic uncertainties, implying that the investors may lose their investments or gain little returns. The fourth risk is related to the ability of failing to get ready buyers. As people advance socially and economically, they may be willing to look for larger and better house (John, 2013 ).
Many investors on Canada have already embarked on owning homes and have started paying off. However, when one is buying a real estate property, several things must be considered e.g. the level of income one has, cost of investment, location and most importantly the type of insurance. Frank Stigter once said that Insurance equates risk. One purchases insurance depending on how much they are willing to risk. In the last few years Canadian insurance firms have pointed to water damage as being the largest risk to since it carries the highest number of insurance claims in the country. Such situations points out to policy choice. Choices can be either broad form policy or named peril. In named peril, the firm states events and damages it is willing to cover while a broad form policy covers all risks naming a few exceptions. In Canada rental income is the most covered risk by real estate owners.
Opportunities and Forecasts
Canada has seen some stagnating trends in the housing sector in the past two years. This aspect has made it difficult for investors to restore their confidence in the housing sector investment. The housing sector is a bit scary especially due to the unclear customer needs and expectations. Future trends seem to be attractive, with sustained low rates investment. It is also expected that their mortgage rates would decrease in the next few years. The country is fully developed with signs of going through improved employment situations. Such improvements in the employment sector depict a better chance for real estate investors. Future trends sometimes seem to give mixed signals. Each day has some non-projected trends, but the future of the Canadian housing market is generally bright for both local and international investors. Most of the forecast data show that the home prices would be higher in the coming years, a factor that may reduce the demand for new investment structures. Due to mixed trends in the market for house business and real estate investment, the market seems to be unchanging. Future trends may only be affected by increased immigration policies, mortgage rates, and population growth (Pellegrini, 2013).
According to David Pett, a real estate advisor, real estate as an asset should not be confused with owning a single home or purchasing a second one but rather including commercial properties such as hotels, office buildings, apartments and retail premises in one’s portfolio. Most real estate’s investments are executed through listed securities such as Real estate investments trusts (REITS), limited partnerships RELPs or via unlisted companies that trade in real estate (Thompson, 2013). In Canada various types of REITs exists especially in Toronto with various mutual funds and ETFs being available to prospective real estate owners in the country. Private real estate investments opportunities are few though growing in number and thus providing an opportunity to prospective real estate owners in Canada. A classic example of such an investment would be the famous West Life Real Estate Fund , a set aside fund that invests in over a hundred Canadian properties and real estate suites such as KingSett Capital.
Karl Mergenthaler, a director at J.P Morgan, recently said that real estate has become a popular option for many in the investment class especially due to the previously experienced global recession. It is his belief that both private and public real estate investments present good opportunities to the investors. He states that it would be imperative for the prospective investors to think about investing in both private and public real estate properties. REITS a the most common real estate investment vehicle especially due to their abilities to offer better transparency and liquidity whilst offering the investor a steady income derived from interest payments and rent from the invested properties (Thompson, 2013). Nonetheless, REITs have a flip side since they tend to be rather volatile than private real estate, the preference of most investors.
Recommendation and conclusion
Canadian real estate investment forms one of the best investment opportunities in Canada. Despite the high risks involved in the real estate investment sector in Canada, the returns are highly attractive. Canada seems to give its neighboring country, the US a great challenge. Such challenges come due to the growing opportunities in Canada. Such opportunities include the growing population, increasing migration rates, and new regulatory policies that encourage immigration into the country (Thompson, 2013). The demand is growing further pulling the investors. It is highly predicted that solid sales and prices can calm the storm in the sector and the market. The country has some foreseen risks due to unpredictable economic trends. It is recommended that investors seek investment options as a way of avoiding the risks. On the other hand, buyers can purchase securities if they are not comfortable with taking risks associated with future prices and rates especially in the mortgage business. Canadian banks can as well take initiatives and take this growing sector as a source of growth opportunity. Bank participation in the investment can highly contribute to the sector’s growth, which could even reduce the cost of investment and reduce the general prices of housing facilities in Canada.
Investors in Canada should seek to invest in several forms of real estate if they want to reap maximum return of their investments. Investing in both private and public real estate would help diversify the incidence of any probable risk especially in times of financial crisis. When one invests in a variety of real estate option, the risks are well spread out among the various options thus decreasing the chance of total loss. Some investment options tend to be immune of particular risks and thus diversifying one’s real estate portfolio will minimize the risk of losing the entire investment.
References
Canada Mortgage and Housing Corporation. (2013). Housing Market Outlook - Canada Edition - Third Quarter 2013. Canada Mortgage and Housing Corporation.
John. (2013 , October 4). Investing in Canadian Real Estate for the Future. Retrieved from frugalrules.com: http://www.frugalrules.com/investing-canadian-real-estate-future/
Leong, M. (2013, March 16). Mortgages & Real Estate: No longer foreclosure nation. Retrieved from http://business.financialpost.com/2013/03/16/us-housing-foreclosure/?__lsa=4cd4-8e43
Pellegrini, C. (2013, September 04). Why real estate doomsayers continue to be wrong. Retrieved from Financial Post Magazine: http://business.financialpost.com/2013/09/04/canada-housing-doomsayers/
Pett, D. (2013, March 15). InvestingCanada's source for market intelligence: Despite housing concerns, investing opportunities in Canada and the U.S. abound. Retrieved from financialpost.com: http://business.financialpost.com/2013/03/15/despite-housing-concerns-investing-opportunities-in-canada-and-the-u-s-abound/
Thompson, R. (2013, September 6). How to make money investing in real estate. Retrieved from http://business.financialpost.com/2013/09/06/real-estate-investing/
