Big debt the downside of loading up on real estate

As I burn the midnight oil filing my usual 150 income tax returns this spring, a number of changing trends are emerging.

When I started preparing returns for the public more than a decade ago, perhaps 10 per cent of my client families owned rental property. Now, nearly 40 per cent have at least one rental property, or rent out part of their own home.

One reason is that interest rates have been near all-time lows for an extremely prolonged period. That has made mortgages attractive for home buyers, and financial institutions have opened up to them, causing a booming uptake on Home Equity Lines of Credit, or HELOCs.

Despite the financial crisis all around us in 2008, many Western Canadians continued to hold jobs and prosper, freeing up cash. An aging population, having been out of debt for a few years, was willing to borrow against their future.

With stock markets having gone through a "lost decade" in which indices wound up where they were 10 years earlier, real estate has become a more attractive investment in many places.

But having a proliferation of rental properties being held by everyday people is cause for concern.

One of my clients bought more than a half-dozen rental resort properties near the Alberta-B.C. border, which was having a building renaissance a few years back. Then the United States housing crisis hit, and many Canadians who used to holiday regularly in the Canadian Rockies tried out U.S. vacations instead, looking to buy depressed property there. Suddenly, Canadian resort rental properties had vacant periods.

Canadian Oil Boom Reverberates in Offices as Returns Rise

Bank of Nova Scotia may have found the perfect time to sell Scotia Plaza, a Toronto office complex that’s expected to fetch as much as C$1.5 billion ($1.5 billion), a record for Canada.
Office vacancies are falling in Toronto and the rest of Canada amid economic growth led by the oil and natural-gas industries. Investor interest in commercial property is rising after the total return on real estate climbed almost 16 percent last year, the most since 2006 and outpacing gains in the U.S., according to the REALpac/IPD Canada Annual Property Index.
Low vacancies and increasing demand are pushing developers to build 8.9 million square feet (827,000 square meters) of office space in Canada, the most since the first quarter of 2010, according to CBRE Group Inc. (CBG) Calgary, the center of the energy business in Canada, is leading the way with more than 3 million square feet under construction.
“They have had a commodities-fueled boom across the country,” Dan Fasulo, managing director at property-research firm Real Capital Analytics Inc. in New York, said in a telephone interview. “The fundamentals of the property markets are in very good shape.”
Office property values probably will rise 20 percent this year in Calgary and about 10 percent in Toronto and Vancouver as low vacancies help landlords raise rents, according to estimates by CoStar Group Inc. (CSGP)’s Boston-based Property and Portfolio Research Inc. Montreal values are expected to gain 4 percent.


The increase in rents and occupancies has helped Canadian real estate investment trusts. The 13-member S&P/TSX Capped REIT Index (SPRTRE) had a total return of 13 percent in the 12 months through March 29. Canadian REITs are likely to have strong returns in 2012 as well, said Heather Kirk, an analyst at National Bank Financial.
“The key Canadian office markets are doing very well,”she said in a telephone interview from Montreal. “The demand is very robust right now.”
Canadian REITs are estimated to have a total return of 15 percent to 25 percent this year, partly because of low and falling vacancies, limited new construction and demand from investors for income-producing securities, according to a Feb. 29 report by CIBC World Markets Inc. analysts led by Alex Avery. The REITs gained 22 percent last year, including reinvestment of dividends.
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Canadians worried about mortgage rate hikes

As concerns over the state of the Canadian real estate market abound, a new survey says nearly half of Canadians are unsure about their ability to afford their homes if rates rise by as little as two percentage points.

The survey commissioned by the Bank of Montreal study finds 43 per cent believe an interest hike would either hamper their ability to pay or leave them on unsure footing.

Regionally, residents of Alberta were the least concerned, with 73 per cent saying that rising rates would not affect their ability to afford their homes, while residents of British Columbia were the most concerned. Just 48 per cent B.C. residents are comfortable in their ability to handle higher rates.

The survey results come as banks and economists warn about the rising debt levels of Canadian households.

It also comes as some of Canada's biggest banks have started raising variable mortgage rates, even though the Bank of Canada's overnight interest rate remains unchanged.

Earlier this week, both RBC and TD raised the posted rates on five-year mortgages.

That could signal the end of the era of cheap borrowing that has encouraged many Canadians to take on houses they may not have been able to otherwise afford.

BMO anticipates that the Bank of Canada will begin increasing interest rates from the current one per cent next year.

Condos VUE a hot spot for condo real estate

Nestled in the middle of the triangle formed by downtown, the East End and the West Island, the area around Namur métro station is quickly becoming a hot spot for condo real estate.

The Condos VUE project is located at the corner of Jean Talon St. and Mountain Sight Ave.

The multi-phase development will consist of seven concrete buildings and take seven to eight years to build. Once it's completed it will house 900 units. Every building will be ten stories high and two of them will feature a commercial element incorporated into the first two floors.