Investing in real estate is often considered to be a risky endeavor. The stakes are high and the room for error is minimal. However, if you're investing in a stable area that has shown considerable growth in the immediate past, that mitigates at least some of the risk.
As you likely will recall, the United States experienced a real estate boom in the early 2000s, before average housing prices peaked in 2005 and rapidly declined from there. Experts referred to this rapid decline as the bursting of the housing bubble, and it was one of the most economically harmful events in the history of the country. Housing prices fell steadily -- at unprecedented rates -- for several years, and the country is still recovering from that financial catastrophe.
Many of those who had invested in real estate, who likely made a small fortune in the first half of the decade, lost everything they had earned over the course of this crash. For this reason, it is important to understand the circumstances in which a given real estate market is experiencing growth. Sometimes that growth is a legitimate sign of prosperity in the region and should be treated as such by investors. Other times, it is the product of a bubble that will inevitably burst and take a lot of people down with it.
Over the past several years, the real estate market in Canada has shown considerable growth, particularly in a few select urban and suburban areas. Specifically, there have been two areas that are experiencing enormous growth: Toronto and its suburbs and Vancouver and its suburbs, are currently in the midst of historic housing booms.
As reported by the "The Toronto Star," via Royal LePag's House Price Survey: "Toronto is on track to end 2014 as the hottest housing market in the country, with prices likely to rise 8.1 per cent, year over year, outpacing even Vancouver’s anticipated 7.1 per cent climb."
The populous cities of Calgary and Montreal are beneficiaries of booms in their housing markets as well, with high-end luxury houses (houses costing $1 million or more) experiencing extreme growth in the current market. According to the CBC, "more than 30 per cent of luxury single-family homes sold for more than the asking price" in the cities of Toronto and Vancouver. Both of these cities have been cited as the respective epicenters of the Canadian housing boom.
There are several factors that are leading to the historic rates of growth that these major Canadian markets are currently experiencing. Canadian real estate firm Realty Canada cites "strong economic fundamentals, increased consumer confidence and mortgage lending rates that remain at historical lows," as reasons for this stable yet impressive housing boom. Perhaps even more reassuringly, the firm states that "all markets are expected to gain momentum in the latter part of 2014."
As for the future, the experts at Realty Canada are optimistic, but they do not believe that this extreme growth will sustain itself for very long before levelling off and returning to a normal rate of growth.
“Looking ahead to 2015, we expect house prices to track more closely to the rate of general economic growth. That is, we see price increases in Canada’s largest cities moderating, just as our smaller city markets should see a lift.”
It is worth noting that some experts have a far more optimistic outlook as it pertains to the Western Canadian real estate market. Richard Crenian, the founder and president of ReDev Properties Ltd, foresees more opportunities over the new several years. Crenian founded ReDev Properties Ltd in 2001 and has grown it to the point where it now manages 25 commercial properties, primarily located in Western Canada, on behalf of over 2,500 investors worldwide. Opposing Views reached out to Crenian to get his take on whether what’s going on with the Canadian real estate market right now is sustainable.
"Canadians are now investing 14 per cent of their income, up from 12.6 per cent in 2013. This is one of the most telling statistics. The Canadian economy did not take a nose dive like the United States’ economy, so Canadians had a head start in the North American market," Crenian explains. "But the fact that Canadians are investing more today than they were a year ago means the economy is strong, and there is huge potential in the market moving forward.
"I think with the extra disposable income that Canadians have today versus what they had even only a year ago, they’re looking for places to spend it," he adds. "Taking it to buy a lake front vacation home somewhere is what you see a lot of Canadians doing these days."
If we have learned anything from what happened with the U.S. real estate market over the past decade, it’s that nothing is for certain. Investing in real estate is like investing in anything else – you’re taking a chance. That said, all real estate booms are not created equally. They are not all sparked by the same thing, and they don’t all end in the same way. As experts like Richard Crenian contend, what is happening in Canada right now is not the by-product of hasty loans being dispensed like candy and lax regulations; thus, for now at least, it appears as though the market is much more stable than some are giving it credit for.