Brace yourself for the correction in the housing rental market

 Brace yourself for the correction in the housing market. While it certainly has started in the west coast, the heartland of Canada has been moving along especially in the periphery.  The writing is on the wall now with the downgrading of several major Canadian banks, the closure of several major tech outlets, and most of us just struggling to pay off the mountain of debt Canadians have racked up, with Christmas bills just the icing on the cake. This should be the time for property owners to look to optimize their situation whether it is lock in interest rates at record low levels, quickly sell off poor performers, add incentives for tenants to stay at optimized rents, or reduce costs through inefficiency reduction. Builders have sensed an increased risk approaching and have backed off on the numbers being built in 2013.

housing starts

From the C.M.H.C.

Some of us who talk regularly about tenancy deposit protection claims are watching for triggers such as the slowing of foreign money from places such as China, who are having difficulties currently, and whose investment in Canadian real estate is a factor along with other foreign money. Whether it is unpaid workers advertising their plight on YouTube, or Chinese hackers scouring the internet for some advantage, the transition of leadership may have complicated a delicately balanced situation by forcing the disclosure of assets held by officials and their families, at a time when money is becoming tighter internally. Other major issues to consider are increasing volatility in the stock markets, external shocks such as an attack by North Korea, the effects of a currency war as countries come to grips with their stagnating economies, looming inflation and interest rate effects, and the shifting of asset location to sectors considered more of a potential for growth than real estate.

The debate has not been on whether a correction is coming, but rather whether it will be gentle, harsh, or precipitous. Significant for property rental owners is the following excerpt from a study written about in the Economist:

‘The first gauge is a price-to-rents ratio. This is analogous to the price-earnings ratio used for equities, with the rents going to property investors (or saved by homeowners) equivalent to corporate profits. The measure displays a massive range, from a whopping 78% overvaluation in Canada’

This is like hearing the stock you own is overpriced by 78%, and the correction is in the picture for the asset class. A comparison from the Economist for various countries is below.



On the issue of Chinese money and pending changes the BBC did a story on issues affecting the rich in China.

…’China’s rigid and opaque political system is perhaps one reason for the wealth-drain, particularly in a year in which there is due to be a changing of the guard at the very top of the Communist Party’…

…’But he admits that for many of his wealthy friends it is a sense of insecurity which is leading them to ponder a life outside China. “Most of them think I’ve got so much money here but one day maybe the government will change the policies and take it all back,” he says. Entrepreneurial, well-connected or just plain corrupt, it does not matter how they made their fortunes, there is mounting evidence to show that China’s super-rich are heading for the exit’…

Large realty markets for the Chinese include Canada, Hong Kong, Singapore, and Australia which are some of the most overvalued markets. The stability of this money in Canada would be a major driver between a soft landing, and a precipitous one. But whatever the case it is time to brace yourself for the coming correction, in motion.