It might be time for Toronto and Vancouver real estate investors to think about selling.
“What I can say with absolutely certainty is, as we know from a real estate and investment philosophy, people should buy at high cap rate and sell at low cap rate,” said Calum Ross, a leverage wealth expert and VERICO broker with Mortgage Management Group.
“When looking at comparative asset classes and at risk-adjusted rates of return, rates on Toronto real estate are running as low as 2-3%, and if there’s inherent risk of the principal and there’s a lot of extra work, I know that the vast majority of high-yield money market instruments or low-yield bonds have much less market risk. As much as I love real estate as an investment, first and foremost I’m a wealth advisor.”
As early as last year, investors enjoyed appreciation north of 30%, but to ignore the fact that exorbitant increases like that are an aberration is to have what Ross calls “delusions of grandeur.”
Ross is not talking about the individual, unsophisticated investor moonlighting as a landlord. He believes the market as a whole is heading towards a calamity of some sort, however, the severity remains to be seen.
“If you start to look at high-end real estate and the vast majority of real estate investments, you can see that the actual yields on these—looking at average rent based on underlying value of the underlying security, the gross cap—are so low that the vast majority of people, if they considered maintenance fees, property taxes, default, the incremental risk of mortgage debt, are engaged in speculative-grade real estate,” he said.
And the yield curve has predicted recessions before, he added.
“The yield curve flattening out has predicted seven of the last nine recessions. Based on the way the yield curve is flattening out, it’s likely we’ll see some form of recession as early as May, 2019.”
Jeffrey Leuchter, a sales representative with Royal LePage, agrees that Toronto real estate is no longer a sound investment. He has set his sights on the Sunshine State instead.
“If someone said, ‘Jeffrey, I’ve been investing in Ontario but there are no great returns left, what should I do?’ I’d introduce Orlando to them,” he said. “The investment side in Orlando has huge upswing. The returns in Orlando currently are what Ontarians saw three to 10 years ago.”
Ross still believes in real estate investment, but he cautions that investors need to conceive robust strategies if they’re going to spend their money on real estate in Toronto and Vancouver—two cities that have begun displaying signs of risk.
“If people did their leverage wealth investing in any way a real wealth advisor suggests, as long as someone has good cash flow, a balance sheet and a long-term investment horizon, real estate is still a very sound asset class,” he said. “However, based on the way values have gone up, almost every single real estate investment client that I have is overweighted in real estate holdings.”