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Why Invest in real estate?

Why Invest in real estate?

Investing in real estate in Canada is a topic that ebbs and flows in popularity, much like other subjects of interest. A look at Google Trends over the past five years reflects this cyclical nature.

But beyond trending topics, those who have consistently invested in real estate over the long term have built significant wealth, regardless of economic fluctuations.

In recent months, for instance, we’ve witnessed the interest rate of the 5-year Canada Mortgage Bond drop from 4.12% in early September to 3.54% on December 14, 2023.

This decline sparked optimism among many property owners and investors, hoping that this trend might continue into 2024 and 2025. If so, it could make financing new property purchases or sales more accessible due to lower interest rates.

This perspective isn’t without merit. In theory, lower interest rates should pique the interest of real estate investors. However, real estate investment should be a continuous endeavor, irrespective of fluctuating interest rates.

So, why should one consider investing in real estate in Canada?

There are always sellers that need to or want to sell for different reasons (old age, partnership dissolution, they need to move, retirement, tired of investing in real estate for various reasons, etc.) , but why would multifamily real estate investors want to invest in Canada?

1 – Stable Market with Growing Population: The Canadian real estate market is robust and stable. There’s a consistent demand for multifamily properties, especially as Canada’s population, which has nearly tripled since 1950, continues to grow. This trend is projected to remain positive over the next 30-50 years according to UN projections, indicating an ongoing need for housing.

2 – Tax Benefits: Investing in rental properties in Canada comes with significant tax advantages. The current tax code allows deductions for the interest portion of mortgage payments, operating expenses, and renovation costs. These incentives make real estate an attractive investment option.

3 – Hedge Against Inflation and Currency Debasement: With the Canadian Federal deficit at approximately 1.2 trillion dollars

and a growing money supply (a 5X increase since 2000), the value of real assets like real estate tends to rise. This inflationary trend means that real estate can serve as an effective hedge against the diminishing purchasing power of currency.

4 – Investment real estate ownership as a business: An apartment building is, in essence, a standalone enterprise. If you own multiple buildings, you’re essentially managing multiple businesses. The key to success in this venture is tenant satisfaction. Investing in your properties, enhancing living conditions, and improving rental income not only benefits the tenants but also increases the value of your investment. Therefore, astute real estate investors who prioritize their tenants can create significant value in their portfolio.

In conclusion, real estate investment in Canada offers a unique blend of stability, tax benefits, protection against inflation, and the opportunity to grow a business. It’s an investment avenue worth considering for anyone interested in building long-term wealth.

CategoriesUncategorized

The Evolution of Interest Rates: Implications for Real Estate Investors

Historically, understanding interest rate trends and cycles wasn’t deemed essential for multifamily or real estate investors. After all, interest rates had been on a consistent downtrend since the 1980s. However, this complacency, in retrospect, may have been slightly misguided.

Real estate investors, especially those in the multifamily sector, must now turn their attention to the macroeconomic shifts impacting interest rate landscapes. The forthcoming decades could very well differ from the patterns we’ve grown accustomed to over the past two decades.

It’s said that hindsight is always 20/20. While events prior to 2010 fall outside the purview of this discussion, it’s worth noting that even a cursory look at Economics 101 reveals a fundamental principle: when supply rises, prices will only increase if demand outpaces supply growth.

Take, for instance, Canada’s National Federal Debt. Since 2010, it has escalated from under $600 billion to over $1.3 trillion as of October 2023. A surge of over 100% in bond supply would typically result in higher yields.

Yet, contrary to expectations, interest rates for these bonds decreased during this period. For context, 5-year bond yields in Canada, which stood at over 3% in 2010, plummeted to a mere 0.38% by October 2020. This defied conventional wisdom and simultaneously led to a reduction in mortgage rates.

What’s the relevance of these developments for real estate investors?

Consider a hypothetical scenario wherein 5-year mortgage rates for multifamily loans had a spread of 100 basis points over the bond yield. A borrower between 2010 and 2020 could have witnessed an enhancement in their borrowing capacity by approximately 46%, solely due to the decline in mortgage rates from 4% to 1.4% – and all of this assuming consistent property value and net income.

However, the dynamics have shifted dramatically post-2020. The Bank of Canada, mirroring steps taken by its global counterparts like the US Federal Reserve, began a cycle of rate hikes, raising the Overnight Policy rate from a mere 0.25% to a staggering 5% by July 2023. The purported rationale? Combating inflation. While central banks maneuver short-term rates, long-term bond yields, like the US Treasuries, or the 5 year Canada Savings Bonds are determined by the bond markets.

With the US National Debt at over $32 trillion and Canada’s at $1.3 trillion by Q2 2023, unchecked fiscal spending casts a shadow on the future. If this trajectory continues, a resurgence of lower interest rates seems implausible, particularly with anticipated inundation of bond markets due to government issuances.

So, how should real estate investors navigate this new terrain?

The key determinant of real estate value in this new paradigm will be net operating income. Previously, mere possession of a property and favorable interest and capitalization rates guaranteed appreciation. However, in an era of rising interest rates, if a property’s net operating income doesn’t evolve in tandem with interest rate spikes, its value will inevitably diminish. This fundamental shift necessitates a recalibration of strategies for all stakeholders in the real estate investment arena.

CategoriesOpinion

Is Real Estate Still a Worthwhile Investment?

A notable pattern I’ve frequently observed within our real estate market is the constant vigilance of a select group of individuals and investors, all poised for new acquisition opportunities. However, some prospective clients, taking cues from renowned investors such as Warren Buffett and the advice of their bankers or accountants, harbour reservations about further committing to the real estate sector. In fact, Warren Buffett has even called real estate a lousy investment.

Link : Warren Buffett Says Real Estate Is a Lousy Investment: Why He’s Wrong | The Motley Fool

Nevertheless, when we step back to examine the bigger picture, the narrative shifts dramatically. In 1963, the average house price in Canada was $15,229 (source: untitled (publications.gc.ca).

Canada’s inflation rates have fluctuated in the years since, with the average annual inflation rate being 3.87%, and the median rate, 2.71%.

Source: Inflation rates in Canada (worlddata.info)

What should a home bought in the 1960s be worth today in Canada?

A pertinent question for real estate investors arises: If a house was bought at the average Canadian price in 1963, what would its value be in 2022? The calculations, based on the aforementioned inflation rates from 1963 to 2022, lead to a surprising answer. The projected average house price for 2022 stands at $135,968, a stark contrast to the current real average home price in Canada of $664,936 (source: CREA | National Price Map ).

So, what can we infer from this significant disparity? Why has the average home price increased 44-fold in Canada since 1963, while the inflation data suggests it should have risen by around 9 times? Explanations often involve theories of supply and demand, declining interest rates, urbanization, foreign investment, and economic growth. However, these interpretations don’t entirely account for the observed reality. The key to understanding this discrepancy lies in analyzing our money supply.

The money supply analysis and explanation

The money supply – which comprises the new currency introduced into the economy – has experienced a dramatic surge, as indicated by the M0, M1, and M2 charts (see below). In other words, our currency has been debased, or diluted, due to the influx of new money into the system.

M0 Money Supply

M1 Money Supply

M2 Money Supply

Conclusion

Returning to the initial question: Is investing in real estate worthwhile? The answer depends on whether the investor wishes to keep pace with this economic currency debasement. If so, real estate investing becomes an effective safeguard. Not only does it present a means to build wealth over time for one’s family and future generations, but it also serves as a potent defense mechanism against currency debasement.

Québec

Baron Realty / Immobilier Baron
400 – 6500 Transcanadienne
Pointe-Claire, Québec H9R 0A5
Telephone: 514 932 9000

Ontario

Baron Realty, Brokerage
303-225 Duncan Mill Road
Toronto, Ontario M3B 3K9
Telephone: 416 301 3931

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