Watching Canada’s Real Estate Market

I remember the house I was born in vividly. Think of the Mediterranean ambiance, blue window shutters, red roofs, white stucco façade, and flowers on every window and balcony. They don’t build them like that any more. These days, homes with ocean view are too expensive to build. Instead, we have low-rise condos sprouting every which way, uniform, boring, but affordable.

The same is happening in my adoptive country–Canada. Traditional homes with wide driveways, picket fences, and tire swings hanging from mature trees are disappearing from Canadian landscapes. Instead, they are being replaced with what builders are calling multi-unit dwellings, rows and rows of identical townhomes and stacks and stacks of impersonal condominiums.

Canadian builders are blaming increasing land costs and deteriorating house affordability for the switch to multi-unit housing. Interest rates are going up, so is inflation, while personal incomes have barely budged for most people. As a result, while single-unit home construction decreased by seven percent in 2004, the construction of multi-units more than doubled in comparison to a decade earlier.

So, what should this tell anyone in the real estate market? If you own a detached home, its price is likely to continue going up because fewer detached homes are built and prices of new detached homes appear too high at the moment.

However, the pool of potential buyers for your single dwelling is shrinking, which may result in prices not increasing as fast as it might have been a year or so ago. Young people and new home buyers are more likely to buy less expensive homes, such as townhomes or condos. In addition, people over 55 are also more likely to downsize towards a multi-unit housing.

If you are a new homebuyer, with rising interest rates and deteriorating housing affordability, you are better off to start with a townhouse or an apartment. However, if you are an investor in the real estate, be aware of the condominiums’ explosive growth. By the time your new condo unit is built, the tide may well have turned against you, as many investors have experienced in 2002 and 2003.

Adding to my last PROFIT CONFIDENTIAL article, we are back to discussing the difference between the value of something and what is something worth. And, while it may look as if I’m making a difference without a distinction, remember many real estate investors and home buyers south of the border have already learned this difference the hard way.

What your investment is worth today does not necessarily mean it will have the same or higher value a few years down the road. Too many factors will be at play by then. As with any other investment, you must ask yourself a few tough questions, the most important one being whether you are buying a home to live in it or as a pure investment. The answer to that question may very well break the camel’s back if and when things go sour, as they, unfortunately, often do in cyclical markets and industries.