Nicole Lopez (00:02):
In the last episode of Real Estate with Nicole, I discussed some of the history of real estate in Canada. For this episode, I really want to focus on where are we today and kind of talk about understanding the big picture for real estate investment. So grab your cup of your favorite beverage and let's just jump right into it. So one of the things that I really think is important is really stepping back to see the big picture and the concept of seeing the big picture isn't just about gaining distance, at least that's in my opinion. I think it's also about taking time to understand the deeper motivations behind our goals and our actions, how we're carrying out these goals.
(01:10):
A ritual for many of us that we partake of is the annual New Year's resolution. We think about things we want to change or what we want to improve or something that we want to achieve in the coming year, and we set a stake in the ground and resolve to achieve the goal. So it could be eating better, it could be losing weight, it could be working out more. It could be getting an investment property, whether it's your first home or adding to your current investments. So perhaps we need to dig a little bit deeper to understand why we want to achieve the goal, and then because we do it sometimes because it just sounds good or maybe somebody else is doing something similar and we think we might need to just jump on board. So we really, really need to dig deeper to understand why we want to achieve a certain goal and why it's good for us and why it's important for us to be seeking after this goal.
(02:19):
So today I'm focusing on thinking about our goals as a real estate investor. Either we're a soon to be investor or a savvy seasoned real estate investor. So let's pause step back and think about the big why of our real estate investment goals, which could range from, as I mentioned, first time home buyer and you want to pursue gaining equity. Or maybe as an investor you want some cashflow, you have a rental property, or you want just to have active appreciation, really getting a great investment property that appreciates quickly over time. I thought it would be good for us to take time to check in and assess what's happening around us today that could influence our next steps. So what we're going to do to invest and how we are strategically going to execute our goals of real estate investment. So I think this episode will provide an overview of the key factors that we really should consider for real estate investing.
(03:36):
Basically, we're paying attention to what's happening around us today. Whether you're a newcomer to the market or an experienced investor, defining your why is essential. Perhaps you're entering the market for the first time, or maybe you're focusing on principle recapture by renting out a property to cover loan payments. You might be interested in equity growth through passive appreciation, including opportunities like pre-construction, having a principal residence, so that's where you live or land investments. Alternatively, your goal could be generating regular cashflow or engaging in active appreciation by flipping properties. Having rental properties or upgrading your current home to add a legal additional unit in order to do this successfully is really important to understand your environment. So to help simplify the process of finding your why and your what and how I propose we really focused in on a few key components or factors that really influence the environment, the real estate environment.
(04:55):
There are about seven of them that I've identified and I think they're important for us to really take a look at. One of them is the cost of ownership. Number two, job security, three, population growth. That's something we've really been hearing a lot about in the news lately. Supply. So the supply of available homes or properties on the market, regulatory changes, so government policy, government programs, et cetera, global factors. So what's happening on the global level, whether it's global from a Canada perspective, internal Canada or external to Canada. And the final one that we really should consider are the replacement or reproduction value versus the market valuable property. So those are the factors that I'm going to delve into to help us really frame our why and understand the environment that we are currently living in. So as I mentioned, the cost of ownership. So investing in real estate, say it's your first time home buyer.
(06:15):
So this is one of the most significant financial commitments that we probably make in our lives, that first property that we acquire, and it requires a real deep understanding of the market, and you really need to have quite a bit of confidence in your decisions that you're making. So a crucial element here is interest rates, which directly influence the affordability of the property that you can attain. So I like to use the following analogy to simplify the topic of interest rates. And I suggest my clients think of it this way just for simplicity's sake, is that when you're purchasing the property, you are basically marrying the property, but you are dating the interest rate. So how I explain this is over a period of time, the interest rates will change and you'll ultimately be in a better position if you purchase the property at a lower price.
(07:29):
So because when you purchase the property, say it's at that higher price, but you have a low interest rate, you are financing the cost of the property. However, in a reverse or a converse situation where you're purchasing the property at a lower price, but a higher interest rate, we know from the trends, historical trends that interest rates drop over time. We know that initially we'd be financing the property at a higher interest rate, and then over time that interest rate will drop and ultimately you'd be paying a little bit less for your property. However, that being said, there is an affordability aspect to it. So yes, if we can purchase a property at a lower price with a higher interest rate, that may be suitable for us if we can qualify for that particular property, and it is affordable for us. So true to form interest rates were running high over the past few years, and as past trends have indicated, they are starting to come back down, and that's as inflation cools within Canada.
(08:50):
So that's one of the key factors. It's that cost borrowing. Next is job security, and I think this is kind of related with the cost of borrowing. So your confidence in funding and maintaining your investment is really closely tied to your job security or your income that's coming in. This includes evaluating prospective tenants, job stability. So if you're renting a property, you want to make sure whoever you're renting to is able to pay the rent on a monthly basis. So job security is a factor. Unemployment rates, so really understanding what's happening in the economy in your particular area. How do you feel about how confident are you about your particular employment situation? There's inflation, there's consumer confidence, and it's basically the overall economic conditions that's related to job security. So really paying attention to what's happening in the economic situation, in the job market. With what's happening with inflation, these factors play a significant role in your investment decisions, how you invest, the strategy you use, what type of investments that you may want to acquire.
(10:23):
As I mentioned before, population growth that has been in the news. We know that Canada has increased our population significantly over the past several years, and in the past few months we've saved that or slowed that down. However, Canada still has an aggressive integration strategy that really aims to address the labor shortages. So that's really the impetus for that aggressive immigration strategy. We have an aging population and we really need to fill jobs in the healthcare sector, in technology sector, and in the construction sector. We do have a shortage of labor in those areas, and we're really trying to fill those positions. However, we need to have a strategy. The Canadian government needs to have a strategy in terms of how we fill those jobs, how we process our immigration strategy. So anyway, the population growth really is to boost those labor shortages and ultimately to boost the economy.
(11:42):
So with the substantial number of new permanent residents coming into the country, we've seen that they really gravitated towards the TA Toronto area. Calgary and Vancouver are those key areas where they have been gravitating to. And as a result, there has been a real strong demand for housing within these core areas in cities, and it's really affecting the real estate supply and the values. So over the past years, you've seen the supply and demand ebbing and flowing, where we had a very strong sellers market, we've had almost a balanced market, and potentially we may be easing into a buyer's market, but that remains to be seen in the coming months. The next item I mentioned, or factor I mentioned, was related to the supply. So yes, we have many newcomers settling in the GTA and there's a very high demand for hos, and as I mentioned, it created a very hot seller's market in the past few years.
(13:02):
So the seller's market, just to provide a definition, it's a situation that often results when properties are selling quickly and at higher prices, and this emphasizes the importance of understanding supply dynamics. So when we don't have a lot of properties on the market, and we have a lot of sellers who are qualified and who are able to afford properties, there is pent up demand in the seller's market. And sellers often see bidding wars happening. Over the past months, we haven't seen as many bidding wars buyers are still on the sidelines, many are waiting for additional decreases in interest rates or other factors that they may be watching, similar to the ones that I've mentioned before, such as the economy, what's going to be happening in the economy. So current market trends indicate that inventory is lower, yet it is anticipated that as 2025 progresses, more properties will come on the market, and consequently, buyers will come from the sidelines once it appears interest rates are settling and inflation seems to be cooling or stabilizing.
(14:33):
But ultimately, confidence in home buyers and home sellers in the current economy will drive the market dynamics. So this is just what we can predict, but it's going to be the confidence of us, the consumer who's going to dictate how the market pans out in 2025. This leads us to regulatory changes. So things that are happening from a government perspective, such as the CMHC insured, mortgage purchase caps, length of amortization, mortgage stress tests that had been implemented, all of these factors can significantly impact real estate investment decisions. So staying informed about these policies is crucial for making strategic choices and understanding what choices you may have that you may want to consider using, or at least you're aware that they exist if it's not something that you would partake in. For example, in mid-December, the government of Canada allowed for 30 year amortizations, and they also allowed for an increase in property value that was allowed for CNHC insured mortgages.
(15:57):
So from qualifying properties of under a million dollars to properties that qualify that are under $1.5 million. So this really brings additional individuals into the market because some of those properties in the GTA about million are those semi-detached or detached homes in the areas that are highly desirable. So we're anticipating seeing more buyers come off the sidelines because they may be able to afford properties within this price range. So we're anticipating things to heat up a little bit, and we're waiting to see if the Bank of Canada Prime interest rate continues to drop as the year progresses. So these changes along with the potential Bank of Canada prime rate drop, will they open up affordability for many investors, particularly for properties under 1.5 million. So watch for that in the coming months. So global factors, global events like financial crises, inflation health pandemics and conflicts can indirectly influence real estate markets.
(17:17):
Fees factors should be considered when assessing investment risk and opportunities. Yes, they may seem far away and it's not something that's going to impact us, but they could in an indirect way. So today, both external government changes such as new administration in the US and the potential for additional tariffs if they're implemented, could impact us. We may need to wait and see how that could impact us and the potential for our internal or Canadian government changes may impact the market dynamics either indirectly or directly. So these are some of the factors that we really need to just keep our eye on and be aware of that could influence our decision with our real estate investing. The seventh item that I wanted to touch on today in this episode is the replacement or reproduction value versus market value. So understanding the difference between difference reproduction cost and market value will help you assess a property's worth.
(18:34):
So market value reflects the highest price a willing buyer will pay. While reproduction cost considers the cost of building an equivalent structure with current standards, I recommend that you consult with a real estate professional who can assist you with obtaining a comparative market analysis for property of interest, and they will be able to guide you through the real estate investment process. Examining these factors, it really helps us to put the GTA housing market trends into context. Over the past few years from leading up to and through the pandemic, were perhaps a blip in the standard trend real estate market trends. If you really zoom out and see what's been happening in the market over the past 25 to 40 years, you can see that the market trends have been growing year over year at approximately a 6.6 to 7% rate year over year with blips along the way. So despite fluctuations due to perhaps financial crises, policy changes, global events, the overall market has seen consistent growth. So recognizing these patterns can help us as investors make informed decisions. And of course, I always recommend that you work with a trusted professional real estate agent to help you navigate the dynamic real estate landscape. If you found this episode insightful, be sure to follow on your favorite podcast app, leave a rating and share with your friend. Remember that preparation and knowledge help you to feel more confident in your investment. This is Nicole Lopez signing off and wishing you a fabulous day.
