If you’ve got your ear to the ground in any sector of the business or financial world, you know by now that real estate is a hot topic in Canada. The realty market is booming, showing somewhere between 40-50% growth in the last few years, with no signs of slowing down anytime soon.
For many people, this makes little sense. After all, our dollar is down considerably, and talks of a third recession have been circulating for some time. Why then is the housing market exploding upwards?
I’ve personally heard a lot of backwards theories and assumptions being thrown around, and that’s a dangerous game to play when you consider how many people make their living off of realty investments.
In this post, I want to share some hard facts about the Canadian realty market’s current growth to help you inform your big-picture investment strategy.
Foreign investors are nothing new, but their focus on the Canadian realty market is.
For many years, Foreign investors have funnelled their money into foreign markets. In doing so, they could secure lucrative returns, and hide some of their assets from their governments.
Until very recently, most Chinese and Iranian investors preferred to spend their money in the US and Europe. But things have changed: the European market is no longer stable, and the height of the US dollar is unappealing. With its low dollar value, Canada is now their best option.
Today, foreign investors are flooding the Canadian real estate market with money. If you observe who is buying properties in upscale neighbourhoods, you’ll see that it’s predominantly Chinese and Iranian people. Their investments are driving our housing market up.
Canadians are participating less and less in the housing market in part due to the strict loan policies of A-lender banks. Unless you have an incredible resume and credit rating, you’re going to be turned away by the top-tier lenders. This means you’ll have to try your luck with a B lender, who will be happy to give you what you want, so long as you don’t mind there being an astronomical interest rate attached. Canadians trying to get a loan for real estate purchases can expect to pay between 3-5%, which translates to a huge monthly payment.
The loss of A-lender banking options doesn’t mean the market will drop; it just means that there will be less Canadians – and more foreign investors – participating in its growth.
When the realty market gets hot, I see people make the same mistakes again and again. Seeing the market moving upwards, dollar signs fill their eyes, and they put their house on the market, trying to cash out. They trigger the bidding war they hoped for, and end up with a nice amount of money in their pocket.
From here, you have two options:
Cashing out can be a good thing in this market, but not for someone living in the house they intend to sell. Cashing out is best for investors with multiple properties, not homeowners trying to ride a market wave.
Our market won’t stay like this forever, of course. We’re currently experiencing an upward trend, which is attracting investor interest, thereby buoying the state of things. Investors will keep injecting money into a market that shows an upward trend, even when it runs high.
Once the Canadian dollar gets back on par with the USD, the market will change. Like all trends, this one will start to decline as investors look elsewhere for cost-effective options and Canadians will not be able to afford to buy so expensive houses.
Stay tuned for a couple of years. The housing market will rise a little higher, stabilize, and then start to slump and then back up again; it’s just history repeating itself, lets give it few years and see what will happen next…