When thinking real estate, think local: Investment decisions should be based on the numbers where you buy
Edmonton Journal
Wednesday, May 17, 2006
Byline: Ray Turchansky Source: Freelance
The second biggest concern among investors already skittish about the future of commodity prices is how long the joy-ride in housing prices will continue.
TD Economics recently reported that the housing market in the United States has "come undone." Resale home prices were up only 7.0 per cent year-over-year in March, down from double digit increases during 2005, while new home prices were flat or down from a year earlier.
Meanwhile, Statistics Canada said combined resale and new home prices in Canada rose at an annualized rate of 7.6 per cent in March versus February, the greatest single-month hike since January of 1990.
The national figure is one that investors should ignore, according to Don Campbell, a real estate investor and instructor with the Calgary-based Real Estate Investment Network.
"Don't get caught up in the average price across the country," said Campbell, who just released his second book, 97 Tips For Canadian Real Estate Investors. He said each local market is different.
For instance, house prices were up 29.6 per cent annualized in Calgary during March, 14.3 in Edmonton, 6.9 in Vancouver and 4.3 in Toronto. But in St. John's, Nfld., prices slipped 0.1 per cent.
"The Calgary market is still about 18 months ahead of us," said Campbell. "The nice thing about here is the in-migration is strong and steady. It's not outrageous, people aren't phoning and saying 'I'm living in my car,' but we're seeing that in Calgary, in Grande Prairie and obviously in Fort McMurray.
"However, the average price for resale homes will be higher than new homes some time this year, because of the in-migration, where people say they can't wait 10 months for a new house. That doesn't happen very often.
"But unlike Vancouver and downtown Toronto, there's economic strength behind it, people are moving in and their income's going up. In Vancouver it takes 60.4 per cent of your pre-tax income to afford an average piece of real estate, and then you add 39 per cent tax (if you're in the highest bracket)."
So how long can the good times roll?
"We'll see this kind of market for another 18 months, then it has to plateau," said Campbell. "A market is a living and breathing entity and you have to stop and take a breath, and it usually does in stages. It'll calm down to something a little more realistic."
He said the real estate market goes up much quicker than it declines, and "we've got at least eight years" before prices will again bottom out. Meanwhile, rents are starting to rise, which means investors who've had to depend on resale price increases for their profits should now be able to survive on rental income once resale prices start to fall.
The concern as a housing market starts to approach the top is that people jump in with both feet without doing their due diligence. "People are buying property here without getting an inspection. You do not want to get stuck with a $50,000 bill to fix the creek running through your basement that you didn't know about."
Another worry has been the quality of new houses and condos being built at a time when tradeworkers are stretched thin. "I find as an investor I do better buying older properties, from a price viewpoint. In Vancouver you had to get a wristband to get in line to buy a condo that did not yet exist."
He cites four common mistakes real estate investors make.
"No.1 is not having a real goal. Real estate is not the end. Have a goal of what you want to make, then when you make it, get out.
"No. 2 is not doing your homework, not asking the critical questions.
"No. 3 would be creating a confrontational relationship with your tenants. Tenants are my best friends. They pay my mortgage.
"No. 4 is signing documents that are not true."
He suggests you that if you use a mortgage broker you should get a referral, and notes that "if you're going to invest in real estate, you need a mortgage broker who specializes in investment real estates, because it's completely different than you or I going to buy our house."
He doesn't recommend "interest only" mortgages for people buying a family residence, but it often does make sense with an investment property because "your payments are lower and your cash flow is better