By Garry Marr, Finan­cial Post Magazine

Cana­dian real estate sales are down, yet prices are up. An out­right col­lapse doesn’t seem immi­nent, but investors should still be wary.

The resiliency of the Cana­dian hous­ing mar­ket has to impress even the most cyn­i­cal observer. And while the con­sen­sus even among indus­try insid­ers is the days of double-digit per­cent­age price increases are over, nobody is expect­ing an American-style hous­ing col­lapse in Canada. “The fear proved to be unfounded,” says Pas­cal Gau­thier, a senior econ­o­mist at Toronto-Dominion Bank. He points out aver­age prices in Canada only dropped 13% from peak to trough. Other than a brief blip in 2008, the aver­age home price has been on a tear since 1996, reach­ing almost $340,000 in 2010. A decade ago, it was $163,992.

Alas, the good times are about to end. Gau­thier says prices will actu­ally go down in 2011, albeit by less than 1%. By 2012, the loss could be 1% to 2%. Even real-estate com­pa­nies are not overly opti­mistic. For exam­ple, Re/Max says Cana­di­ans can expect an aver­age 3% price increase in 2011. Such uncer­tainty doesn’t nec­es­sar­ily mean aban­don­ing the hous­ing mar­ket in the com­ing years. Indeed, it may even be time to take some of that bloated equity in your prin­ci­pal res­i­dence and bet on an invest­ment prop­erty, such as a con­do­minium, cot­tage or per­haps even some­thing in the mori­bund real-estate mar­ket down south.

Scott Plas­kett, a cer­ti­fied finan­cial plan­ner at Iron­Shield Finan­cial Plan­ning in Toronto, isn’t opposed to using home equity to buy other assets. “I rec­om­mend it in the right cir­cum­stances,” says Plas­kett. “I wouldn’t sug­gest just real estate. But real estate is a great option, because it’s one of those assets that can pro­duce cash flow while hold­ing the assets.”

But find­ing con­do­minium invest­ment prop­er­ties that pro­duce pos­i­tive cash flow is get­ting tougher and tougher in Canada because of the high val­u­a­tions. Ben Myers, edi­tor of Urba­na­tion Inc., which tracks Toronto’s condo mar­ket, says about 50% to 60% of the city’s con­dos are now being bought by investors look­ing for hefty price gains. “Peo­ple have been play­ing off that. Over the last three years, we’ve had 7% to 9% annual price increases,” says Myers. Those price increases have made some peo­ple rich. If you bought a new unit for, say, $300,000, it would be worth about $367,000 by the time it was built, based on 7% appre­ci­a­tion over three years. That’s more than 100% return on your 20% down­pay­ment, if you flipped the condo after tak­ing possession.

But a flat­ter mar­ket means investors may be stuck car­ry­ing their prop­er­ties and mak­ing money that way is more dif­fi­cult. To carry a 500-square-foot con­do­minium, which can eas­ily cost $300,000 in down­town Toronto, you would need to recoup $1,900 per month based on a $240,000 mort­gage. Here’s the math: monthly mort­gage pay­ments are about $1,275 based on 4% inter­est and amor­tized over 25 years, and then add condo fees of $250, taxes of $250 and $125 for heat and hydro. To reduce costs, Myers says some investors are choos­ing variable-rate mort­gages. That can save $150 a month in car­ry­ing costs, but leaves investors heav­ily exposed to ris­ing rates. “The worry is if rates go up, are all these investors going to [sell] and flood the mar­ket with units?” he says. “At more than $600 a square foot to buy, can rents go to $2,000 for a 500-square-foot unit?” Renters are will­ing to pay more for con­do­mini­ums than apart­ments, accord­ing to a Canada Mort­gage and Hous­ing Corp. report at the end of 2010. For exam­ple, the aver­age rent for a two-bedroom con­do­minium in Van­cou­ver was $1,610 ver­sus $1,195 for a sim­i­lar con­ven­tional apart­ment. But that dif­fer­ence won’t cover an investor’s costs.

Don Camp­bell, founder of the Real Estate Invest­ment Net­work in Cal­gary, uses an invest­ing for­mula that looks at an area’s growth in gross domes­tic prod­uct. “GDP growth leads to job growth and that leads to in-migration growth about 12 months later,” he says. The more new peo­ple there are, the lower rental vacan­cies go, and the higher rents go. That leads to increased demand for invest­ment prop­erty and a bet­ter return on invest­ment. “That trick­les into the resale mar­ket because peo­ple say, ‘Rents are so much, I’ll just buy some­thing,’” says Camp­bell. Using that analy­sis, Camp­bell likes Cal­gary, Edmon­ton and — in Ontario — Hamil­ton, Kitchener-Waterloo and Cambridge.

5.7% – Aver­age price increase last year for a Cana­dian home, which cost an aver­age of $338,676, com­pared to $320,333 in 2009

3% – Decline in the num­ber of home sales, which dropped to 451,825 units from 465,251 units in 2009

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Con­tact the Jef­frey Team for more infor­ma­tion – 416−388−1960

Lau­rin & Natalie Jef­frey are Toronto Real­tors with Cen­tury 21 Regal Realty.
They did not write these arti­cles, they just repro­duce them here for peo­ple
who are inter­ested in Toronto real estate. They do not work for any builders.
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tim ces­t­nick prin­ci­pal res­i­dence exemp­tion jointly own with child

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