House Prices: Too Expensive?

Rev N You Man

We skipped May – we really weren’t sure what to write about. When we began the newsletter 14 months ago we anticipated that by now we would have purchased at least one more property, probably two. We felt like we had only old stories to tell. We want to share the juicy lessons from the past, but we also wanted to be current and relevant.

The reality is that life has gotten in our way a bit. With Dave venturing into the world of mortgage brokering, Julie traveling at least a week of every month for her day job, and wedding plans commencing, it just doesn’t seem like there is enough time to properly dedicate to a purchase decision. And then, there is the fact that finding a property that makes financial sense is very hard right now (house prices are so much higher than a few years ago!). Does buying real estate make any sense right now?

Dave often likes to remind everyone that Canada’s house prices are still cheap relative to much of the rest of the developed world. And even though we haven’t expanded our real estate portfolio in the last 14 months we have not stopped learning so there are still lessons to share.

If you think a house in Toronto is expensive, Try Shopping for a House in Moscow

by Julie Broad
Moscow is the most unaffordable place to live in the world with London coming in a close second in the recent survey by Mercer Human Resource Consulting. The survey considered costs on everything from a loaf of bread and a litre of milk to the cost of a movie ticket to assess the living costs. So, when you think things are getting expensive in Toronto (ranked 82nd), Vancouver (ranked 89th) or Calgary (ranked 92nd) remember it could be much worse.

Canadians, and even Americans should be holding tight to their homes as we look internationally at the 2007 Demographia survey on international housing affordability. A home in Canada is one-half as expensive relative to incomes as in Australia, where housing is the most expensive (with New Zealand, Ireland and the U.K. following close behind).

Looking for the larger affordable housing markets in Canada, relative to income? Look no further than:

* Regina, Saskatchewan
* Quebec City, Quebec
* Winnipeg, Manitoba
* Saskatoon, Saskatchewan
* Ottawa, Ontario
* London, Ontario
* Oshawa, Ontario.

On the opposite end of affordable housing, Canada has two cities in the world’s 25 most unaffordable cities – Victoria and Vancouver, BC. And maybe I am biased, but I think the climate and scenic beauty of these two cities justifies their existence on the high end of the scale. It’s no accident that these two cities are up there with those in California, Hawaii, and Sydney, London, and Perth. They are places that people from all over the world desire to call home. I know that Winnipeg and Saskatoon have their own beauty as cities, but you have to have thick skin to get through the winter. As far as we are concerned, you can’t beat mountains, ocean and temperate climate while living in this great country we call home.

So, given the fact that some cities (e.g., Vancouver and Victoria) are getting too expensive to buy and hold revenue properties, how does this help the real estate investor? Read on and hopefully we’ll shed some light.

Where, what, and how to buy a house in a heated market

by Dave Peniuk

Where to buy? Right now may not be the best time to buy in markets that are (or have been) extremely hot such as Vancouver or Victoria. As Julie mentioned above, these markets have seen double digit growth in the last few years, as have many other markets in Canada (Edmonton, Saskatoon, Toronto etc.). As with the stock market, it is not always advisable to buy high. That being said, markets that have a lot going for them, (Oil and gas in Alberta, Economic Center of Canada in Toronto, Temperate Climate and scenic beauty on BC’s coast), may not give you huge returns, but they’re pretty safe bets over the long run because people will want to live there (for jobs and/or for lifestyle reasons).

So, where do you buy revenue properties? Well, you can look to the cities Julie mentioned above. Most of them are solid cities with good employment opportunities, have been growing, and are much more affordable than in Alberta or BC. But, if you are looking to those areas, or any area that you do not live, make sure you find a fantastic property manager in advance! They can advise you as to rental rates, good areas and also help rent out your new investment for a smoother transition. Also research the fundamentals of that city. There are good reasons why many cities remain affordable, and sometimes that reason may also be a reason not to invest in that city.

What to buy? As we have discussed previously, what you buy is really based on your objectives. Do you want cashflow? Do you want appreciation? Do you want a property that is fairly easy to unload (sell) if times get tough? Personally, I have been looking at middle income duplex’s and homes with nice basement suites in middle income areas. Why? Because nicer properties attract “generally” better tenants, will bring you higher rent, give you less headaches, and be easier to sell. Of course, nicer properties cost more too. This brings us to how to buy in a heated market.

How to buy? With Canada’s increasing housing costs, the government (and lenders too) have introduced programs and legislation to make purchases still possible for many buyers who may not have been able to afford a property even a few years ago.

1. The government passed legislation for only 20% down payment for conventional (uninsured) mortgages;
2. A third mortgage insurer has come to Canada, providing more competition;
3. Some lenders have introduced up to 90% loan-to-value financing for rental properties;
4. Some lenders are allowing up to 80% rental income to help qualify buyers;
5. Amortization can now be stretched to 35, and in some cases, 40 years.

Many of these new programs may help purchasers buy property, either owner-occupied and/or rental properties, but there are still techniques that may help you purchase in this market. For instance, using joint ventures, partnerships, and financing a little more than necessary to offset negative cashflow for the first few years may help you purchase that rental property that you couldn’t afford to buy (or carry) otherwise.

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