The people with their heads in the sand in the above photo may not be a depiction of actual Toronto real estate investors hanging out at Ashbridges Bay in the Beach (or Beaches) area of Toronto, but they very well should be.
The “hot” Toronto real estate market and “record real estate prices” are terms that make the news seemingly almost daily. So I understand why you want to know where the Toronto real estate market is headed from here given that it is such a hot topic these days.
As a Realtor, it seems that wherever I go these days, people naturally always ask me what I think the future holds for our crazy real estate market.
What may surprise you is that many of these questions come not only from those who live and invest in the hot Toronto market but from locals in Barrie, Hamilton and indeed people from most mid to larger cities within the Golden Horseshoe Region.
Before, I dive in and give you the facts I would first like you to know that my analysis will be solely based on Toronto’s real estate as an investment rather than a place you call home.
I need to make this perfectly clear because I realize that most of us have been taught throughout our lives that our home will likely be the biggest “investment” we will ever buy.
I tend to agree with Robert Kiyosaki, the author of “Rich Dad, Poor Dad” firmly on this point. Our personal residences ARE NOT investments. Instead they are liabilities. REALLY!
Even after you pay off the mortgage on your house or condo you still need to continue paying for your property taxes, insurance, repairs, maintenance fees, and utilities indefinitely!
At best, over the long term, our homes are no more than inflation adjustable hard assets. Yet so many people continue to believe their homes to be investments.
One of the very first things I teach any new investor client is how to adjust their mindset by distinguishing between where they wish to live versus where they want to invest.
In reality, we should all strive to live where we want to live, and more importantly these days, where we can afford to live.
On the other hand, we should invest only where we can maximize our returns while at the same time mitigating our risks.
Let’s say that you were to buy stock on the stock market and after some time ultimately found it to under perform. It may have earned less income or paid less dividends (cash) to you then what you originally expected. So what would you do?
Well you would simply sell it and buy another investment with hopefully a better risk/reward profile, that you felt would generate higher returns and cash flow for you, would you not?
At their core, real estate investment goals are no different than they are for any other investment asset class. That is, the goal is to always strive to maximize your return on investment with minimal risk.
The facts below will illustrate that investing in Toronto real estate are unlikely to result in either lowering your risk or maximizing your returns.
Myth #1: Toronto Price Appreciation Rates are Superior to Other Municipalities in Ontario
As I mentioned before, at best over the long term, physical real estate is nothing more than an inflation adjusting asset. As such it is not a true investment in and of itself, especially when it is your very own home where you live.
For Part I of this article, I want to exclusively focus on the concept of rising (appreciating) real estate prices as it seems to be making the most headlines these days.
Yet this is a concept very few people truly understand and actually one of the least relevant reasons to invest in real estate. At the same time it is also one of the riskiest reasons to do so as well.
No kidding!
Real estate as an asset class, in fact any asset class for that matter, does not truly become an investment until it begins generating income (that is, a return on your investment).
So it should now become very evident why your principal residence is unlikely to be a true real estate investment since each month you continue to pay out of pocket for all costs required to carry your home, even well after your mortgage on that property is paid of.
This is why home price appreciation rates are of very little relevance to most long term real estate investors, who are concerned more about what income their investments are expected to generate rather than any increase in their underlying real estate asset values.
Sure it may make investors feel warm and fuzzy when prices continue moving higher. However, they need not go up at all EVER for them to be extremely successful with their real estate investments. REALLY!
Now I understand that this view may appear very radical to you. But before you start thinking that I have gone completely off my rocker, let me explain:
Say you work for a company. You come in to work 5 days a week and do your job and in exchange every couple of weeks you “earn” a pay cheque.
In real estate investing, the monthly positive cash flow you get when you collect rent from your tenants, after paying for all your monthly expenses, PLUS the monthly portion of your mortgage principal your tenants pay off each and every month is considered your “pay cheque”.
Now in addition to your regular pay at your job, you may (or may not) become eligible for a yearly bonus that may be based on your personal or company wide performance or a combination of both.
Here’s the problem. Do you know what your bonus will be in any given year? Worse, let’s say your company’s performance was miserable in any given year. Do you really know whether you will even be getting a bonus at all?
Well in real estate we call this “bonus” appreciation. Does anyone really know by how much home prices will go up by in any given year? Do you even know whether they will even increase in value at all?
Worse still, there could be a market correction and home price values can actually go down.
This is why so called “investors” who focus almost exclusively on rising real estate prices in order to generate their returns are not really investors at all.
How can they be?
Can you imagine if your manager at work said to you:
“You know that pay cheque we keep on paying you every few weeks, well it’s gone. Poof!
Instead you will now be compensated solely based on your year-end bonus which in turn will be based on the company’s performance.”
Who in their right mind would agree to such insanity?
Now you can clearly see that those who call themselves “investors” in Toronto real estate are not investors at all. Instead they are actually speculators/gamblers.
If your investment (any investment) were to generate say $1,000 stable income each and every single month indefinitely, would it really matter to you what the underlying asset value was at any point in time?
As long as it continued to consistently generate that $1,000 inflation adjusted income for you each and every month, would it really have any impact on you if your underlying asset doubled in value? Ask yourself what has changed?
Now say the market were to instead correct and property prices were to drop by say 50% in value, like they did in the US during the Great Recession. Ask yourself again what has changed for the true real estate investor?
Not much really.
The reality is that rental rates rarely, if ever, go down in value even during major market corrections. So again, you would still be making that $1,000 per month, each and every month.
In fact, since less people would be looking to buy homes during a market correction, demand for your rental property would likely be even higher than it is today!
Unfortunately, the same cannot be said for Toronto real estate speculators who focus almost exclusively on home price appreciation instead of positive cash flow.
These currently “lucky” success stories may very well find themselves caught with their pants down during a real estate market correction. They risk losing not only their investment properties but their shirts as well.
However, from a practical perspective there are a few reasons why true real estate investors may hope for appreciation in values of their real estate holdings.
The main one being if they wished to ultimately refinance their property to pull out their initial investment and/or built up equity to have access to funds to further expand their real estate portfolio, or for anything else they wish to use the money for really (i.e. to travel the world, buy a vacation property, buy a nice car, etc.)
Now you know that even though Toronto’s increasing home prices continue to get a lot of press, it is one of the least relevant factors for true real estate investors.
Now for those of you that have been reading my articles, posts and newsletters for any length of time, this next part will not come as much of a surprise.
So let’s both humour and enlighten the speculators who still feel that Toronto real estate appreciation rates and returns are superior to all other areas of the province by providing them with some facts they absolutely need to know:
As the above TREB chart shows, with the only exception of Halton Region Townhouses, home value appreciation rates of condos (aka Apartments) Single Family Detached, Attached and Townhouses in other areas of the GTA and surrounding areas on a percentage basis have kicked Toronto’s butt over the past year!Now you can see why I continue to be surprised by how many people continue to believe, and continue being duped by so-called real estate investment experts, gurus and real estate agents into buying the quintessential Toronto “go to first” real estate investment “The Toronto Pre-Construction Condo”, which incidentally have the absolute lowest appreciation rates out of all the areas covered in the above report at only 8.52%.
And that was only in the past year!
What’s worse, is that the Toronto pre-construction condo investment strategy has not worked for many years now as I have already illustrated in a previous article. Here are the facts again:
Reality check for all Toronto condo investors and would be investors thinking of buying a pre-construction condo with the hopes that it will be worth substantially more when completed than what they are willing to pay for it today.
While, average low rise new home prices have gone up by more than 50% over the past 5 years, their new high rise condo cousins’ average prices increased have been nearly $0 over the same time period.
More importantly, there are currently very few, if any, properties in Toronto or the entire GTA for that matter, that would actually be cash flow positive with a 20% down payment.
This alone remains the biggest reason why I steer my clients clear of the GTA real estate “investment” market altogether today.
Now you know that those who continue to invest in the Toronto real estate market today are taking on significantly more risk, by focusing almost exclusively on appreciation, but getting much less return than some of my other targeted areas. Not to mention that they are paying a hefty price of entry into the Toronto market as well.
And even that is not really working out for them as well as they are expecting it to.
They are instead generating lower returns by assuming progressively higher risks? Is this not supposed to work the other way around?
As an example, per the above TREB chart, detached home appreciation values in Durham Region were over 3% higher than those in the City of Toronto over the past year.
Assuming you were to invest the same $1,202,753 (the average price of a detached home in Toronto) into Durham Region instead (say like the City of Oshawa), where by the way you could buy about 3 similar properties in comparatively good areas.
Your investment appreciation would be over $36,000 higher with your Oshawa property investments, with the same initial amount invested, than if you were to buy that Toronto house over the past year – and that is assuming that you were to buy these with 100% cash!
More realistically, you would likely only do the traditional 20% down to secure these properties. By doing so, your overall return on your Durham Region investment properties would actually be over 15% higher over the past year than your Toronto property!
So be very weary of those who continue to peddle “Platinum” pre-construction condo pricing with FREE bonuses on signing as great investment properties.
Ask these hustlers a few very simple yet very telling questions:
1) If these are such great investments, how many have they purchased and own themselves?
2) If they are so highly in demand and such great deals, then why in the world would a builder be throwing in all these bonuses, especially in a condo real estate market that is supposedly on fire right now (but then again you already know better)?
Warning: If they are truly honest with you, then you may not like their answers.
Note: If my clients were to tell me that they wished to purchase a condo as a their own personal home, because they wanted the specific lifestyle that it offered, the location and amenities, then by all means I would say go for it and would be happy to find them a great new home in the sky for them.
However, if they wanted to purchase one as an investment, you can now understand why I am not a big fan.
Now that you know 🙂
In Part II, I will provide further insight on what the future may hold for Canadian mortgage rates, impact from foreign investors and more on what is currently impacting the Canadian, Ontario and GTA real estate markets that you absolutely need to know.
I hope you get to enjoy the rest of your summer before it’s gone 😉
Until next time…
Felix
Your Chief Millionaire Maker & Real Estate CFO
