- Urban centres and condo markets, particularly in Toronto and Vancouver, are going to be negatively impacted by COVID-19 while outlying regions will likely see more homebuyers and migration.
- The government should commit more to small- and medium-sized enterprises, who represent the lifeblood of our economy and are therefore a significant driver of the real estate market.
- Buyers should treat their real estate investments like a business: know your clients, manage your cash flow and establish a strong network of support amongst mortgage brokers, realtors, lawyers and accountants.
Investors or potential investors in real estate need to educate themselves on the larger trends in the Canadian economy in order to inform their decisions about investing. Immigration, job growth, consumer confidence and GDP—which have all been negatively impact by COVID-19—will affect the real estate market and investors must be aware.
How would you characterize Canada’s real estate market today? What are its strengths and weaknesses?
The Canadian real estate market right now is very confusing and uncertain. Across the board we are starting to see some headwinds—and there is no question we will be stronger in the months ahead—but these are cautionary times.
Real estate inevitably happens in predictable cycles, and we are always looking at where we are in a given cycle. In some areas, people are actually feeling like we are in a boom because things have hardly changed. But really, what we are recognizing in this cycle is that we are in the beginning of a slump, and that applies right across the country with a few exceptions.
It is hard to talk about strengths and weaknesses in a market, but one potential strength is that an excess of 40% of Canadians own their home or are mortgage free. The weaknesses of the market are really what has been affected by COVID-19. Given the pandemic, we have run into some problems that are starting to show up and will continue to show up in the future.
“An excess of 40% of Canadians own their home or are mortgage free.”
We cannot look at the real estate market in a bubble or silo. We have to look at it as part of what is happening economically in Canada including jobs, immigration, borders being shut down, the impact on SMEs and what that means for job creation and taxes. All of these things right now are supported by the government, so our GDP is really government-driven and we have a false economy. Once the government funding ends, we will see what is behind the curtain.
Are there additional supports you would like to see from the government for the real estate sector and Canadians in general?
Politics aside, governments in general have a tendency to support the larger corporations—yet SMEs make up well over 50% of our job growth and GDP. Ultimately, we need to look at the SMEs and ask how we are supporting them and their need for capital.
One of the underlying issues right now is liquidity. The Bank of Canada and central banks globally are busy printing money for governments facing liquidity issues. We want to see our government support SMEs because they are the development of the economy—they are trying to save their businesses and are operating on thin margins, with restaurants being an obvious example. How do we support those businesses in order to maintain and create good jobs that are necessary to drive our economy?
“Governments in general have a tendency to support the larger corporations—yet SMEs make up well over 50% of our job growth and GDP.”
However, we cannot compare what the government has done to the actions of any previous governments, because previous governments never faced anything like this before. If we compare it to SARS or 9/11, the fundamental difference is that this is global, it is multisector, and there are going to be breakdowns in our supply chains. We know that immigration is going to be impacted and that is going to affect Canada in a huge way.
“Real estate needs GDP growth, job creation, consumer confidence, immigration and interprovincial migration.”
Although it is not immediately associated with real estate, there is a connection between all of these things and the real estate market. We know that real estate needs GDP growth, job creation, consumer confidence, immigration and interprovincial migration. At the Real Estate Investment Network (REIN), we look at 70+ data points that drive real estate, and all of these things—GDP growth, immigration, job growth and consumer confidence—impact real estate prices.
What is the connection between COVID-19, and the residential and commercial real estate markets?
They are connected but not in the way you think. I will give you an example. Imagine I live downtown and own a condo and begin to see commercial buildings closing up; the people are no longer working downtown; tourists are no longer visiting and there aren’t as many jobs. Our major urban centres are being incredibly challenged by COVID-19, primarily because nobody sees an end in sight for the pandemic. People are fearful—genuinely afraid—and many do not want to be living in tight quarters in an urban centre. Right now, decisions to live downtown are being driven by fear.
People are accepting that they no longer have to work downtown because their employer allows them to work from home a few days a week, so they are happy to commute when necessary. Instead of spending $1 million on a 700 square-foot condo, they can move to the suburbs and get a house with a backyard, a house where they can put the kids in a room and couples can work from home. All of that makes sense, and that is how they are connected.
“One of the things that people are going to see is a strong likelihood of increased property taxes, and in some cases that is already happening.”
I will use Calgary as an example of what is happening on the commercial side of things. Even pre-COVID, downtown Calgary had a high vacancy rate for office and commercial real estate. I recall about 27% and post-COVID it will be much higher. The challenge that all cities are going to face is a drop in municipal tax payments that businesses used to provide, so municipal budgets are being cut back. To use another example, in Edmonton they stopped mowing some lawns of city-owned properties because they have had to cut back on their budget, and when that happens the property values are actually dropping but the taxes are going up. In the real estate world, one of the things that people are going to see is a strong likelihood of increased property taxes, and in some cases that is already happening.
Content continues below ↓
If we look at Canadian cities and regions, what has been the impact of COVID-19 on particular markets? Where would you invest?
In Toronto, over the next two years, you will see prices come down—especially in the condominium market downtown. The tax will remain strong, but you will see prices falling because supply will increase, there is a lack of immigration and there will be new condos coming into the market but there will not be enough absorption.
In Vancouver, it will be very similar to Toronto. We are seeing rent in the condo market softening and there will likely be a pullback. People do not want to hear that, but the Canadian Mortgage and Housing Corporation (CMHC) predicts there will be a 9% to 18% drop in the condo market. Toronto’s downtown is likely to be hit harder than Vancouver’s, but there will be outlying areas in the GTA where people will move because there is more space and they can get a better bang for their buck. So, we are seeing an increase in activity in smaller centres like Peterborough, Waterloo and Durham. Those areas will remain strong, but I do believe there will be a pullback.
In Montreal, there is likely to be a significant impact due to immigration. Do not forget, when you get 300,000+ people immigrating into Canada every year, Montreal is one of their landing places. Will unemployment increase in Montreal? Probably, yes. Are businesses still being shut down? Are businesses being challenged to deliver goods? If the answer to those questions is yes, then you are going to see a pullback.
As an investor, if I had $500,000, that would allow me to buy in the suburbs in most major centres. I would likely buy in the Western provinces because prices there are already depressed. However, when investing in real estate you have to have a strategy; long-term buy-and-hold, rent-to-own, agreements on the side, fix-and-flips. Right now, I would not want to be doing a fix and flip unless I was very experienced and knew exactly who my buyers were, because you can easily get caught with a fix-and-flip and that is where you hear many horror stories in real estate.
“When investing in real estate you have to have a strategy; long-term buy-and-hold, rent-to-own, agreements on the side, fix-and-flips.”
If I had $500,000 in Eastern Canada, I would look at Peterborough, the Durham region or Waterloo. In Alberta, I would look at Edmonton, and in Saskatchewan and Manitoba I would look at Regina or Winnipeg. Those markets are already soft but here is the thing about real estate: it is always about your exit. If I was advising someone right now who did not know whether to buy or sell their house, I would say sell into this market and then sit and rent, because there will be a buying opportunity in the near future.
How do you view real estate as a sector in the Canadian economy?
As a sector in Canada, real estate is a huge driver of our economy. It creates jobs in renovations, construction and the retail industry.
Since the 2008 financial crisis, the lending philosophy of major financial institutions has changed, making more money available for people to borrow against their homes which in turn drives consumerism—people buying toys, purchasing vacations, doing renovations. Access to capital for the everyday mom and dad was significantly improved. Even if the family is making $100,000, they also had $200,000 to $400,000 worth of equity in their home for them to support their kids’ education or help their children buy a home—so it is a big churn. It influences the speed at which money is moving, and right now with COVID-19 we are waiting for the money to start moving again.
One of the foundational ways our network educates real estate investors is by teaching them that you have to treat your real estate like a business: know your clients, manage your cash flow and establish a strong network of support, whether that is with a realtor, mortgage broker, lawyer or accountant.
The other thing we talk about is time, money and knowledge, or TMK. When you treat your real estate investing like a business, how much time do you have to actually invest in the real estate? What is the capital that you have available? How much knowledge do you have?
REIN is an education and research company and a solutions provider for our real estate investors, and that includes homeowners. We look at homeowners as investors, especially first-time purchasers who are buying a starter home. From an investment perspective, if they treat it like an investment that will shift how they make their decisions—and that comes down to knowledge.
“Potential real estate investors would be doing themselves a disservice by not being educated on trends in the economy.”
I remain extremely optimistic about Canada and the future of real estate, but this is the time where people need to pay attention to what is happening economically. There is a phrase that somebody used which is “knowledge is the new currency,” and I think all potential real estate investors would be doing themselves a disservice by not being educated on trends in the economy. As I look forward for Canada, I look at the long-term because real estate in my world is long-term. These are cycles, there are ups and downs, and COVID-19 is only different in that we have never done this before, and I think the cycle could be longer.