Canadian Real Estate 2020: Sell High and Buy Low?
The Canadian housing market seems to be defying logic in 2020.
COVID-19 is currently tearing through the global economy. According to the IMF, worldwide GDP is set to contract by over 5 percent in 2020. With the world looking like it’s heading into recession territory, Canada is certainly not immune to the crisis. Canadian unemployment for May 2020 was a record high of 13.7 percent.
Both the Royal Bank and the CMHC are calling for a drop in home prices; but so far, Canadian real estate has barely flinched. In fact, since the lockdown ended in late May, the housing market has only gotten stronger. On a yearly basis, Canadian home prices are up by 5.4 percent and sales activity is up by 15 percent.
What’s Causing this Divergence?
COVID-19 has clearly been terrible on many sectors of our economy. Unprecedented layoffs and high unemployment figures have put some tenants and homeowners into precarious financial situations. Many Canadians are uncertain if they’ll be able to make their next payment - or if they’ll have a job to go back to at the end of this crisis. Before long, we could see a wave of Canadian mortgage delinquencies that leads to a drop in prices.
Yet through this uncertainty, buyers are embracing new technology and snapping up homes like crazy. Mid to late summer is usually a slower season in the Okanagan, but this year there’s absolutely no chill.
June’s housing data firmly indicates a market rebound:
Home Sales through the Canadian MLS are back to pre-COVID-19 levels.
Actual sales in June 2020 were +15.2% compared to June 2019.
The National Average Sale Price was +6.5% vs June 2019.
The MLS price index went up 0.5% between April and June 2020.
At the end of June 2020, housing inventory was at 3.6 months - a 16-year low point. What this means is that if no new homes were added to the market, every listing would sell in 3.6 months. These numbers suggest we’re in a seller’s market.
The Sky is Not Falling
I’ve never been one to publicly claim the sky is falling in the real estate market. But I do feel a sense of duty to consult my clients on the best course of action - no matter what the market does. If you’ve followed my thoughts on real estate over the last 2 decades, you’ll know that I don't get caught up in the doom and gloom and I don't believe in good or bad markets - only good or bad tactics.
Saying that, right now is a very unique window of opportunity for real estate investors. Thanks to a number of converging factors, we are seeing a nice flurry of sales that could slow to a crawl at any time. According to RBC Senior Economist Robert Hogue, supply will soon begin to outpace demand, leading to a Canadian housing glut by fall/winter 2020.
I truly believe this could be the calm before the storm. In a short period of time, we could see the divergence between housing prices and our economic situation corrects itself.
Why Home Sales and Home Prices Are Rising
First let's look at why the housing market is defying common logic, and secondly, what you can do to profit from the situation.
Here are 4 reasons I believe the Okanagan housing market is booming:
There’s Pent-up Demand post Lockdown.
Fifty percent of buyers who intended to move between March and May 2020 had to delay their plans. On top of the typical summer sales activity, we’re now seeing the demand backlog turn into strong June home sales numbers. I expect this rebound in demand to last about as long as the hiatus itself; in a couple months, things may calm down to a slower pace.
Unprecedented Government Stimulus and Mortgage Deferrals.
The federal government has added $343 billion to the national deficit to help our country through the COVID-19 induced recession. For many households, support programs like the CERB, small business loans, and the ban on tenant evictions are things keeping them afloat.
With the liberals now under heavy scrutiny for their profligate spending, the extension of CERB, and the WE charity scandal, the unprecedented stimulus spending may be nearing an end. If the easy money handouts come to an end before jobs bounce back, many homeowners could be facing insolvency leading to forced home sales.
Seriously Cheap Money.
Getting approved for a mortgage in Canada is only getting tougher, but incredibly low rates are available to qualified buyers. A five year fixed mortgage can be had at 2.49%. These historically low borrowing conditions are likely driving demand from both first-time homeowners and investors seeking to create positive cash- flow.
The Exodus from Major Urban Centres & An Un-tethered Workforce.
Due to the pandemic, there is a new movement of people escaping the shoebox-in-the-skye lifestyle in crowded cities like Vancouver and Toronto for less populated communities like Kelowna and Vernon.
On top of that, the new trend of remote work means some employees may never return to their office cubicle. Companies are learning that most employees can be just as effective - if not more effective - while working from home.
If you can live anywhere and keep your job, where would you rather live? Having a property with enough elbow room to avoid crowds and grow your own veggie garden seems like a smart idea. Looking across Canada, the Kelowna lifestyle is a popular choice.
How to Protect Your Wealth in a Recession
This could be the best selling opportunity we will see in Canadian real estate for years to come.
And sometime over the next 1 to 3 years, I have a sneaking suspicion we will be facing the best buying opportunities since 2010.
So, if you expect housing prices to drop, how should you position yourself to prosper from the shift?
Sell High, then Buy Low
An easy strategy is to sell your home for top dollar now, then sit on the sidelines until the market cools down. With the economy contracting, widespread economic hardship could lead to an increased supply of housing with fewer buyers.
With cash in hand, you’ll be ready for the perfect moment to redeploy your capital.
If you bought a house in 2016/2017 and you’re not fully in love with the place, now is a great time to realize your tax-free gain. You’ve likely done well and doubled up your initial equity, so relax on the sidelines, wait for the big glut of inventory, and then get the home you really wanted - at a handsome discount.
Unlocking Your Home Equity
If you truly love your primary residence and don't see yourself moving for the next 10 years, then I highly recommend setting up a Home Equity Line Of Credit (HELOC). A HELOC is a revolving loan facility that lets you borrow cash using your home as collateral.
If your home has increased in value since your purchase, a HELOC lets you crystallize your equity gains and access a nice chunk of investment capital. HELOCs let you borrow large sums of money at lower interest rates compared to credit cards.
With a HELOC, your household will be financially ready to take advantage of new opportunities or withstand an economic storm.
Should You Sell or Refinance Your Home?
If we are headed into a global depression, then cash will be king. There are two ways to convert real estate equity to cash - normal selling and cash-out refinancing.
Cash-out refinancing involves setting up a new mortgage at your home’s market value, paying off your old mortgage, and then pocketing the difference in equity as cash. If your home has increased in value since your initial mortgage agreement, a refinance lets you access some of this equity as cash, or at least negotiate more preferable borrowing terms.
What’s the best way to cash out your home? That really depends on two things - your capital gains exposure, and your net cash flows.
Capital Gains Exposure, Cash Flows, & Your Selling Decision
Before making a selling decision, you should understand your capital gains exposure. Primary residences are typically exempt from capital gains taxes, but if you own a second home, you’ll need to pay back about 20% of your equity gains depending on your tax bracket.
If you’re renting out a second home with positive cash flows, you’ll probably be better off refinancing over the long term. Refinancing will provide you with the same net access to capital - about 80% of your home equity - but you’ll still own your income property through the years ahead which will always pay off long-term.
If you own a rental property with negative cash-flow, now is the time to unload it. The last thing you want going into an economic downturn is a drag on your personal finances. If your investment is not paying you monthly, it should become someone else's problem.
Instead, take some money off the table now and invest in something that pays you - or at least does not lose money. This might mean sitting out of the market for a bit. We can’t predict exactly when opportunities will come up, but it pays to be ready with cash in hand.
Will Kelowna’s Housing Market Stay Strong?
Now it should be said that the Kelowna market may be somewhat insulated from global economic conditions. The Okanagan is one of Canada’s hottest real estate markets, and one of the most beautiful places in the world. Kelowna now has the 8th most expensive rent prices in Canada, with the average 1-Bedroom apartment going for $1340 per month.
It’s entirely possible that housing prices won’t end up plummeting here.
To illustrate, let’s take a look at New York real estate - arguably the world’s hottest real estate market. Around 40% of apartments in the financial district got price cuts in the second quarter, but housing prices in the Hamptons are at record highs.
If the urban to rural flight trend we’re seeing in New York plays out in BC, I expect to see a big wave of "Vancouverites" coming to live in the Okanagan Valley.
As a long-term investor, please keep in mind that the Okanagan is not the only housing market with opportunities. If oil continues its rebound, Alberta’s Market might be the place to hunt for deals. Or maybe American real estate will go back on sale like it was in 2009.
A Game Plan for These Uncertain Times
Now this is a real estate blog, but I personally believe it’s wise to diversify a small percentage of assets into physical gold and silver as a hedge against the US printing press. I'm even planning to hold some Bitcoin as a hedge against potential Weimar-style hyperinflation.
Just like our last market correction, opportunities will only be available to those with cash in hand.
This is the exact reason I created Cash Offer LP: a private investment partnership where we pool our capital and then pounce on distressed home sales. Since the start of 2020, we’ve already seen an increase in homeowners looking to liquidate their largest asset.
If you compare where we are in July 2020 to the boom and bust cycle from 2008 to 2013, selling in summer 2020 can be compared to selling in spring 2008. The writing was on the wall, but it took years for prices to bottom out in 2011 at a 20% discount.
Keep in mind it took 5 years afterwards for prices to rise back to pre-crisis levels.
This means we are playing a long game. It also means that once this selling window closes in a few months, you could be years away from seeing your equity value return to today’s levels.
Please don't let indecision and herd mentality stop you from making a move that could set you up for the rest of your life. If you’re not sure exactly how to protect your finances and use this crisis to your advantage, let’s chat about your unique situation.