Real Estate Market Trends In Canada- Where to Invest in 2024.

Introduction:

Welcome back to the True Wealth podcast! I’m Seun Adeyemi, your host, and today we’re delving into the dynamic world of real estate with my esteemed colleague, Chris Bisson. In this insightful conversation, we discuss the current state of the real estate market, shedding light on trends, challenges, and strategies for making informed decisions.

Unraveling Market Fluctuations:

Seun kicks off the discussion by acknowledging the market’s recent fluctuations, marked by high-interest rate increases and an overall tepid atmosphere. Chris, drawing on his wealth of experience, shares a concerning anecdote about a national real estate office in Southwestern Ontario that failed to close a single deal in a month, despite having over 85 agents. The conversation unveils the realities of the current real estate landscape, prompting a deep dive into market specifics.

Regional Insights:

Chris proceeds to provide regional snapshots, emphasizing the impact of localized factors on market dynamics. From the scenic cottage country, where sales are plummeting, to the southern city of Windsor experiencing a 25% drop in unit sales, the discussion highlights the diverse challenges faced by different regions. The narrative is rich with statistics, showcasing the sharp decline in sales and average prices, offering a nuanced understanding of the intricate real estate tapestry.

Analysing the Unhealthy Spike:

Seun astutely observes the deceptive nature of the real estate market between 2020 and mid-2022, characterized by an unhealthy spike in prices. Chris complements this insight, revealing that those who purchased homes in the latter half of 2021 or early 2022 might find themselves underwater, owing more than their property’s current value. The conversation underscores the importance of a balanced, long-term approach to real estate investment.

Navigating the Calgary Opportunity:

The dialogue takes a turn towards Calgary, a market that has shown resilience. Both hosts emphasize the cyclical nature of this market and stress the need for a cashflow-centric strategy, considering the impact of oil prices on Calgary’s real estate. The discussion serves as a cautionary tale for investors eyeing markets with short-term appreciation.

Cash Flow vs. Capital Appreciation:

Seun and Chris share insights into the types of properties that offer better cash flow. Small multi-unit residential properties, especially those with two to four units, are highlighted as lucrative investments. The conversation touches on the potential of student rentals, acknowledging their higher turnover rate but emphasizing the substantial returns they can yield.

Cash Flow Plays and Property Valuation:

Chris emphasizes the significance of cash flow in real estate investments, describing it as a “real cash flow play.” He discusses the income approach to property valuation, where net income is divided by a cap rate to determine its value. Although this method might not align with direct comparison approaches, such as evaluating a property as a family home, the numbers can be enticing for investors.

The conversation touches on the challenges of finding properties purpose-built as fourplex or triplex units. Chris suggests that the scarcity of such properties has led many cities to promote increased density by allowing basement accessory apartments and laneway homes. This approach allows homeowners to create additional rental units, addressing the demand for affordable housing.

Strategies for Investors:

Seun raises the issue of finding lenders willing to finance properties with multiple rental units. Chris notes that finding a suitable lender is crucial, especially for properties that may require ongoing maintenance and have high turnover rates. He also highlights the importance of functionality and safety over luxury in such properties.

The conversation shifts to identifying markets with reasonably priced multiple-unit properties. Chris acknowledges the challenge in finding such properties, emphasizing the need for research and proactive searching. He points out that cities aiming to increase density often have programs for accessory apartments, providing an affordable way for investors to create two-unit rentals.

Choosing the Right Realtor:

Chris suggests that not all real estate agents understand the rental market, making it essential to choose a realtor who has experience in this niche. He advises asking potential realtors about their own rental properties and assessing their knowledge of the rental market. Understanding the math and the unique considerations of rental properties is crucial for a realtor to guide investors effectively.

Due Diligence and Market Understanding:

The conversation highlights the importance of due diligence, especially when considering property development or modifications. Chris shares an example where a realtor’s assumptions about severing lots on a farm were incorrect due to zoning regulations. Investors are urged to verify information with municipalities and understand market-specific demands before committing to a purchase.

Considerations for Specific Markets:

Chris emphasizes that understanding the specific market is essential for investors. Factors such as proximity to public transportation and neighborhood regulations should align with the target tenant demographic. He suggests avoiding potential issues by selecting properties that fit the intended use, whether for professionals, families, or students.

Emerging Trends in Real Estate Appraisals:

Chris mentions two noteworthy trends in real estate appraisals. Firstly, he warns about potential appraisal shortfalls for deals made on new construction properties at the end of December and early 2022. Secondly, due to reduced buyer activity, sellers are advised to price their properties accordingly. For long-term investors, the current market presents decent opportunities.

Current Market Conditions and Buyer’s Market:

Seun and Chris agree that the current real estate market presents a unique opportunity for buyers. With an increased inventory of listings, buyers have more options than in the past two years. Chris notes that, for the first time in a decade, some markets are considered buyer’s markets. He recommends checking the Canadian Real Estate Association (CREA) website for market statistics to make informed decisions about buying in specific locations.

The Cash Flow Challenge:

Seun highlights a challenge for buyers despite the favorable market conditions—the cash flow challenge. Even with lower property prices, the stress test for mortgage qualification has become more stringent. Seun shares an example where a client needs a $90,000 income to qualify for a $280,000 mortgage, emphasizing the impact of interest rates on affordability.

Debating the Stress Test:

Both Seun and Chris engage in a discussion about the stress test and its relevance in the current market. While Seun acknowledges the original intent of the stress test to ensure affordability in the face of rising interest rates, he questions its efficacy now, with rates potentially decreasing in the coming years. Chris suggests a gradual reduction in the stress test rate over time as a more reasonable approach.

Variable vs. Fixed Rates:

Seun introduces a trend he’s observed—more clients considering variable rates over fixed rates. Chris shares his perspective, expressing his belief that going variable makes sense in the current market. While rates might rise slightly in the short term, Chris anticipates a decrease in rates by late 2024 or early 2025. Choosing a variable rate allows borrowers to benefit from potential rate drops in the future.

Building a Strong Team:

Towards the end of the conversation, Chris emphasizes the importance of building a strong team of professionals, including realtors, mortgage brokers, contractors, and more. He encourages listeners to conduct research and ask pertinent questions when selecting professionals, as these relationships can last for decades.

Conclusion:

The conversation between Seun and Chris provides valuable insights into the nuances of real estate investing. From market conditions and mortgage challenges to stress tests and interest rate trends, investors can gain a comprehensive understanding of the current landscape. Building a knowledgeable team is highlighted as a crucial element for long-term success in real estate ventures.

If you’re considering real estate investment, keep these insights in mind and stay informed about market trends to make well-informed decisions. For further guidance, reach out to professionals like Seun and Chris, who are dedicated to helping investors navigate the dynamic world of real estate.