For many individuals and families across the country, COVID -19 had a major negative impact not only related to health but also related to jobs and income. However, on the other hand the pandemic didn’t hit the earnings of high-income people as hard as it hit others. For many individuals and families, savings rates are at an all-time high. Many people are just not spending like they normally do because of all the pandemic restriction. That means that they were not going on vacations, not going out for dinners, not going to theatres, sports or music events, and so on.
The Perfect Storm
Many of the real estate markets across Canada have experienced some of the highest single year price increases in decades for single family homes, town homes and in certain regions even condos. This is even when we haven’t really experienced the normal listing conditions of the spring market due to the pandemic restrictions. Why are the prices going crazy, why are there so many being sold/bought subject free and over asking? One reason as I pointed out in my last month’s blog FOMO in an Intense Seller’s Market!
Many experts believe that the current abnormal conditions are due to a pent up demand because at the beginning of the pandemic in 2020 there was a great deal of fear, most businesses and services were shut down, but now society has adapted, people are looking for bigger spaces both indoor and outdoor. Then combine these conditions with the ultra-low mortgage rates and “boom” we have the “perfect storm” in the real estate sector.
Affordability and High Housing Prices
With these ultra-low mortgage rates, it set something in motion that seems to be out of control in many cities and suburbs across the country. In fact, Canada has experienced the highest house price increases of all G7 countries since 2000. Another interesting stat is the house prices have risen 28% faster than rents in Canada. This makes it very difficult for the many trying to buy their first home. Many will continue to be forced to rent until either their income increases and or the price of homes become more affordable. This is good for us rental housing providers/investors.
For years there has been a government hunt for the villain to housing affordability. The big one for years was the “foreign buyers,” yet here we are with no foreign buyers but still the affordability is no better even after tax measures were implemented to curtail foreign buyers. In fact in some cities housing has become even less affordable. As many of us in the real estate industry have saying it is and will be always a “supply and demand”. All levels of government need to look in the mirror and address the real issues that are causing the lack of supply such as red tape, development fees, and the length of time to get building permits. Meanwhile there is a governmental push to attract foreign immigration for population growth (demand side).
Now on top of all the stressors on housing prices the cost of lumber, drywall and building materials have increased dramatically which will trickle down to the consumer to further impact an difficult affordability situation.
Why is this Growth Unsustainable?
The challenge with this entire current situation is that it is absolutely unsustainable. In many of the cities with overheated housing markets, the first time and or move up buyers are realistically highly over-leveraged, those buyers are going to be extremely vulnerable to interest rate shock. Surprisingly there was nothing in the 2021 Canadian Federal budget to address the housing affordability issue. All that has been done is overspend increase the debt to record levels where were already at record levels before the pandemic begun. The end result is even more inflation.
So why is it a good time to invest in real estate now?
One of my long-time real estate friends, Ozzie Jurock has been stating for literally decades that we are in a time of some of the highest unreported inflation. One of the best if not the best hedge against inflation is real estate. All we need to do is look at how real estate values have increased even since 2000, but you can see that the acceleration of housing values even in the 1970’s. One word of caution here is one must be wise and do your research so that you don’t become a victim of the conditions but use them to your benefit.
But what about other investment vehicles like stock, bonds, mutual funds? Why not invest in those? I am not saying don’t invest in these investment vehicles, but pay attention to the performance between the different asset classes in terms of your risk vs. reward and incorporating your timelines for your investment goals and invest accordingly.
Smart money is looking for a safe haven with a good sustainable return meaning higher reward for low risk of loss of capital. In inflationary times, real estate has performed better than most other asset classes.
World renowned investor Warren Buffet said “Be fearful when others are greedy and be greedy when others are fearful.” I would add that for the real estate market, the “where” is just as important as the when. Be fearful when and where others are greedy and be greedy when and where others are fearful. Many people are now buying in the crowded spaces/markets fighting and over and in many cases blind bidding on over inflated values. This is speculating not investing.
Do Your Research
The key to the success here is to do your research. The market, in which to invest, needs to have the correct underlying fundamentals, GDP Growth, job growth, infrastructure growth, population growth. And if the market has been through an economic downturn then there is the added bonus of motivated vendors and less competition. Can the current conditions support building new product? You need to investigate the inventory supply as to what it looks like. Is it stable, decreasing or increasing? That means you are able to invest in real value opportunities.
What we are seeing here in many cities is the phenomenon of buying high hoping to go higher, which is a dangerous place to be in. If market corrects due to mortgage rates increase earlier or more severely than originally projected, the market can slow down dramatically, the overvalued prices can correct as we have seen on several occasions and those over-leveraged speculators could easily and quickly be financially underwater. I would rather invest in a recovering economy like Alberta and specifically Edmonton that has all the right fundamental ingredients for a sustainable growth where you can buy reasonably priced quality properties with built-in value and in many cases below replacement cost.
Final Good News
A final good news thought: with the eventual global population being vaccinated, economies will open up, travel, and spending activities will resume at or even higher than pre-pandemic levels. This would translate into more worldwide demand for resources and those resource provinces like BC, Alberta, Saskatchewan, and Manitoba are well positioned to benefit from the global economic reopening.