The Future Landscape of the Canadian Real Estate Market

The Canadian real estate landscape is undergoing dynamic changes, presenting new opportunities and challenges for investors. We recognize the value of diverse perspectives in shaping a well-rounded view of what the future might hold so we sat down with Nick Hill Partner at Landbank Advisors and Host of Canada's? #1 Real Estate Podcast, The Canadian Real Estate Investor.?

Here’s what he predicts going into 2024.

This past year has been one of volatility and change for Canadians. One of the fastest and most aggressive rate hiking cycles in history has put an end to the ripping bull market we experienced for the last few decades. Real estate was an easy guaranteed investment with low interest rates and year over year appreciation that didn’t make sense, all of this only exacerbated by the behaviour during the pandemic.??

The tables have turned; the game has changed. It’s now back to understanding and abiding by the fundamentals of proper real estate investing.??

So what’s in store for 2024 & how can investors adapt to these changing market conditions???

The first thing is liquidity, liquidity is key. Having cash to deploy will be more important in the coming quarters than it has been in the last several years as the lending environment has tightened. Having cash will allow you to have staying power as well as the ability to scoop up distressed deals from over-levered speculators. If you don’t have cash, sell any non-core or non-performing assets and increase liquidity.??

The second is to reanalyze your investment thesis. What worked in the last few years may not work anymore. Opportunities in major markets across the country (GTA, Lower Mainland Vancouver and even Calgary) are hard to pencil out and we are seeing cap rates in the 3-4% range. Why would you buy as an asset when a GIC is less risky and has a better-guaranteed return? It’s time to get creative and look at the data. Look to secondary markets that are seeing high population growth through international immigration or interprovincial migration.?

From a financing perspective, there has been a major increase in sellers offering VTBs, vendor take-back mortgages, also known as seller financing. This is where the seller will hold a portion of the mortgage, so it is easier for the buyer to qualify. For years, VTBs were essentially unheard of in the small cap investment market, now it’s the latest buzzword for investors. In certain secondary markets, you are still able to purchase cash flowing assets below replacement cost. This is an immediate win on the way in.??

Another growing trend which has recently been incentivized by the federal government is the construction of purpose-built rentals (PBRs). It was recently announced that the annual limit for Canada Mortgage Bonds is being increased from $40 billion to up to $60 billion. This change is the next step in the government’s plan to build more homes, faster, and will ideally unlock low-cost financing for multi-unit rental construction. This new measure will help to build up to 30,000 more rental apartments per year.?

This change coupled with the elimination of the 5% GST for constructing new PBRs, and the contemplation by some municipalities to reduce or eliminate development charges, is poised to create a significant positive effect. This shift is anticipated to benefit small to mid-sized developers aiming to leverage CMHC's MLI select program for optimal financing and the longest available amortizations.

Finally, we’ve seen major municipalities, such as Toronto & Vancouver allow for changes in zoning where single family homes are now allowed to be converted into multi-unit residential properties. In Canada, we have more square feet per capita than almost anywhere else in the world outside of the USA and Australia. Simply put, we have very large houses here. This presents an opportunity for savvy value-add investors to buy these properties, and increase the density and use case for the properties. In Toronto, non-profit groups like Rehousing.ca have developed a catalogue of the most common types of housing in the city and a guide to convert them.??

Canadian Real Estate is about to go through a renaissance period where investing fundamentals like adding value, creative financing and delayed gratification are going to be key to any investor's success in 2024 and beyond.