Canadians Need Better Property Investment Advice
Property is an important investment for Canadians:
24 percent of Canadians are relying on their homes for retirement income.
11 percent, approximately 4.4 million, own investment properties.
Duty to the Client’s Best Interests
The real estate professionals involved in the purchase, management, and sale of property have the legal obligation of a real estate agent to act in their client's best interest. This is often called fiduciary duty.
However, it’s unclear whether this extends to property investment advice. Most real estate agents are preoccupied with helping clients get good market value for purchases or sales, but that doesn’t necessarily translate into a good long-term investment.
The Current Situation — Risk of a Correction
5-year mortgage rate fluctuations 2021 to 2024
When mortgage rates were near 2 percent, Canadians piled into the market. Some were first-time buyers claiming the first rung on the “property ladder,” but many first-time buyers were being crowded out by investors.
Canada residential purchase and sale activity, CREA
The share of properties snapped up by investors claimed from close to 20 percent in 2014 to approximately 30 percent in 2022.
Canada residential purchase and sale activity, CREA
Investors bought almost 30 percent of all homes but bought an even higher share of pre-sale and newly completed condos in major centres like Vancouver and Toronto.
New Condo Development Dominated by Buy-to-Rent Investors
While all housing supply is good in a Canadian market starved for supply, individual investors did not properly stress-test their purchases to fit their circumstances.
The banks stress-tested them to help ensure that in the event of default, the lender would be unlikely to lose money. However, the lender is not providing investment advice.
Many Investors Ignored Cash Flow — Expecting Capital Gains to Shore-up Negative Cash Flow
In 2022, more than half of buy-to-rent new condos in Toronto were cash flow negative. Negative cash flow occurs when a landlord pays out more cash to cover the mortgage, utilities, property taxes, and condo maintenance fees than they receive in rent from their tenants.
Over 80% of new condo investors in Toronto are estimated to be losing money on their rentals.
If they were cashflow negative in 2022, they are likely to be deeper in the hole in 2024 because inflation has raised maintenance and utility costs, and the costs of city services have also risen with inflation.
In February, Toronto's city council approved a 9.5% property tax hike, and Vancouver's council approved a 7.5 % increase.
Mortgage rates today are much higher than in 2022. A Reuters article from July 17 claims that many Canadians are choosing to sell their homes as their rate renewal date approaches, and they recognise they will be when faced with significantly higher mortgage payments.
There are record numbers of condos for sale in Toronto, and Vancouver is just a little behind.
Metro Toronto condo apartment listings break records
Vancouver condo listings are almost 50 percent higher than in recent years
The truth is that for many different reasons, people are selling properties:
People who bought pre-sale and hopped for a quick flip.
Canadians who bought a loss-making rental, banking on a large enough property price increase to cover the operating losses.
First-time and repeat buyers who underestimated the total cost of ownership and the impact of mortgage rate increases on the lifestyle.
People generally made decisions that underestimated future mortgage rates and overestimated future price growth. They also took on significant risks that experts would have said were likely to happen, like mortgage rates returning to the long-term average, but they were under the impression that the risks were very unlikely.
Metro Toronto condo apartment values are trending downward
Vancouver condo apartment values are begining to drift downward
With high prices and borrowing costs, the market has frozen up. In one way, this shows that market and economic fundamentals matter and that prices can not rise indefinitely due to population growth.
Canada has increased its population dramatically in the past few years and has been unable to put a floor under home values. There are limits to what ordinary Canadians can pay in housing costs — whether they buy or rent.
Canada's population grew by 3 million in 3 years
The Solution
People need a trusted advisor who gives unbiased advice and does not have commissions or compensation linked to completing a transaction, buying or selling a home.
Real estate agents, loan officers, mortgage brokers, and real estate lawyers only earn a fee or commission if you complete a purchase or sale, so they are conflicted. They are much less likely to tell you to wait a year or to look for a home in an area of the city, province, or country where they can’t help you complete the transaction.
It helps people make better property-related decisions, coordinate real estate professionals, and objectively assess the performance of their property portfolios, even if they have only one property.
