So many Canadians are finding themselves nowhere near being able to afford a house, despite being at or just past the age where there parents and grandparents were becoming 1^st-time homeowners. We live in a very different world now and these people have the unfortunate reality of being young adults at a time when salaries and wages are not keeping up with inflation or the price of housing in Canada. Why fewer people than ever before are able to afford a home – even a starter – has been covered at length in the media and to a lesser extent here too.

People who do have a sufficient nest egg saved up for buying a home but don’t want to purchase something at a price that may make it have negative value in the future have options. One of them is to invest that money in a REIT – a real estate investment trust. These investment groups have for the most part been very successful in Canada and America because in both countries the value of real estate can be relied upon to appreciate significantly. When your money is invested in one that makes smart calls about where to invest in real estate, it can net you the return you need to buy a home down the road.

This, along with the affordability challenges facing many would-be buyers, is something that we can relate to here at Real Estate Leads, and in the same way we know that generating new clients can be similarly challenging for new agents. That’s why we are so keen to promote our online real estate lead generation system to any new real estate agent who is eager to do everything they can to make their career profitable as soon as possible.

But back to our topic and why investing money in a REIT may be a good choice for clients who can’t get into the market but feel they still want to make an investment in real estate.

Fave of Yield-Hungry Investors

For decades now REITs have been preferable for yield-hungry investors because they provide steady dividend income and tax benefits. There is a lot of insider belief right now that it is an opportune time to invest in REITs amid rising inflation, record capital flowing into the property sector and tight real estate supply. Of course there is risk, but there always is to some extent. But we need to remember we are in an inflationary period and historically real estate investments have performed well in inflationary times.

The stats certainly bare out that’s where we are right now with Canada’s economy. The country’s inflation rate climbed 7.5% in February from a year earlier to a 31-year-high, and the Bank of Canada raising interest rates earlier this month was a big part of why that happened. All the while home prices went up 20+%  in February to a record $816,720, and this has not surprisingly left many Canadians priced out of the housing market.

Interest rates can go up because of inflation during an economic expansion, and this is also what we have happening here moving into Q2 for 2022. Along with that rental income for REIT companies goes up too, and the profits then become dividends redistributed to shareholders.

Role of Private Capital

Another very noteworthy reality for 2022 is we have a RECORD amount of private capital chasing real estate, which makes this space that much more attractive to potential investors. Somewhere areound USD $364 billion in private capital was earmarked for global real estate investment over the past year.

The best of REITS if you have the means of investing in them are single-family home REITs, and the reason is simply because most now have double-digit growth in net operating income growth. Need to be convinced of that? Investors who put big money in Canadian residential REITs over the last 10 years have gotten an average 220% return out of that investment. Looking at it from the other end of the equation, homeowners have seen somewhere around an average of a  137% increase in home prices from 10 years ago. Tax measures need to be taken into consideration there, but still.

Long story short – investors can appreciate their wealth through REITs without taking on the costs of a mortgage, property taxes, and home maintenance. Industrial REIT investments are smart too, there are many people who choose to be invested in both.

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Sign up for Real Estate Leads here and receive a monthly quota of qualified, online-generated buyer and / or seller leads that are delivered to you exclusively to ensure you are the only realtor who has the chance to be in touch with these people. People who live where you work as an agent and are likely ready to make some type of foray into or further into the world of buying and selling homes. Either as investors or for people who need the right home for their family. It’s a dynamite way to build up your client base much more quickly than you would otherwise.

If there was any dispute about homes in Canada being valued at more than they are truly worth, there isn’t anymore if a new report from the Organisation for Economic Co-operation and Development is to be taken at face value. Many people will suggest – with some merit to it – that a home is like any other consumer product in that it’s real value is what someone is willing to pay for it. But the real estate market is different and primarily because so much of this country’s GDP is actually in real estate, and that’s to say nothing of all the lesser factors that are factoring in too.

It is also true that homes have their value inflated unnaturally here in Canada simply because new housing starts are nowhere near keeping up with immense population growth, and that is doubly true for cities that are desirable for job opportunities, cost of living, and the natural environment. This is something that is very different from other countries, and very notably our neighbour the USA to the South.

Real estate agents do better for themselves when houses sell for well over asking, but most realtors are also aware of the negative realities of when houses are overvalued and people who would be qualified buyers in any other country are not able to get into the market here. We will also say that most realtors are civic-minded people who realize that home ownership allows people to be more solid fixtures when contributing to a community. Acquiring new clientele can be more challenging these days, and our online real estate lead generation system here at Real Estate Leads is a great way to gain an advantage there.

Back to topic, let’s look what this OECD report is detailing exactly and how it highlights how Canada’s housing market isn’t in the best of health overall with homes that are overvalued. So much so that only one country – the Netherlands – overall has homes that are more overvalued.

House Price to Income Ratio

One of the fundamentals of housing affordability is the house price to income ratio. It’s the ratio of the market price of a typical property based on the share of household income. An upward trending ratio will indicate that prices for homes are outpacing median income growth, and the result then is always worsening housing affordability for the average citizen. If the ration is going down then incomes must be outpacing home prices, and housing affordability is improved as a result.

The OECD created an index for cross-country comparison. By setting 2015 at 100 and the indexed value from that period indicates the changes and variances. An index of 110 would indicate home prices have grown 10% faster than household incomes between 2015 and today. An index of 90 would mean incomes gained 10% on home prices. The hope here is that by measuring the rapidity with which these metrics are changing, the problem can be addressed before it becomes a runaway one.

Surging Canadian real estate prices over recent years are not due to an income boom. The index reached 141.9 in Q4 2021, which shows us that from 2015 incomes trailed home prices by 41.9%. And home prices have more than doubled the pace of income growth over the 20+ years since 2000. It is interesting to note that these house price surges are being seen in most advanced economies. The situation in Canada, however, is different and one needs to keep our smaller overall population in mind first and foremost there.

Canada Outpacing USA

If we look at home prices in the USA it puts the situation in even more pointed perspective. The US house price to income ratio index went up to 130.5 for the 4^th and final quarter for 2021. Since 2015 there home prices grew 30.5% faster than incomes but if we then look at the similar since-2000 number it’s only around 23%.

The important takeaway here is that Canada’s gap between home prices and incomes grew almost 5x faster than the US over the last 20+ years, and that’s not something that should happen naturally. And of all G7 countries Canada has the most overvalued real estate according to this report. The disconnect here is fast growing, and the fix for all of this is something that decision makers in Ottawa are obviously struggling with.

We need to understand further that Canada’s very large gap is due in part to the extent of time it has gone on. Following the central banks overstimulating markets in 2020, price surges have been observed nearly everywhere. But in Canada it has been a different story, starting with bering flagged by the US Federal Reserve back in 2015 for housing exuberance. Home prices have been on an expressway for almost half a decade, and unfortunately the wider this gap becomes, the more difficult it will be to effectively remedy it and make houses more affordable for larger numbers of people.

Which will also promote a better working environment and a more suitable type of qualified-buyer client base for the real estate agents like you who will be reading this.

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Sign up for Real Estate Leads here and receive a monthly quota of qualified buyer and / or seller leads that will be provided to you exclusively. They’re your leads and will not be shared with other realtors, and these leads will be identifying people who live in the same region of the country as you and have shown themselves to be ready to either buy or sell a home there. It’s a dynamite way to get more out of your client prospecting efforts, and for new agents in particular it really is an invaluable digital resource for you.

You wouldn’t know if you only read mainstream media sources, but there is much more to the state of the housing market in BC than just the housing crisis that at the most basic level is based on a huge disparity between the demand for homes and the supply of them. For sure that is as newsworthy a topic if any if we’re to discuss the market here or anywhere in Canada, but other points that are especially relevant at this time are the real estate transaction process and consumer protections.

The need for consumer protections in particular is one that has been pushed to the forefront by the blind bidding trend and people making offers without subject-tos or home inspections because of the fact they have no chance of getting the home if they don’t bid and move to close as soon as possible. This of course is inadvisable in any homebuyer scenario imaginable, but it’s happening more and more frequently in Vancouver and elsewhere in overheated markets in Canada.

Real estate agents are always keen to provide good advice and guidance for clients, but these new realities can have them in a tough spot too. Any dedicated realtor will want to steer their clients in the right direction, but with fewer and fewer prospective homebuyers being qualified to purchase homes it becomes a challenge for the realtor too. That’s why our online real estate lead generation system here at Real Estate Leads is such a good choice for anyone who wants to be immediately put in touch with greater numbers of people truly ready to sell a home, or buy a home.

Back to topic, just a little more than a week ago the BCREA (British Columbia Real Estate Association) released a white paper with the goal of addressing a wide swath of concerns that people in the industry and those who want to enter or move in the market have at this time. Let’s look at it with our entry this week.

5 + 30  

The paper made 5 primary recommendations, and then an additional 30 secondary recommendations. The 4 primary recommendations were

1. Providing buyers with a grace period to research a property before making an offer, which would be accomplished by a mandatory ‘pre-offer period’ of at least 5 business days from when a property is first listed. No offers can be made during this period.

In our opinion this is an excellent suggestion, and much more appropriate than the ‘cooling off’ period suggested where buyers could back out of an agreed-upon home sale after closing a deal.

2. Helping consumers make more informed decisions in multiple offer scenarios by having real estate sector stakeholders collaborate to establish a process that promotes offer transparency for buyers while still respecting privacy concerns.

3. Ensuring immediate access to relevant information is provided to would-be buyers by making property disclosure statements mandatory and available immediately when a home is listed.

4. Mandating all documents related to strata transactions be made available with the listing, possibly to include strata bylaws, depreciation reports, status of contingency funds, strata council correspondence and any Form B.

5. Raising the entry qualifications for new licensees as a means of ensuring consumers are supported by an evolving profession that is evolving and both knowledgeable and receptive to a changing market.

The BCREA also states they believe market conditions are untenable and that long-term measures to create more housing options for British Columbians are very much needed.

Following Recommendations

The white paper also contains an additional 30 recommendations around housing supply issues, better consumer protections in real estate transactions, how the real estate sector should evolve and the proposing of a world-leading regulatory structure.

The aforementioned proposal for a ‘cooling off’ period was a part of what the report was designed to address specifically. Their statement regarding it was that they are ‘concerned that this decision was made without first conducting thorough public consultations with the real estate sector and consumers, a problem statement or supporting rationale’ and of course that is something that we are also very much in line with and imagine that all realtors and many current homeowners will agree with.

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Discussions around the less-than-ideal state of the Canadian housing market will take all sorts of approaches, but one aspect of it all that doesn’t get talked about enough is the way the number of new building starts is not anywhere near what it needs to be if housing supply shortages are to be addressed. The fact that building intentions are once again back in correction territory is yet another piece of news that isn’t a positive for the outlook on Canadian housing. These declines have been consistent, and we’ll talk about how that is and what it can indicate for the future.

What’s most notable about this is that permits issued for new home builds of all sorts are way up from where they were in early 2020, but that doesn’t change the fact that building intentions being down shows that there is less enthusiasm on the part of the builder to build. Is that because the types of housing being promoted by local governments isn’t the type of housing developers would prefer to build? Maybe, but that remains speculation.

Vibrancy and health in the housing market is dependent on a sufficient supply of homes being for sale, and the profitability of a career in real estate is also tied into that. Some realtors may be struggling to cement themselves in their new career choice, and for these people our online real estate lead generation system here at Real Estate Leads comes highly recommended. It is a means of getting a leg up on other realtors when it comes to being first in touch with prospective clients.

Let’s stay on track with the topic for our entry here though, and specifically with how building intentions can be a very different indicator than the number of building permits issued.

Down 11% From Peak

Across residential and non-residential sectors we are seeing building intentions lose steam. In January of this year seasonally adjusted value of permits dropped down to $10.1 billion, an 8.8% dip from the previous month. The highest number there was recorded this past November but is now 10.96% lower than where it was then, and that definitely does qualify as a correction. This was primarily in the residential sector, but if we look at the combined seasonally adjusted value of Canadian residential and non-residential building permits in current and inflation-adjusted dollars we see much of the same trend.

Unprecedented inflation rates are also part of the big picture right here and now in 2022, and inflation in Canada is running so high that annual growth is suffering for it. This affects real estate directly as you would imagine it would given how much of Canada’s GDP comes from real estate (regrettably). Seasonally adjusted real growth took a monthly plunge to the tune of 8.23% in January and March of 2021 seems to be when inflation reached its adjusted peak. Permit values now being 17.54% lower than they were at that peak is not a good thing in any way, shape, or form when you understand that developers build homes to make a profit, as would any business.

Building Intentions Down 18% From Peak

Residential real estate is always going to be where most permit value is found, and these homes are the ones that are behind the large decrease in values. Seasonally adjusted residential building permits went down to $6.72 billion in January, and 11.63% drop from the last month of 2021 and down around 18% from the peak seen in March 2021 as mentioned. A correction is defined as any drop of more than 10% , and so with the number being near double that what we have is something much more drastic than just a correction.

The primary factor in this decline was a sudden lack of enthusiasm for multi-family units, but again consider what we alluded to before – developers build types of homes that are a)  in demand, and b) bring them the largest profit. But no matter whether you agree with that or not, the decline in building  permits does indicate falling intentions for building future. Yes, they are 50% higher than anything seen through or before 2020 but that’s a comparison to excessive demand. There are still many homes coming to market, but enough? Nowhere near it.

Last but not least we need to remember that labour and material prices are up significantly too because of large-scale building over such a short period. This drives the cost of building higher as more homes were built and growth is then accelerated further.

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