Don't hold you breath for the Investors Condo sell-off.
Buy to Rent Market is a bubble about to burst. There’s no question about it - mortgage costs are rising, lenders are slashing their loan books and all those greedy landlords are about to get it in the neck.
This is the typical view of many outside the property world and quite a few with a good deal of insight into bricks and mortar – but I’m not so sure.
The theory is that with house price falls starting to register, Listings and Assignment of Purchase Agreements will start selling/posting up en masse, and one of Canada's most loved and hated get-rich quick bubbles will go pop.
Too many landlords chased capital growth, speculating on easy profits, is the bears’ theory. And when these misguided hopefuls can no longer justify subsidising tenants in a property falling in value, with mortgage costs going through the roof, they will jump ship.
Of course, Investor cheerleaders dispute this in the strongest possible terms. Buy to Rent is in good health, they claim, and landlords will see falling prices as a buying opportunity.
There is however, another side to the story. And that says both the bears and the bulls have their points, but the great Buy to Rent sell off may not arrive. Buy to Rent is facing its first serious bout of tough times, but amateur landlords might be more resilient than people think.
And there’s a big reason why – pensions.
A number of favourable factors are credited with helping Buy to Rent take off since its conception more than myriad decades ago - low interest rates, lenders exploiting a new market and a decades-long house price boom. Constant and continuing immigration to Canada and especially the Golden Horseshoe, namely Toronto. But one factor that is often overlooked is the public’s complete lack of faith in the financial services industry and the Government.
Often, the only substancial asset at retirement is the Principal Residence, allowed to accrue value Tax Free. Imagine if you had bought a second property, You can with draw equity at any point in time to add a second or third investment, or pay a college tuition. There are no taxes payable till it is sold.
‘My property is my pension’ is an overused phrase and a philosophy that has distorted the Canada's housing market. However, people didn’t arrive at this conclusion without having already lost all retirement hope elsewhere.
Endowments, pension scheme collapses and poor investment management; excessive bonuses and out right fraud have created a culture where the public doesn’t trust the experts with its cash. This mistrust is so deep, that people don’t even have much faith in the banks anymore.
Rightly or wrongly, many only trust themselves when it comes to investing, and the Buy to Rent boom created the perfect vehicle for the paranoid investor. A property is a tangible asset – you can walk around it, improve it, decide who manages it and even decide who lives in it.
If you have made a substantial return on your investment over recent years - as many Buy to Rent landlords have - common sense says prepare to sell now. The property market has peaked, favourable capital gains tax changes are in place and refinancing properties has become a lot more expensive, as the average loan tops 6% and arrangement fees run into thousands.
However, while those who bought recently, or opted for new built condo apartments, may find continuing with their investment unsustainable, many others will not.
If you bought a condo that cost $200,000 five years ago and it is now worth $280,000 you won’t have problems with loan-to-value, your rent will comfortably cover the mortgage and a 10% drop in prices doesn’t sound too worrying.
What else will deliver $150 per month on top of the mortgage cost into your bank account. And where do you put your $80,000 capital gain, if you don’t trust the professionals?
Even those barely breaking even or losing money may take some time to jump ship. As a paranoid investor, where do you put your money instead? That $100 per month subsidising tenants would only go into a pension you mistrust instead. The Canadian home-owning psyche says there will be a lot of people out who will continue to put money in, even as prices dip, on the basis that in 25 years time that property will be worth more.
At the moment, smart money is piling into commodities and emerging markets, Warren Buffet recently made some huge investments, but the man on the street will take some convincing to swap bricks and mortar for wheat, gas or stocks.
The easy credit that fuelled the Buy to Rent boom is gone, house and condo prices have peaked and property sentiment has shifted. Without a flood of new entrants, the Buy to Rent market will run out of steam fast as new blood is essential to any market. But don’t hold your breath waiting for the big sell-off – it may not arrive as fast as predicted.
Lets look at a specific example; I am talking about prudent risk analysis. You can buy a brand new condo in Downtown Toronto asking between $400 - $600 per square foot. These range in size at an average 0f 650 to 900 square feet. But is everyone a tenant for a one bed plus den or a two bedroom plus den? Where are the three bedroom units?
There are stable existing (albeit older established) condos that are priced in the almost $300K that are 3 bedroom units up to 1,600 square feet. Will they find a tenant? Would someone rent at $1600 per month? Absolutely. These are units that are priced at $180 to $200 psf. Is that a better deal?
Examine the financial proforma's and forecast statements for yourself.
What if they don't pay? What if they damage the unit? What IF??
What if you do nothing? Then you will have nothing.
But that is just my opinion.