Why Ontario real estate prices will FALL to 2014 (except in some very select pockets)

[Thomas Beyer]

I love real estate .. especially in rising markets with perpetual income .. and thus, the vast majority of my personal net worth is in it.



Where are the markets rising ? Where there is job growth, with (at least flat or better,) rising wages, with a growing population. That exist primarily in two provinces today in Canada, in SK and in AB, and in some BC pockets.



After a 3 year decline in real estate prices from 2007 to 2010 (due to job losses due to drastically lower natural gas prices, lower provincial revenues and the financial crisis of 2008/2009), and a flattish year 2011, prices are starting to rise again in AB: See here, for example: http://www.vancouversun.com/business/Energy+revival+fuels+another+boom/5918015/story.html



However, much of Ontario will likely see FALLING real estate prices for 3+ years because of:



a) a left leaning, taxation heavy, debt increasing, union friendly, top heavy, recently re-elected government



b) vastly increasing utility costs due to poor feed-in-tariff decision (for "green" energy such as bird killing wind mills or very expensive solar energy) and nuclear reactor upgrade costs



c) some further expected tightening of mortgage rules



d) falling wages & employment levels in both the high-tech and manufacturing industry .. see
notice here about Caterpillar strikes & Ottawa's decline in the
high-tech area.. expect that to happen in the auto & general "high tech"
industry too (if one can call a BlackBerry high tech). Ontario's manufacturing might was built on a low Canadian $ and low
utility costs. Those two crucial main competitive advantages are now gone. For now, the work
force remains highly productive and well educated, but new job prospects are very
slim locally, and the upwardly mobile will move south to the US (with
lower wages, but also far lower housing and living costs and better
weather) or west in Canada, for higher wages and better job prospects.



http://business.financialpost.com/2011/12/27/how-ottawas-tech-sector-lost-its-edge/



http://business.financialpost.com/2011/12/30/caw-votes-in-favour-of-london-caterpillar-plant-strike/



e) curtailed federal government expenditures around Ottawa [far too slow in my opinion, as federal and most civil servants have far too high defined pensions, and thus, far too high total wage package compared to the real decline in earnings in the private sector in recent years]



f) failed immigration policies of too many uneducated immigrants
draining the social welfare & healthcare system, creating undue high unemployment and
increased crime



g) a fairly high Canadian $ making wages uncompetitive as we see in the Caterpillar example. Likely those 400 jobs will be lost, moved to Alabama, and the 400 people will join the unemployment line in the affected town.



TD Bank agrees by and large and see -2 and -6% for Toronto (and less, but also negative for Ottawa) here: http://business.financialpost.com/2011/12/22/get-ready-for-housing-market-correction-td/



To me the only thing that makes sense is rental (apartment) buildings in
stable Ontario towns in the 50-70/door range with a 6-8% CAP rate with a
steady flow of rental income, sensibly levered with cheap sub 3% debt.



In fact, I see no reason whatsoever that prices in Ontario will rise, except in a very few isolated instances in cities with job growth.



Do you ?



Until some or all of these 7 issues mentioned above are substantially corrected, Ontario will join the ranks of Spain, Italy and Ireland as failed states with too high debt levels, higher unemployment and thus, falling real estate prices. Thus, if you invest or own in Ontario check the local employment developments very very carefully.



Oh yes, I forgot to mention: too many condos are being built in Toronto. Don't buy those as an investment, unless at clear out deeply discounted prices on bankruptcy sales nor invest in those indirectly, such as some syndicated mortgage investments being marketed right now. 2013 or possibly even 2012 will see quite a few of those towers under construction in bankruptcy.

 

[Tony Miller]

"some further expected tightening of mortgage rules"



Thomas, what kind of measures/tightening is expected?



In addition to possible high tech concerns in Ottawa, the Harper government has conducted program reviews across Government of Canada departments and, as a result, some positions/jobs in the Ottawa/Gatineau area will be cut in the coming months. I don't think that this round of program reviews will truly impact the number of people actually employed by the feds in the Ottawa region. The government will cut in some areas but there are always new initiatives and re-org's which lead to people being hired which offset the cuts/savings that are made. It is a never ending cycle in government land!



Ottawa is also seeing a large quantity of new condos being built/sold across town. A total of 253 condo class properties were sold in Ottawa this past October which represents a 14.5% increase from October 2010 sales. Four new condo projects have been launched in the last 2 months alone. Maybe Ottawa is turning into mini-Toronto from a condo development perspective?



http://www.condosottawa.com/blog/categories/condo-development/

 

[LakeshoreCC]

Hi Thomas,



I agree that the Ontario market right now must be approached with some caution, however as a Westerner currently residing in Ontario I strongly disagree with many of your core arguments.



a.) Ontario has the same governing party and very similar tax structure as British Columbia. Yet because BC has no real right-wing alternative, people confuse the BC Liberals for a right-wing party, when in reality they are very close to the Ontario Liberals on the political scale.



c.) This would become a national issue - not just limited to Ontario.



d.) Yet Ontario still has the most diverse economy in the country, and among the highest incomes amongst Canadians. Certainly higher than British Columbia with a much lower cost-of-living - giving it a much more favourable housing costs/income ratio. People commonly point to RIM and automotive when predicting the doom of Ontario - yet they forget that economies here are very regionalized.



f.) RE: Crime. Check any national crime statistics, and you'll see Western cities consistently score amongst the worst nationally. Prince George, Regina, and Vancouver's suburbs being particularly bad. Ontario cities, especially suburbs the Greater Toronto Area (York, Halton etc.) were amongst the safest urban areas in the country.



RE: Your comments:

Until some or all of these 7 issues
mentioned above are substantially corrected, Ontario will join the
ranks of Greece, Italy and Ireland as failed states with higher
unemployment and falling prices. Thus, if you invest or own in Ontario
check the local employment developments very very carefully.



Comparing Ontario to failed European countries is just silly.



Oh yes, I forgot to mention: too many condos are being built in
Toronto. Don't buy those as an investment, unless at clear out deeply
discounted prices on bankruptcy sales nor invest in those indirectly,
such as some syndicated mortgage investments being marketed right now.
2013 or possibly even 2012 will see quite a few of those towers under
construction in bankruptcy.



Can't disagree that Toronto's condo market is becoming overbuilt - but investing indirectly via a syndicated mortgage or similar structure could be ok given the right circumstances. Like any investment, due diligence applies - and one must consider the track record of the developer and their ability to support the project in the event of a downturn.



It seems your overall intention is to slam the Ontario economy, and Ontario based real estate investments for the sole purpose of boosting Prestigious Properties. Somebody with your track record certainly doesn't need to resort to negative misinformation for the purpose of promoting your own deals, do they?

 

[seanxx]

Agree with Lakeshorecc!!
Do your own due diligence &see what's behind
The curtain.!

 

[Tibo]

Did you mention that you had property in Sudbury. Are these the little pockets that you mean. The printing of money will bring the Financial House of Cards. So if in Ontario is it better to sell and buy tangible assets like silver and wait for the sale price on RE.

 

[Thomas Beyer]

[quote user=LakeshoreCC]

Comparing Ontario to failed European countries is just silly.
just check the provincial debt figures .. and the union rights .. and the vast number and overpaid civil servants .. all similar trends that led to Italy's, Ireland's, Spain's and Greece's decline .. and soon France's !! Or compare Ontario's failed solar energy program to Spains .. similarly creating "green" jobs while destroying - by a factor of 10 - real jobs due to far higher energy prices.



For example here: http://taxpayer.com/ontario/ontario-debt-clock-highlight-mcguinty%E2%80%99s-borrowing-record



[quote user=LakeshoreCC]People commonly point to RIM and automotive when predicting the doom of Ontario - yet they forget that economies here are very regionalized.
That is true .. and that is why I mentioned that you should check the local employment stats very carefully. The point I was trying to make is that Ontario's two main advantages over the US, the main reason for the success of the auto industry was the low Can $ and cheap energy. Both of these advantages are now gone.

[quote user=LakeshoreCC]It seems your overall intention is to slam the Ontario economy, and Ontario based real estate investments .. negative misinformation
Where is the mis-information ?



Everything is UP UP UP .. all the time ??



btw: you did not give me a reason why it would go up in Ontario. There must be a city (or suburb) or 3 where it goes up .. where is that ?



My point is to highlight the likely risks of falling single-family/condo real estate prices in many markets given the FACTS (behind or in front of the curtain) !



Why not buy Don Campbell's newest book on real estate cycles ?



The market always goes up, until it doesn't. It follows an inflationary curve, with ups and downs along the curve. We have reached a down in many (but not all) markets for a few years. That's the point I wanted to make (besides a few political opinions, perhaps) .. so fellow readers can make better decisions to improve their wealth (or that of their JV partners and co-investors as money stewards !)



Happy New Year !

 

[Hutchym]

All,



One place in Ontario that may have significant increases in property values over 5-10 years and good cash flow is bowmanville/port hope areas. The planned nuclear station expansion there will create roughly 2500 new full time employment and up to 6000 construction jobs!! These are $100,000 jobs that will last approximately 8-10 years! On top of this these construction workers come from all over, including out east and west and get paid allowances of approx $600 a month for rent. This is a huge cost that people forget to cost in when comparing cost of nuclear power. Green Energy on the other hand produce a couple hundred jobs during construction, and a fewfulljob per wind farm post construction. Paying only $40-$50,000 by the way. This will become more relevant as the economy starts to really hurt and I think there will be a re-shift to high paying and large creation of jobs into electric power generation construction. This may create a relatively large influx of population and need for housing/growth. Ontario will be losing 3000 megawatts nuclear power with the pickering nuclear station in 9 years.. guaranteed... Even during the recession the demand dropped but even base generation now is too high to shut down and not replace new nuclear.



Keep this in mind when looking in Ontario.

 

[LakeshoreCC]

Hi Thomas,



You make some excellent points - many of which I agree with. I do however take issue with your general point, and the tone of your article, which is more or less "Don't invest in Ontario". Your underlying message is to paint a very large market with a brush of generalizations - with what seems to be with the sole intention of promoting your own deals, which are predominently based in the West.



Whether or not you are right about Ontario, I'm simply of the belief that it's bad business to create articles of a negative tone that slam a particular market, a particular property type etc, when the overall goal of the real estate investment community and groups like REIN should be to promote real estate investing under the right circumstances across Canada - and that the players should stand united in this purpose. Putting down somebody's market, property type etc accomplishes nothing.



I could easily use selective statistics to point out arguments of why somebody shouldn't invest in the West. For example, Metro Vancouver has poor income/housing costs ratios, Calgary is too tied to oil, Kelowna, Canmore, Victoria etc are resort cities without strong fundamentals and well paying jobs. Although these things may be true, they are only half truths, and should not prevent somebody from investing in the right sector of real estate in any of these markets.



I could also write about how the capital and exempt markets in the West have loose regulations, with less investor protection, and how the majority of failed real estate syndication firms over the past few years have originated from BC and Alberta for the sole purpose of promoting my agenda.



Again, whether I'm right or wrong, it wouldn't be fair to reputable syndicators like yourself to publish half-truths on the internet for the sole purpose of damaging one's efforts to promote investment real estate in a particular area.



Instead of posting an anti-Ontario article, I'm just saying it would likely be more effective to post an article that was pro-West.

 

[housingrental]

Good post Thomas.



You can also add present high values to income, rental licensing and a more time consuming and costly operating environment. (re lower caps on rent increases, future potential negative changes).



Lakeshore: Good post too. To be fair to Thomas I'm sure he believes in what he has wrote and it's purpose was not to solicit funds. You do bring up a good point, and it would be desirable for Thomas to also point out that many of these issues, and other issues, are to be found in other provinces.

 

[Nir]

Hi Thomas,

Mr. Lakeshore and others raised some very good points.

If I understand correctly, you usually buy and hold long term, maybe refinance while holding.

You are not a flipper.

Therefore, one of your biggest basic assumptions when buying must be LONG TERM appreciation or at least no value depreciation. Are you saying Ontario will not do well in the next 30 years or 3 years? sounds like 3. Therefore, if you still believe in it long term, NOW IS OR SOON WILL BE THE TIME TO BUY! This contradicts your own recommendation but think about it - when do you want to buy/when can you get the best deal - when there is fear/prices are flat or dropping/during a recession or when RE is booming?

Sincerely,

Nir

* Of course buy now is a generalization and you want your other criterias re property and specific location to be met

 

[Thomas Beyer]

[quote user=Nir]one of your biggest basic assumptions when buying must be LONG TERM appreciation or at least no value depreciation. Are you saying Ontario will not do well in the next 30 years or 3 years? sounds like 3.
Indeed.



I am saying there is no need to rush into the market right now like so many, especially young rookies, seem to think. The short term appreciation is just not there. If you buy for cash-flow with a 5+ or better, 10+ year in mind you'll do OK in Ontario (or elsewhere with decent economics).



And yes, some of my arguments are not just for Ontario. Many markets in Canada will see flattish to falling real estate prices, with the notable exception of AB, SK and some NE BC pockets as stated. Would love to hear from some ON investors where local employment situations or infrastructure enhancements ( GO train, highway, bridges or subways) will cause deviation from the norm, i.e. increases..



So, the question any real estate investor has to ask is: if this asset is worth the same in 5 years, would I still buy it ? I.e. look at all the costs, the time involved, the risk, the $s invested, the (measly) cash-flow .. is it worth it ? In many instances it makes no sense, in others it totally makes sense. The second question to asks also: where do I add value so the asset is worth 10, 20 or 40% worth more in 5 years ? for example through sensible renovations, or location choice, or sub-market purchase.



Overall return expectations have to be lowered, as well as leverage, as cash-flow with 70%+ levered is tough and with little appreciation it may make more sense to put more money down to enhance cash-flow. That is the conclusion I have reached in our own business (multi-family assets in growth markets).



The intent of my post is not to scare people, but to be realistic, to show that real estate in the right markets, sensibly levered is still one of the better investment classes out there and also to show that an uninformed or hasty investment does not necessarily result in wealth increase. Area expertise and local knowledge is more critical than ever before.



Govern your actions accordingly !



Happy New Year !

 

[AndreiAngelkovski]

Very interesting discussions here.

There are valid points made and some disputable ones.

Nevertheless, I believe that there are many cities within Ontario (and more specificially local neighbourhoods within cities) that have done very well, and will likely continue to do very well into the future.



The key is to become an area expert and understand your local market better than anyone. That takes time.

 

[Thomas Beyer]

[quote user=AndreiAngelkovski]and some disputable ones.


such as ?



Read this article here: http://www2.macleans.ca/2011/10/17/why-ontario-is-poised-to-become-canada%E2%80%99s-greece/



Or look at these debt to GDP ratios across Canada: http://worthwhile.typepad.com/.a/6a00d83451688169e20153926ea5eb970b-pi



You have to be very VERY selective where to invest in
Ontario, close to transportation improvement areas or towns with employment growth with at least flat wages.



Ontario is, or shall I say, used to be a center for manufacturing.



Manufacturing relied on 5 or 6 main components:

a) cheap Can $ - gone

b) cheap labour - gone .. but getting back with new contracts such as the one attempted by Caterpillar with far lower starting wages and no defined benefits pensions that killed the car industry

c) cheap energy - gone

d) easy access to the US market .. not wow .. getting better with a new Windsor bridge in a few years

e) educated work force - can't comment .. I assume for now still decent

f) low taxes - gone in Ontario as it will not follow other provinces 10% corporate taxes - it can't afford it - too much debt and too much spending



So, 4 out of 6 advantages are gone and will take years to rebuild.



Ontario competes with Alabama or Texas or Kentucky and SE Asia for manufacturing jobs.



Future, lower wages will not translate into higher real estate prices in most instances !



Unions flexing their muscles such as in the caterpillar strike (see here: http://business.financialpost.com/2012/01/02/electro-motive-locks-out-workers-in-london/) ... don't help either. There is a good chance those jobs end up in Alabama, or if the workers and union see the light, stay in Ontario with lower wages and certainly lower benefits. Even the public sector is shedding jobs, soon, in big numbers: http://fullcomment.nationalpost.com/2012/01/05/kelly-mcparland-dire-economic-outlook-puts-ontario-government-on-notice/



The world has changed since 2008 and we will see flat real estate growth in most markets .. or declines. Thus investments (not only in ON, of course) need to be far more cash-flow oriented.



Many of my points do not only apply to Ontario, of course, but are concentrated there far more than elsewhere in Canada.

 

[JBagorio]

Very interesting conversation! Thanks Thomas for this very insightful post to help others see where to put their money next. Biases aside, I agree that buying and selling is a balancing act...different provinces, cities, towns, or areas has its ups and downs. With the RE cycle, we are buying low and selling high...we simply look for a location that is positioned for growth after being stagnant for a while. I know where i am puting my $$$$. Much like what i have done in 2005, I'll put it where the signs of an up trend is obvious (be it Alberta if it is Aberta / be it Ontario if it's surely is...).

Happy investing to all!

 

[electricianhoward]

Thanks Thomas for sharing your insight.

As an investor in Toronto, I have same feeling.

 

[Thomas Beyer]

[quote user=electricianhoward]I have same feeling.


Let's try to eliminate those .. let's stick with FACTS .. such as selected plant closures: Ford and Caterpillar in London, ON, for example, and thus, associated negative wage pressure on remaining factories in the area !



See this article, and wasted $5M tax dollars too:



http://www.thestar.com/news/article/1125718--electro-motive-to-close-london-locomotive-plant



or this: strike in Toronto looming and flat to falling wages in the public sector: http://www.thestar.com/news/article/1126236--toronto-labour-disruption-what-you-need-to-know?bn=1



Or bus drivers in the York Region: http://news.nationalpost.com/2011/10/24/york-region-transit-viva-service-disrupted-due-to-strike-while-go-bus-labour-action-averted/



or this one on unsustainable debt: http://fullcomment.nationalpost.com/2012/02/03/kelly-mcparland-deficit-report-reveals-decrepit-state-on-ontario-finances/



Add the unsustainable clean energy feed-in tariffs, thus rising
electricity rates, the very high debt and you have to be very careful where
to invest in Ontario to get house price upside in a flat to falling wage
environment.



Lower wages + tighter mortgage rules = lower house prices !



Thus, ask yourself: would I make this investment if the house price is flat for 5 years ? It may make sense, depending on the asset, or it may not.



Tread carefully !



Next province to follow Ontario's "lead" of more union power, higher debts, higher taxes and a downward spiraling economy: BC (NDP leads in the poll's .. OMG .. election in spring 2013)

 

[mortgageman]

One of Thomas' arguments that no one picked up on is the potential for tighter mortgage rules.

I think he's bang on and that we'll see tighter mortgage rules very, very soon. Like right around the coming federal budget.

The finance minister seems to be musing about it in the media and I wonder if it is a trial balloon or a shot across the bow.

A number of lenders over the last week or so have completely left the stated-income programs that are very popular with self-employed people. Other lenders have tightened up their stated income rules so that for all intents and purposes they're out of the game too.

These changes affect all provinces but will arguably have a larger impact on areas that are expected to see sluggish job growth and softer real estate prices.

 

[invst4profit]

[quote user="Thomas Beyer

Lower wages + tighter mortgage rules = lower house prices !



Thomas clarify something for me.

You suggest that lower wages contribute to lower house prices yet you are in favour of overthrowing the unions control over wages and benefits in Ontario, particularly public sector, am I correct.



Would this not mean that you are in favour of union wages being reduced and therefor in favour of the impact that will have regarding the lowering of home prices.



As investors would we not prefer that prices continue to rise, regardless of the reason, and therefor prefer to see higher wages. Why should we care what the reason is that we are making money as long as we understand the reason.

Or is it that long term high wages will have a negative effect far out stripping the immediate positive effect on housing prices.



I am confused and curious.

 

[Thomas Beyer]

[quote user=invst4profit]As investors would we not prefer that prices continue to rise, regardless of the reason, and therefor prefer to see higher wages.


What matters is what is sustainable (and not what I or you prefer) given economic or demographic realities. Entitlements in the "first world" are by and large too high .. and will have to be curtailed such as unlimited free health care, retirement at 65, free education until 25, defined benefits, inflation indexed pension, 12 weeks vacation a year for teachers making $80K+, bus drivers making $70K+ or using "the government" as a cradle to grave insurance policy.



There is enough work to go around, but it has to be more affordable.



Italy (or Canada) pays their unemployed more than the Chinese pay their employed. This is not sustainable.

 

[invst4profit]

What indicators do we presently have to show today's continued growth is not sustainable for the next 10-20 years. Throughout history there have been down cycles that have always recovered.

Who would ever of imagined 40 years ago that the economy would reach the point where double income families were practically mandatory to be able to afford a home.

Income growth has slowed yet never permanently stopped or reversed.



Each decade or so the consensus is that "it can not be sustained" yet it continues to grow.

I personally believe it is unsustainable based on the present world economic situation but at the same time do not see how a correction will ever take place with present day world financial institutions and governments artificially insulating the economy. Easy to say it can not continue yet history shows otherwise.

The growth pattern is also encouraged not discouraged by investors who do have a influence on decision makers. Although most of us may be small potatoes the world is run by investors that do not want to see a reversal of the factors driving growth. Such as personal incomes.

As a investor I certainly do not want to see any of the corrections to the economy that you suggest regardless of any logical reasoning behind the need for correction. My personal financial desires trump common sense.



As a example I would have expected the tech crash several years ago would lead to a second world depression to rival that of the 30s yet it did not occur. Again now with the European situation we should be experiencing the same but the powers that be will not allow it to occur.



How can a company that produces nothing (face book) be of any possible financial value, yet it is. People today have far too much insatiable greed to allow a correction. Logical thinking is apparently no longer relevant in a world with personal wealth beyond imagination.



How can we believe there will ever be a correction aside from the fact that we think "this can not continue indefinitely".