Why Real Estate?
Leverage
There’s more leverage allowed with real estate than any other type of investment – banks will lend investors 75% or more of the total value of their purchase, and often at relatively low interest rates. This high-leverage capacity results in a higher-than-average return for investors.
Appreciation
People will always need a place to live. When a property is purchased in a market with a growing population, each year the property will increase in value because more people will be moving to that market and will be driving the demand for housing up. In the same situation, a rental property’s debt owed will decrease over time, as tenants gradually pay down the principal on your mortgage.
Cash flow
Few assets match the cash flow capabilities of real estate, a smart investment will yield a steady stream of income from the outset, and this income will continue to increase over time as the mortgage is paid down and rents rise.
Predictability
Historically, real estate has been more predictable than stocks and has carried much less risk. Have you heard of anyone seeing their property disappear overnight?
Control
Real estate is a tangible asset, thus allowing owners to add value to their properties through improvements and efficient management. Unlike stocks and mutual funds, investors can control their cash flow by actively decreasing expenses or increasing rents.
Protection against Inflation
Real estate returns are directly linked to the rents that tenants pay. As inflation increases, cost of living increases, and rent increases. Thus, real estate income tends to increase during periods of inflation.
Tax advantages
Owning an investment property may provide some tax advantages, including various government tax breaks.
Why Canadian Real Estate?
While the world is in financial turmoil, foreign investors are looking to Canada like never before. Where else in the world do you have a stable government and stable banking system, with a proven supply of resources to maintain the delivery of goods and services efficiently through harsh financial times? More recently, Canada has become a safe-haven for global capital from Asia, Europe and the Middle East. There are many reasons why Canadian real estate is so appealing. Here are the “Four F’s” that put Canada ahead of other countries in stability and growth:
Food
With the devastation of Japan’s land and China one bad harvest away from starvation, the global demand for food is obvious. As our word’s population increases at an exponential rate, the demand for food globally places Canada’s food goods and services in high demand.
Fertilization
Necessary to support the food we consume is the ability to harvest it at maximum capacity. The need for petrochemical plants, potash and natural gas, all products of Canada, is also on a global rise.
Fuel
We know this need isn’t going away any time soon and with comments like US President Obama’s that the US needs to look to their “friendly neighbours to the north”, Canadian oil will continue to be a rich and marketable resource globally.
Forestry
With Japan rebuilding and their desiring for the top 10% of quality lumber, Canada is well positioned to make big bucks in Forestry. This is not to mention China’s huge demand for lumber, or the tariffs that Russia has put on their forestry exports – all favouring Canada.
A US-style real estate market crash won’t happen in Canada
Some people speculate that Canadian Real Estate market is following in the footsteps of our neighbouring country. This however is not the case for a few key reasons:
Borrower Default
US mortgages are “nonrecourse”, meaning that owners who default on their mortgages can just walk away from their homes with no further financial obligations. This is not the case in Canada – Canadians still have the obligation to pay their full mortgage debt.
Tax Laws
In the United States, home owners can deduct their primary residence mortgage interest from their taxes. This encourages home equity loans and “over-leveraging”, usually for discretionary or luxury purchases – not a sound practice in the eyes of those who are financially educated. Conversely, Canadians are not permitted this tax deduction, and hence are discouraged from using their primary homes as “piggy banks” for irresponsible reasons.
Regulation and Government Policies
American lending standards were lowered to encourage people to take out mortgages. This was an overly aggressive strategy to stimulate economic growth and maximize profits for certain large banks. Canadian banks however, have much stricter standards, and they remained relatively tight even while US lending practices loosened in the mid early and mid 2000s. Also, as a reaction to the recent American crash, Canadian bank lending rules have toughened up even further, specifically with the intention of limiting over-leveraging in the real estate market.
The numbers
The sub-prime mortgage market makes up more than 20% of the total mortgage market in U.S., but less than 5% in Canada. Borrower-default in the sub-prime mortgage market is around 8% and growing in the U.S., but less than 0.5% of borrowers in Canada default on their subprime mortgages. The U.S. housing market is ten times larger than the Canadian housing market, so there is also an amplification effect when numbers are reported in the U.S.. When keeping the size of the different markets in context, the Canadian mortgage market is much more stable and appropriately leveraged.
