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THE DIRECTION OF HOUSING IS DOWN… IN SIZE, NOT VALUE

 

 

This brief article synthesizes what a couple of demographic changes and economic events will mean to the real estate investor in 2013.

A 2013 Recovery

US recovery is happening but it is happening slowly. Averting the potential damage from the Fiscal Cliff has an extremely positive impact on real estate generally and has also had a positive impact on the Canadian Economy, which translates into a positive impact on real estate.

Gains are modest in most markets. This will continue to NOT be a flipper’s market characterized by high and quick returns. Investors in the residential market will generally see some reasonable monthly income and gradual appreciation. Investment pundits remain confident that real estate returns will continue to out-perform fixed income assets and offer stability in the wake of the ups and downs of the stock market. With a forecast of interest rates remaining historically low, the investment in real estate assets will remain a solid choice.

Our Real Estate Market Does Not Operate In Isolation

Global events continue to put the brakes on too much excitement in the real estate market. Wherein the biggest global impact on the Canadian economy is definitely the happenings in the US, world economic crises affect the confidence in Canada and the US. The instability in Europe, does however, lend itself nicely to benefitting Canada’s markets by positioning it as a safe haven for foreign investment. “The world’s problems actually benefit our real estate”. With Europe’s economic issues, China’s economy sitting at an export slowdown and the US not dealing with its debt, the investor is wise to keep an eye on world events because they can turn the direction of the market on its ear.

Shrinkage Will Happen

Real estate investors must remain innovative and adapt with the changes. Large scale projects are taking a back seat to smaller ones, boomers and the Y-generation are re-shaping the needs of the tenant and buyer and commercial tenants have expectations rooted in technology and environmental concerns. Builders should consider smaller units for both residential and commercial real estate, especially those located next to rapid transit. The desire by Gen-Yers to be close to work and play mean the willingness to compromise on space in order to keep rent and mortgages manageable. Even in larger homes, multi-generations pool resources to live together resulting in less personal space. Even commercial space trends towards less with a higher proportion than ever before being comprised on online sales.

How Low Can You Go?

How many years have real estate professionals been predicting that rates will go up soon, for how long can they stay this low? Each year for nearly five years, they have stayed low. One year, pundits will get it right but with the Canadian economy mimicking “50 Shades of Grey” by being tied so intimately to the US economy, we may be remiss in thinking that 2013 is the year of rising interest rates. The tortoise-like recovery in the US and the printing of money by the US reserve leads industry professionals to believe that rates will stay at these unprecedented lows until at least 2015 in the US. It is highly unlikely that Canada would not follow the lead of the US on this. To speak in relative terms, Japan’s rates have remained rock bottom for 20 years, not to disregard the fact that so has its economy. It’s no coincidence. Yet, investors must keep in mind that these historically low rates in Canada and the US should be enjoyed but should not be normalized. Advice from the real estate field is to “lock in low mortgage rates [and] assume long-term mortgages.”

Best Bets for 2013

The Urban Land Institute in its annual publication of Emerging Trends in Real Estate (2013), outlines investment prospects by asset class for the calendar year and finds that the BEST investments will be those in the private, direct real estate market (investors purchasing their own properties), followed by publically listed property company REITs. Following in the Fair category in descending order are publicly listed equities, publically listed homebuilders, commercial mortgage backed securities, and finally investment grade bonds .

Some markets will see a build- up of demand from continued net migration, (particularly in areas with job growth and wage increases that are attracting immigrants from overseas) and Gen-Yers leaving their parents’ home. Many of these markets will be well-served by the multi-family market. Invest in economically diverse cities that weather the storms of industry specific downturns and attract workers from other countries, or parts of the country. Focus on areas that are attractive to the Y-Generation (such as near transportation, jobs, and entertainment hubs) and supply them with the amenities that suit them (such as communal meeting areas, high tech features, and environmentally conscious attributes). Cities with energy and high-tech industry drivers are anticipated to do well in the near term.

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