Executive Summary
The Canadian housing market has historically offered enough return with much volatility over the last two decades. It is the more stable of housing markets around the world and is favored by the changing demographics. From well-regulated financial markets to encouraging immigration policies, Canada’s housing market is poised for surges in demand, given stable supply, and is supported by solid financial regulation. Investors with medium to long-term horizons, as well as people simply wish to enjoy Canada’s peaceful lifestyle, would all benefit from the diverse investment choices. We suggest starting with investing in residential real estate i.e. detached homes and condos.
Why Canadian Real Estate
In today’s low rates environment, and amidst market uncertainty i.e. U.S. Debt Ceiling, Eurozone instability, Middle Eastern political strife, few investments offer solid returns with comparatively little risk. The Canadian Housing Market is a dark horse amongst investment vehicles, historically offering double-digit returns and was hit a little compared to the US during the credit crunch. Besides, the Canadian housing market is on the ropes especially in major cities like Toronto and Vancouver (Pett, 2013). The market seems to be softening an aspect that could make investors opt to invest their money within the rebounding market in the United States. The housing prices in the Canadian market are expected to grow to almost 15 percent by the year 2014 (Pett, 2013). This expectation and trend follow the several years of the declining market in the housing sector in Canada giving the US market a greater opportunity for investors.
John (2013) father says that the economist to the Canadian Imperial Bank of Commerce, Benjamin Tal believes that the market strength lies on the eagerness of homebuyers to lock in the low mortgage rates before any future possibility of rising. By September 2013, sales in the Canadian real estate business were 19 percent higher than in the previous year. Given this trend and the fact that the growth of sales in Canada remains strong, Canada is a great place and market for real estate investment. Investors especially Americans are also looking towards the investment opportunities in Canada because of the Canadian Dollar strength. The major problem with the US market is that the future of its currency could be worse (Pett, 2013). The Canadian market is also favored by the fact that anyone can own property despite his or her citizenship.
Using the United States as a comparison, between 2008 – 2010, the US housing market saw a 40% decline in valuation while Canada only saw a lower decline over the same period (Figure 1). The Canada housing market also exhibits tremendous resilience in that immediately after the ’09 decline, the housing index recovered above pre-crisis levels within half a year. The U.S continued to sink even further.
Figure 1: the United States vs Canada housing prices over the last decade
There are three key success factors that drive the tenacity of housing markets, and the Canadian housing market has historically shown strength in each of these three areas are described below as follows:
Low and regulated mortgage rates
Canadian housing market is highly affected by the low rates and increased regulations in the mortgage market. There are new rules insured via the Canadian Mortgage and Housing Corporation as well as other insurance providers in the private sector. The rules have some effect on homebuyers since it required the buyer to makes less than 20 percent as a down payment in order to succeed in their processes. The maximum amortization period has reduced to 25 years. Canadians are also able to borrow a maximum of 80% based on the homes values (Leong, 2013). The maximum gross debt service ratio (GDS ratio) is now limited to 39 percent while the total debt service ratio is set at 44 percent. Besides, a government-backed mortgage has been established.
Stable employment rates
With a qstable employment rate in Canada, people are able to purchase houses and pay rent in a timely manner. Canada being a developed country has stable employment rate, which makes people have confidence in acquiring mortgages. The mortgage firms also find it secure to issue loans to both investors and house buyers. This aspect increases not only the supply of houses in Canada but also the demand of houses in the market. The demand is also influenced by the population. This makes Toronto have better investment opportunities than other cities.
Encouraging immigration policy
Immigration is highly encouraged in Canada. Investors from the United States are highly encouraged to invest in the housing industry in Canada. Canada does not require any citizenship for one to own property. The only condition is to follow the legal emigration requirements. This aspect attracts investors from the US and beyond (Leong, 2013).
Comparative Investment Vehicles
The Canadian housing industry is full of opportunities initiated by various factors. According to John (2013), recent reports show that the Canadian market in real estate investment is still strong with cities like Toronto, Vancouver, and Calgary indicating solid annual increases. The market stocks are very attractive especially due to the growing strength of the Canadian Dollar. The high prices in the housing market are caused by high population and high immigration rate. Stocks are volatile to a great extend but the returns are high. High returns are caused by the high demand and the low costs of investment as compared to the same investment business in other countries like the United States. The laws and regulations in this type of investment are favorable but pose some risks such as the risk of facing mortgage change rates. People thus increase their present house purchased to avoid the risk of facing future high prices. Bond rates are low with no good returns thereby pushing investors to opt for housing investment.
Diverse Investment Choices
The Canadian housing sector has various choices to invest in. One can decide to invest in condos, houses such as detached houses, apartments, bungalows, or vocational homes. Each of the choices has different benefits in terms of risks, costs, and returns. Dues to risk of uncertainties, people may decide to invest in houses whose demand would not change with time. An example is the investment is rental houses in which investors may not be ready to withstand any future uncertainties. The best choice in this case could be condominium investment. Many individuals would be able to afford it (Canada Mortgage and Housing Corporation, 2013). Canada has an increasing rate of immigrants as well as upcoming families. New employees can only afford relatively cheap houses. Investing in single family in Canada would include the purchase of fixer uppers, foreclosures, or even other properties that are considered undervalued due to their locations. This is done in order for the investors to buy undervalued housed, fix them up and then sell them for quick profits. Investors can as well rent them out to single tenants or single families.
Risks to Your Investment
The risk of investing in Condos include the rising ownership costs in Canada. This high cost of ownership may discourage buyers or tenants. Besides being smaller properties that lowers the cost of investment to the investors, some of the buyers may overlook such houses. Condos may also be limited to certain areas implying that the investor may lack the perceived number of buyers or tenants for rental investments. Again there are many economic uncertainties, implying that the investors may lose their investments or gain less returns. The fourth risk is related to the ability to fail to get ready buyers. As people advance socially and economically, they may be willing to look for a larger and better house (John, 2013 ).
Opportunities and Forecasts
Canada has seen some stagnating trends in the housing sector in the past two years. This aspect has made it difficult for investors to fully restore their confidence in the housing sector investment. The housing sector is a bit scary especially due to the unclear customer needs and expectations. Future trends seem to be attractive with sustained low rates investment. It is also expected that there mortgage rates would decrease in the next few years. The country is fully developed with signs of going through improved employment situations. Such improvements in the employment sector depict a better chance for real estate inventors. Future trends sometimes seem to give mixed signals. Each day has some non-projected trends but the future of the Canadian housing market is generally bright for both local and international investors. Most of the forecast data shows that home prices would be higher in the coming years, a factor that may decrease the demand for new investment structures. Dues to mixed trends in the market for house business and real estate investment, the market seem to be unchanging. Future trends may only be affected by increased immigration policies, mortgage rates, and population growth (Pellegrini, 2013).
Recommendation and conclusion
Canadian real estate investment forms one of the best investment opportunities in Canada. Despite the high risks involved in the real estate investment sector in Canada, the returns are highly attractive. Canada seems to give its neighboring country, the US a great challenge. Such challenges come due to the growing opportunities in Canada. Such opportunities include the growing population, increasing immigration rates, and new regulatory policies that encourage immigration into the country (Thompson, 2013). The demand is increasing further pulling the investors. It is highly predicted that solid sales and prices can calm the storm in the sector and the market. The country has some foreseen risks due to unpredictable economic trends. It is recommended that investors seek investment options as a way of evading the risks. On the other hand, buyers can purchase securities if they are not comfortable with taking risks associated with future prices and rates especially in the mortgage business. Canadian banks can as well take initiatives and take this growing sector as a source of growth opportunity. Bank participation in the investment can highly contribute to the sector’s growth, which could even low the cost of investment and lower the general prices of housing facilities in Canada.
References
Canada Mortgage and Housing Corporation. (2013). Housing Market Outlook – Canada Edition – Third Quarter 2013. Canada Mortgage and Housing Corporation.
John. (2013, October 4). Investing in Canadian Real Estate for the Future. Retrieved from frugalrules.com: http://www.frugalrules.com/investing-canadian-real-estate-future/
Leong, M. (2013, March 16). Mortgages & Real Estate: No longer foreclosure nation. Retrieved from http://business.financialpost.com/2013/03/16/us-housing-foreclosure/?__lsa=4cd4-8e43
Pellegrini, C. (2013, September 04). Why real estate doomsayers continue to be wrong. Retrieved from Financial Post Magazine: http://business.financialpost.com/2013/09/04/canada-housing-doomsayers/
Pett, D. (2013, March 15). InvestingCanada’s source for market intelligence: Despite housing concerns, investing opportunities in Canada and the U.S. abound. Retrieved from financialpost.com: http://business.financialpost.com/2013/03/15/despite-housing-concerns-investing-opportunities-in-canada-and-the-u-s-abound/
Thompson, R. (2013, September 6). How to make money investing in real estate. Retrieved from http://business.financialpost.com/2013/09/06/real-estate-investing/
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