Do the math: Canadian real estate market will not crash
by Mark Weisleder, lawyer, author and speaker to the real estate
The doom and gloom stories have started again about the Canadian real estate market. Here are some signs:
Canadians debt to income ratio is at 160 per cent, which means $1.60 or debt for every $1 of income;
Canadian real estate is 20 per cent overvalued
In Toronto, too many condominium units are coming onto the market. If there are no buyers or renters, prices will fall.
If interest rates rise 1 percentage point, many of those with a mortgage will be in trouble.
Canada is not creating jobs as quickly as the U.S.
I see it another way. If you look at the market fundamentals, you can conclude the real estate market is extremely healthy.
I spoke to Brad Lamb, one of Canada's leading real estate brokerages, who has developed projects in Toronto, Ottawa, Calgary and Edmonton. You would expect him to put a positive face on things, but here are his arguments why things aren't what they seem.
1. No place to build low rise homes anymore
In 2001, 30,000 new homes were built in the GTA, of which 22,000 were low rise homes and the rest were condominiums. Buyers were able to find new detached homes in the GTA in areas such as Mississauga, Oakville, Oshawa and Milton. However, as land became more expensive and more greenbelts established across Ontario, the result is not enough land available to build that many low rise homes. As such, for the last few years, we have seen the opposite; 22,000 new condominium units every year and 8,000 detached homes being built. But we still have the same number of buyers coming into the GTA, who need to find a home to work or raise a family.
2. There are few apartment buildings being built anymore.
Due to the rent control laws, it has made more sense for years for developers to build condominiums instead of rental apartments. Yet young people entering the workforce still need a place to live. That is why the vacancy rate for new condominiums in Toronto is still close to 1%. If the units are filled with tenants or owners, prices cannot crash.
3. Will interest rates go up at all?
For the past 4 years, banks have been saying that rates should begin to rise within 18 months. Same story today. Although it is true that governments cannot by themselves influence interest rate policy, the fact is that most of the countries in the world have so much debt that they would likely go broke if interest rates rose, so this is the number 1 reason why this will not happen. In addition, rising rates go along with an overheated economy. Canada is very far from being over-heated, with growth averaging about 2% the last few years and likely to remain the same.
4. The debt to income ratio is a misleading statistic.
When analysts comment on the 160% ratio between debt and equity, they do not distinguish between credit card debt, which Brad likes to refer to as "stupid debt" and mortgage interest debt, which is the interest you pay on your home or on investment properties.
With interest rates at historic lows, most Canadians are able to carry the cost of their own mortgage debt and the rental income from their investment properties in most cases pays for all of the property expenses. If these analysts would do the right thing and separate out the good debt of Canadians from the bad debt, we would be nowhere near any dangerous debt levels in Canada.
Do the math. Canadian real estate remains one of the best investments out there.
Mark Weisleder is a lawyer, author and speaker to the real estate industry.