August 21, 2013 | condos, real estate investing
People are afraid of the unknown. Some times there are good reasons. Perhaps aliens are visiting earth and would like to use us humans as their food supply. Other times, there was really nothing to fear at all, like the concern of Christopher Columbus about steering his ship off the edge of the earth.
When it comes to real estate, the big unknown for Canadians has to do with how many real estate investors there are out there. These investors, from Canada and abroad, are buying properties for investment purposes and do not plan to live in their purchased properties. They either wish to hold them and rent them out, or they are hoping they can flip them and sell them for more money down the road.
What’s the unknown to be afraid of here? Well, as far as Canada goes, there is no official record of how many investors have bought into the real estate market, particularly in the condo market of big cities like Toronto or Vancouver. Some estimate that up to 50-60% of all units now being built are for investors.
Why be worried? Some fear investor have artificially pushed up the demand for housing, particularly with condos. If the market should suddenly fall, then some believe investors will attempt to get rid of their property as a way of minimizing their loses. For some, it will not be cost-effective to keep a condo that’s tanking in value. Those owners who live in the place they have purchased are more likley to ride out the rough times since they need to live in the place they have bought. So, they are far more likely to hold on to their properties. If many investors leave at the same time, the housing market is flooded with oversupply and prices plummet and no one’s happy, except those poor first-time buyers who have been waiting for a break for over a decade.
Think Florida, a place where vacation rentals and tourism are a key part of the economy. There’s a place that has a definite high number of investors. And low and behold, it was one one of three states that has the worst price drops during the American recession and housing crash. Luckily, they are on their way back up.
In many ways, it sound like a horrifying recipe for disaster. But investors can be good too! What many of those worried about the numbers of investors in the market don’t realize is that investors are currently very essential to the rental market. In many cities, such as Toronto, there are very few new projects that are built for renters. Builders can simply make more money if they sell condos. Regardless, those in need of rental accommodations continues to rise. For those who are not ready to buy or even never intend to buy, the rental market is tight. Strangely, as prices go up and the banks make it more difficult for buyers, particularly first-time buyers, to get financing, there are more rental units required. In growing cities with migration and immigration, there is even a bigger need for rental units.
In many ways, these real estate investors are the solution to what could have been a rental crisis in many cities across Canada.
In Toronto, rental condominiums are currently outpacing resale prices. And this has two key ramifications. First, investors are not necessarily keen on flipping their property and would prefer to rent out their units. And second, the rental market stays more balanced. Even with all the investors providing the rental accommodations, rental demand is still up 4.1% from last year to a record $2.35 per square foot, according to the research firm Urbanation.
In fact, currently with the increase in rental units coming to market, the vacancy rate is still low in most Canadian cities. The average Canadian vacancy rate is 2.7%, but many of the larger cities have lower rates including: Calgary and Edmonton, both at 1.2%, St John’s Newfoundland at 1.5%, Toronto at 1.6% and Vancouver at 1.8%.
Of course, we all know in real estate that things can change quickly. Currently, though, it seems that the investors are not attempting to flip their properties as much. Instead they are deciding a more conservative approach by holding their units for a longer term, and having their mortgage paid off or partially paid off by the rent they generate. Some of this may have been brought on by the recent decision of Revenue Canada to come down like a hammer on those who are flipping their properties to make sure they pay their capital gains and income tax. Financially speaking, it may be wiser for the investors to hold out.
Any way you slice it, investors are here to stay, and there will be more to come, though there numbers may be dwindling as foreign investors move on to cheaper destinations in the United States. Regardless, there will be more new condo units coming to market in Canada, but builders have really begin to ease back on their builds, reducing the supply, and hopefully steering away from an oversupply situation. But real estate is not a science. There will always be a fear, real or imagined.