It would really help housing affordability if real estate investors take a break.
There’s a sign this is happening as we head into a crucial period for housing. When readers of the Carrick on Money newsletter were recently asked about the overall best place to invest, just 1.7 per cent of the 1,986 participants selected real estate. A diversified portfolio of stocks and bonds was chosen by 61 per cent, while all-stocks portfolio was picked by 30 per cent.
The best investment choice for the most people is undoubtedly a diversified portfolio and, if you’re under 40 or chill with stock market risk, all stocks can work well. But the lack of enthusiasm for real estate is a surprise. How many hundred times have you heard someone you know utter the phrase “investment property” in the past five years?
Investors accounted for 30 per cent of home purchases early last year, according to Bank of Canada data. Recent weakness in markets such as Vancouver and Toronto suggests less demand from investors and other buyers, and therefore less support for prices that many would-be buyers find unaffordable.
When you look at the May data for the Greater Toronto Area, the minus signs really pop. Detached home prices fell 3.2 per cent year over year, semi-detached prices dipped 2 per cent, townhouses fell 5.6 per cent and condos dropped 2.4 per cent.
But all of these declines still left the average resale home price in Toronto just under $1.2-million, a number that highlights how hard it is to afford a house in the country’s biggest city. The most recent housing affordability report from RBC Economics summed up the state of the national housing market recently as the “toughest time ever to afford a home.”
High mortgage rates are one aspect of housing affordability that will improve as inflation eases and the Bank of Canada continues a cycle of rate cuts that began earlier this month. Some housing market experts see people entering the market as mortgage costs fall, but a rush of buying would quickly offset the benefit of lower rates. A strong investor presence in the market in the second half of the year would not be helpful in this regard.
The lack of enthusiasm about real estate in our newsletter survey comes at a time when housing prices are still off their early 2022 peaks in many cities. Survey participants were asked about what investment produced the worst results for them and real estate was the fourth-ranked choice at close to 7 per cent.
One-third of people said bonds produced the worst results for them, while one-quarter chose stocks and 7.3 per cent said guaranteed investment certificates. Diversified portfolios were chosen by 6.2 per cent, gold by 5 per cent and crypto assets by 2.7 per cent.
Bonds have been a sharp disappointment because they lost money in two of the three past years, a shocking result from an asset that’s expected to add stability to investment portfolios. Real estate has had some issues as well in the past 24 months.
The flipping strategy has flopped – you need a fast-rising market for that. Income investors have been stretched by high mortgage costs that make it hard to generate a net return after paying all landlord costs. Broadly speaking, the old narrative that home ownership always delivers a financial reward has broken down for people who bought in recent years.
Looking ahead, multiple uncertainties weigh on the housing market. How far will mortgage rates fall? How will immigration affect demand? Will governments deliver on promises to jolt new home construction? One thing we know for sure, and this applies as much to bonds as housing, is that distress equals a buying opportunity.
If housing prices fall from current levels, real estate investing starts to get interesting again for people willing to wait out a recovery. Investors helped give us this overpriced housing market, and they might just lead a rally from any declines ahead.
As for bonds, they’re a solid buy-low opportunity for patient investors. As ever, a diversified portfolio of stocks and bonds is the best way forward.
Are you a young Canadian with money on your mind? To set yourself up for success and steer clear of costly mistakes, listen to our award-winning Stress Test podcast.
