Investment strategies you can use in uncertain markets: Conversations with The Condo Store Part II

It’s no secret that the Toronto real estate market has changed in recent months, leaving a feeling of uncertainty for some.

According to the latest numbers from the Building Industry and Land Development Association (BILD), new construction sales dropped 56 per cent in June compared to a year ago and 52 per cent below the 10-year average. New single-family homes felt the pinch especially, as June sales fell 85 per cent year-over-year.

In the resale segment, sales slumped at a similar rate to new construction homes, dropping 47 per cent annually in July as per the Toronto Regional Real Estate Board’s (TRREB) most recent report.

Higher borrowing costs, affordability challenges and economic uncertainty have added pressure to the real estate segment, prompting buyers to delay purchases and for balanced market conditions to take effect. On the other hand, some areas of the market have seen prices remain steady or even rise, positive news for investors and sellers.

The benchmark price for a new condo apartment in the GTA was $1,189,894 in June, a 12.4 per cent year-over-year increase according to BILD. The average selling price for a resale home in the same region grew 1.2 per cent annually in July to $1,074,754 as per TRREB’s latest data, while less expensive property types like condos reported yearly prices gains as high as 6.9 per cent.

In the rental market, monthly rates only continue to soar. Average condo rents increased by double digits annually for all bedroom types in Q2-2022 according to TRREB, as the average one-bedroom rental price rose 20.2 per cent annually to $2,269 and grew 15.3 per cent to $2,979 for two-bedroom units.

Market uncertainty and economic turbulence can be used to one’s benefit if the correct strategies are implemented.

Simon S. Mass and John Mehlenbacher, CEO and COO of The Condo Store (TCS) came together to discuss investment plans for tough and uncertain times.

Recap the 2008 financial crisis for us. How did this impact the new construction industry in the Greater Toronto Area at the time? How would you describe the market’s recovery and growth in the years following the crash?

Simon S. Mass: There was some data that showed resale prices across Canada dropped by 9.5 per cent and new home prices fell by 3.5 per cent which sounds about right. But of course, with our proximity to the U.S. and other media factors, you would have thought it was much worse during that specific time.

Canada remained relatively strong and was only impacted by a fraction compared to other countries, due in some part to the regulated bank system and less securitization of mortgage debt. Canada lowered interest rates and prices across the Greater Toronto Area — and Canada — began to rise again. Therefore, the re-growth or recovery was swift and strong after the tide turned with the financial situation.

John Mehlenbacher: I’ve said this many times, Toronto is a hugely sought-after city which keeps growing and will for the foreseeable future. This helps in situations like the 2008 U.S. housing crisis and other downturns. The market will rebound earlier and quicker when you have a place with demand outpacing supply, historically speaking.

We are coming out the other side of an unprecedented pandemic. How would you describe investor sentiments during this time and over the last three years? In what ways would you say that investors and the new construction industry have shown resilience against unpredictable circumstances?

SM: I think the word resilience is not correct when thinking about investors during the past several years. Savvy investors evaluate the fundamentals and look at the long-term situation with a potential investment. Once the initial shock of the pandemic had passed, the market remained as it was always going to be, and investors continued to purchase. They realized that housing was a fundamental factor in survival and as such, even with the lower rental incomes, it was going to continue to be a great long-term investment.

JM: It’s been a regular curve in terms of pricing in the new construction industry through the pandemic, but obviously sales activity has gone up and down in pre-construction, but more so in the resale market. That is where the volatility was and remains.

The pre-construction industry keeps moving and is facing its own situations in terms of labour and material challenges, which certainly affect the industry but hopefully is a shorter-term issue and something that doesn’t impact the regular supply and demand economics much longer. Sentiment has remained similar to what it was before — some pulled back, some stayed aggressive and some just went about their normal business.

Based on the 2008 crash and COVID-19, what are some successful investment strategies that you recommend for pre-construction purchasers in tough economic times? What is important to keep in mind during times of recession or other market difficulties?

SM: I understand this is not an option for some people, and in times of uncertainty and crisis, people suffer real loss and feel an impact on their financial strength. But, if and when possible, you will be able to find increased value in a tough economic situation. If you can, and many of our clients did, you will be in a better position in the long-term to keep buying during these times. Even if you can just keep to your normal purchase schedule and not stop, you will be ahead when the market turns back.

JM: It also creates a situation where you might be able to take a risk in terms of buying in another asset class or in a different geographic area than you normally would. Given that there could be increased value, it might make the differentiation of your portfolio easier to manage.

SM: Like every purchase, you still need to make sure that you are in control of your payments, especially if you are in on multiple units. We never suggest to clients to go past their threshold even if the potential asset is a great investment.

JM: As it is such a hot topic, clients and buyers need to understand what their limits are in terms of mortgages as well as their tax implications when looking at the market. You might see value, but ultimately, you need to be able to afford the investments in the longer term.

Would you say that it’s generally safe to invest during challenging economic situations if you have the means to? Can downturns present opportunities in real estate that others may not see?

JM: Everyone has their own relationship with risk, and while there has not been much risk in the GTA real estate market for some time now, everyone evaluates things on their own and with a different prism, as they should.

It’s not for us to aggressively advise and push clients to invest and create wealth; we can simply offer the opportunities, and everyone evaluates and purchases where they deem it fits into their long-term strategy.

SM: I will say though, that if you continue to evaluate investments based on a tried-and-true method that has served you for years, don’t deviate from that and continue to look at the factors that are important for you and your portfolio.

It may be time to make a change and take a different approach, but ultimately everyone needs to look at each opportunity on its own merits given your threshold and limits. There are certainly opportunities for those who are willing and able to continue or increase their investment spending through these downturns, and we’ve seen and been a part of many of those firsthand.

 

It’s not possible to anticipate every twist and turn in the real estate market. However, are there any strategies to bolster your investments so that they can more effectively withstand unseen challenges in the market? Is it possible to make decisions that “recession-proof,” your real estate investments?

SM: We talk to every client about our “Buy. Hold. Prosper” approach and I feel like this is a pertinent time to bring this up.

Nothing is foolproof and 100 per cent certain in any market, but, given the capital appreciation in short- and long-term historical data at hand, you can withstand changes like interest rates, mortgage stress tests and other situations that arise by simply buying consistently with the goal of holding and being a long-term investor. Quick-buck strategies can work but are not for the long-term when we talk to clients about truly creating wealth for their families, potentially for generations.

JM: As we’ve seen here in mid-2022, with a small dip in the sales market, rents have increased. So, if you are a landlord with a few properties, your income has increased, and your long-term evaluation of assets has remained the same in the long-term.

What would you advise pre-construction investors not to do in tough economic times? When it comes to buying and selling new homes, are there actions and mistakes investors should avoid?

SM: We’ve touched on this before, but the risk is when you change your criteria or get into something that is outside your stated limits of investments.

JM: For example, if you are someone who believes immensely in the location of your investment, then perhaps you should not jump at an offer that doesn’t satisfy your location criteria just because there may be a small advantage now. Ultimately, the market will regain strength, get back on its normal growth curve, and then you’ll have an asset that you don’t necessarily believe in which can cause issues for you when having to sell or mitigate the asset that doesn’t fit in your plan.

As markets gradually begin to recover during a recession or other economically challenging events, what next steps should an investor take? How can investors capitalize on an upswing in the market as much as a downswing?

SM: The work is done before the upswing, and often much before the upturn. That means that as you grow your portfolio, your assets will appreciate that much more as the market turns upward. Ideally, you have added to your portfolio prior to this occurrence to reap the maximum gains as time goes along.

JM: When the market turns upward you can use the positive sentiment to your favour when you have a strong portfolio, given that you already hold the assets. Rents will go up, prices appreciate, and so on. There might be added investment opportunities as projects ramp up in such a market. You might be able to find more people willing to make deals and invest in projects as the more positive market makes for more deal-making and opportunities.