If you Invest in Real Estate, a Housing Correction Could be a Great Thing.
It’s been a year since the attached article of a housing crash was first published. I remember when I first started investing over a decade ago and my financial advisor strongly urged me to not invest in real estate given an expected crash (this was 2004). If I had listened, I would not be where I am today. However there are some key points to consider about a correction in the housing market. If you prepare, it could actually be a positive thing for your investments.
- You win or lose when you sell: If the market drops, (even a significant drop) the banks will likely not come calling as long as you are making your mortgage payments. If there is a significant drop, the bank must invest time and money in appraisal and administration before they can call for funds. If you are holding that asset through the correction you can simply carry on having the property rented and pay down your mortgage as well as collect your cash flow, its business as usual. Real Estate does come in cycles, if you simple continue past the cycle, they the correction really did not impact your investment much.
- Everything is on sale: This is pretty self-explanatory as we all know home prices may be more attractive). However, the saying is very true in that “it’s not timing the market, it’s time in the market”. If you have equity or funds during a correction, it becomes a great time to buy. Buying is a great time for a new investor as they are buying low (and hopefully selling high), but those that have been investors for years which average appreciation and mortgage pay down, will likely have the equity built up in their existing properties to be able to go out and purchase.
- The rental market improves: This is a positive sign for those that already own investment properties, and allows them to benefit during correction times with higher rents. In a market downturn, the confidence of the population to buy homes has decreased. Given population is still increasing, the demand for a place to live is still there. Simply by supply and demand, with people not buying, the demand for rentals increases. There is already a large demand in Ontario for affordable housing with vacancy rates at all-time lows (some cities less than 2%), with home buying slowing down in a correction, the natural economic result will be higher rents. If you are in a situation of transitioning tenants, the opportunity is there is increase your rents to drive up your cash flow.
- Future Opportunity. At current levels, Appreciation increases at a much faster rate than the rental market, if this continues, then over time, rents will not be able to cover all of the costs of running a property. In a correction, appreciation slows down and rental rates increase, this allows the investor to continue to purchase properties that cash flow. Take Toronto as an example, most investment properties do not have rent covering all costs to run the property, hence these purchases are based on the hope of appreciation. In years past, Toronto and the GTA was a market that you could find cash flowing properties, unfortunately, this is not the case anymore.
I do expect a correction in the next couple of years for Ontario, and you know what…It’s not such a bad thing!