For decades now investing in real estate has been a staple for investors in Canada, and as we all know many of those who invest in real estate in Canada aren’t residing in North America. The propriety of that is certainly an issue of contention among some, but with one Federal Government after another relying on real estate to prop up the country’s GDP we can say definitively this isn’t going to change. Let’s also keep in mind that a good amount of the people who are investing in real estate aren’t deep pocketed or have expansive profiles, while of course many do have both of them.
Over the course of the last 15 years or so it’s been nothing but positive when it comes to real estate investments in the country, and finding ones that didn’t promise to be profitable were few and far between. That sort of positive outlook and enthusiasm has been tempered recently as the market has slowed and many economists believe that Canada may be on the verge of a recession. The prospect of going from what has been a bull market for close to 2 decades to a bear market does have some people concerned about the future values of their investments in real estate.
But it seems that the majority of real estate investors are concerned, but not to any extent that will cause them to really fret or reconsider the investments they have in Canadian real estate. This is of course good news for realtors who work with clients who are often buying real estate in Canada an adding it to their investment profiles, but market downturns of any sort mean less overall activity and that’s a counter to all of that. Here at Real Estate Leads our online real estate lead generation system is an excellent way to keep new clientele coming no matter how the market is currently going.
Let’s get back on track and use this week’s entry to look at why real estate investors continue to have a positive outlook on investing as we get into the back third of 2022 here.
Stable Over Time
Fears of a recession are definitely playing into investor moves, and the bear nature of the stock market is a reflection of that right now. A double-digit tumble for the TSX Composite Index fell has led to real estate taking a big hit, and as we know the purchasing power of people has been curbed big-time by sky-high inflation. Plus rising interest rates have made mortgages expensive, combining with real estate prices that peaked during the pandemic recovery are now going in the other direction. So the question is should real estate investors be intimidated by this bear market?
Looking south briefly for a comparison, in the 20 bear markets that have occurred in the the United States since 1952, real estate values increased in 18 of them. Property prices are in part determined by the health of the economy, and right now house prices are above pre-pandemic levels. Whether they will fall as demand slows and new properties enter the market remains to be seen, and it is true that supply overtaking demand promotes a lot of real estate being for sale. Those who have cash in hand are best positioned with this buying opportunity.
REIT Stock Prices Down / Income First Approach
The stock price of real estate investment trusts (REITs) are down considerably right now, due to the fair market value of their investment property being diminished due to weakness in property prices. REITs with ample cash reserves always use a bear market to buy more income-generating properties. Enhancing their rental income in the future becomes possible with this if they manage to get the desired occupancy rate.
An opportunity to lock in higher distribution yields is created with the steep decline in REIT stock prices, and inflation has increased rent renewal of almost all REITs, which sort of cancels out gains made during the pandemic and the economic realities that came along with it. While REIT distributions remained unchanged, the dip in their stock price inflated the yield.
Recession-Proof Real Estate?
The real estate industry has survived recessions before, but some properties are more resilient than others here. Depending on the recession’s severity, a REIT could see higher vacancy rates, lower rental income, and slow demand. If you’re an investor considering becoming a part of one at this time, you should be looking for REITs with deep pockets, lower debt obligations in the near term, and healthy distribution payouts that can weather a recession. Plus REITs with a rich portfolio of hot properties may well bounce back faster.
Investing in real estate in a bear market will depend on whether or not REIT stock prices might continue their downtrend throughout the recession. Exhausting your remaining Tax-Free Savings Account (TFSA) limit on certain REITs is an option, but experts say it is better to invest small amounts every month. This will give you ample cash and a TFSA limit to buy REITs throughout the bear market and bring down your investment costs.
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