Housing Market Correction Unlikely to Faze Smart Money Investors

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The world may be ready for another residential real estate correction. While that may negatively impact some over-leveraged speculators, the true “smart money” investors have already been moving on to other types of real estate investment.

Per Zillow’s home value index, property prices will follow a downward trend in 2017 and into 2018. Many Canadian investors suspect that Toronto may see similar trends, as local property prices are up almost $300,000 over the last year to a new average price of almost $1M.

While many have become immune to the years of talking about a housing crash in the GTA, Bill Morneau, the federal Finance Minister has once again stoked a media frenzy with talks of additional moves to clamp down on speculators. This could come in the form of new taxes on non-residents and on vacant condos, as well as further tightening of mortgage lending rules. There has also been talk of new rent controls and affordable building to try to maintain some housing for regular workers. Similar scenarios seem to be playing out in many other major cities as well.

Still, the World Property Journal reports that there is almost $2T in global investment capital ready for deployment this year, much of which will come to North America. The Mortgage Bankers Association has also announced a forecast for the US real estate finance market which could see new record lending highs set in 2017 and 2018.

Two important factors to remember to stay objective in the days ahead are that many GTA investors will only experience paper losses. While other types of real estate remain separate asset classes which operate on separate sets of fundamentals. For example; if an investor paid $750,000 cash for a Toronto condo two years ago, it is now up to $1M, but drops to $500,000 in value, before eventually returning to its purchase price in 15 years, there is no tangible loss unless the unit is sold during the down period.

Of course, many smart money investors are now already investing in income producing commercial property, in secondary markets. Around half of the commercial mortgage loans to be financed in the US this year are multifamily loans. Retail is another attractive sector catching the attention of single family offices, accredited investors, and partnerships.

In conclusion, we will likely eventually see a dip in prices and performance of condos and homes in some overpriced cities. That may happen naturally through market demands or by the design of legislators. Smart investors that are not simply speculating with borrowed money should find that they remain unscathed and can realize consistent yields and stable asset values in savvier investments.