Interesting BNN article below today. It’s nice to have media actually provide some relevant data regarding what is really driving real estate prices in Toronto and Vancouver. Seems to be such a rarity these days.
Simple economics 101: Continuing massive demand and very limited supply can only result in prices moving up, up, up!
I still strongly believe that those buying properties for investment purposes in Toronto and Vancouver today, especially those who are buying condos in these cities as investments, are not actually investors, rather they are speculators. The main way they are hoping to make a return on their investment is via an expectation that prices will continue going up indefinitely.
No investment, not stocks, bonds or even real estate goes up in a straight line. History has proven this time and time again. One only has to look at what happened to stock values during the Great Recession of 2007-2009, home values in the US during the same period and even in Toronto in the late 1980’s.
As for bonds, well now more than 1.5 trillion of NEGATIVE interest rate bonds (not a typo) across the world have been sold to date. In fact, negative interest rates are now in effect for a number of European countries.
To be clear, I am still a huge fan of real estate as a long term investment class and continue to buy more personally and for my clients even today.
The difference is that I only focus on cash flow positive properties (which is no longer possible in Vancouver and Toronto at 20% down) in municipalities within commuting distance of Toronto, where I buy these homes for 50-70% less than what they go for in Toronto.
I should also mention that the appreciation rates on these properties is just as good if not better than Toronto PLUS I actually put money in my pocket monthly with these investments. In Toronto, you would need to pay money out of your pocket monthly as current rental rates are not sufficient to cover all your carrying costs.
We all know what real estate market corrections look like. Remember what happened to our American cousins only a few years ago when properties plummeted by 50% or more in some cities during the Great Recession. So-called real estate investors, flippers and home owners lost their shirts along with their houses.
The good news is that if the market were to crash in Toronto today and spill over into our target investment areas, we would not be affected. After all, what would have changed for us? Rent will continue to be paid by our tenants. Rent that would continue paying down our mortgages, cover all our carrying costs and leave us with consistent and stable cash flows.
Here’s a little known fact. Investors who were landlords actually came out relatively unscathed in the US, as long as they were not overly leveraged. In fact they experienced a boom in their rental businesses during the Great Recession since those who were losing their houses to repossessions by the banks still needed a place to live.
So we fully expect that our positive cash flow would continue to come in every month regardless of whether the economy or real estate market is booming or in a recession. Why? Because we offer something that people not only want but actually need, a roof over their head!
Superior returns with significantly lower risk is the holy grail of all investments.
Remember, it is land that goes up in value in real estate not buildings. Buildings depreciate (go down in value) and require substantial maintenance over the long term. Ask yourself, how much land do high rise condo unit owners actually own. A very tiny fraction! Most of the value of their investment is in the building, an an asset that gets older and depreciates annually. Similar to a car, it simply continues to go down in value than when you bought it new, say 10 years ago.
Just like fiat currencies, where the value of our currency is based on what people perceive it to be (otherwise it would simply be a worthless piece of paper or plastic), I view condos as the fiat real estate asset class.
Do yourself a favour and steer clear of the hype and Toronto condo craze. By doing so, you could very well avoid the inevitable pain of the next Toronto real estate market correction. It is a matter of not if, but when this will occur.
Consider becoming a real estate investor, not a speculator!
“Buy Land — They’re Not Making Any More” – Mark Twain