Our CEO and President, Brian Dorr has launched a YouTube Channel. This channel is all about sharing his knowledge, experience and insights in the Canadian Commercial Real Estate Finance area to Canadians.

Here is a sneak peak  to a pre-launch August 2024 Economic and Real Estate market overview. Brian has some insights into the market now and speculation as to where its going.  Check it out.  Follow along on YouTube, share with your friends and colleague, Please like the video (but only if you like it) and provide some comments. We are #alwaysopen to content ideas. 

As a real estate investor or future real estate investor there are some key terms you will hear used over and over again.  Here is an introduction to some of the real estate terms, concepts and acronyms. With this knowledge, you’ll be able to make more informed decisions or ask better questions when it comes to real estate investments. 

Absorption rate: 

This is the rate at which available homes are sold in a specific market. It is calculated by dividing the number of homes sold in a period of time by the total number of homes available.

Amortization: 

The process of gradually paying off a debt with periodic payments. This period can range anywhere from five to thirty years.

Appraisal: 

This is an estimate of a property’s value, typically conducted by a professional appraiser.

Assessed value: 

This is the value of a property as determined by a local municipality for tax purposes. The assessed value should not be confused with the sale price.

Bridge loan: 

A short-term loan used to finance the purchase of a property before the borrower obtains permanent financing.

Broker: 

A professional who helps facilitate the sale of real estate, usually in exchange for a commission.

CAP rate: 

The capitalization rate is used to estimate the potential return on an investment property. It is calculated by dividing the net operating income by the purchase price (or current value) of the property.

Cash flow: 

The net amount of cash and cash equivalents being transferred into and out of a company.

Contingency: 

A condition that must be met in order for a real estate contract to be legally binding.

Closing: 

The final step in a real estate transaction, during which all the paperwork is signed, and the property officially changes hands.

Down payment: 

The initial payment made by a buyer to a seller when purchasing a property. The down payment is typically a percentage of the purchase price.

Due diligence: 

The process of investigating a property before making an offer, in order to confirm that it meets your investment criteria.

Easement: 

The right of one party to use the property of another party for a specific purpose. For example, an easement may give a utility company the right to build power lines on your property.

Encroachment: 

The unauthorized use of another person’s property. Encroachment can be something as simple as a fence that crosses onto your neighbor’s land, or it could be a building that is constructed on your property without your permission.

Escrow: 

An arrangement in which a third party holds and administers money or documents on behalf of two other parties.

Equity: 

The difference between the fair market value of a property and the amount still owed on its mortgage.

Fixed-rate mortgage:

A mortgage with an interest rate that remains the same for the life of the loan.

Infrastructure: 

The basic systems and services that a community needs in order to function, such as roads, sewers, and power lines.

Joint tenancy: 

A form of co-ownership in which each tenant has an undivided interest in the property and the right of survivorship. This means that if one tenant dies, their interest in the property passes to the surviving tenant (or tenants).

Land contract: 

A contract in which the buyer agrees to pay the seller for a property in periodic installments, rather than in one lump sum.

Liens: 

A type of debt that is attached to a property. When a property is sold, the liens must be paid off before the sale can be completed.

Loan-to-value (LTV):  

The ratio of a loan amount to the value of the property it is being used to purchase.

Leverage: 

The use of debt to finance the purchase of an asset.

Mortgage: 

A loan used to finance the purchase of a property. Mortgages are given by banks and other financial institutions and are typically repaid over a period of 15 to 30 years.

Market value: 

The highest price that a buyer is willing to pay and the lowest price that a seller is willing to accept for a property.

MLS: 

Multiple Listing Service, a database of available properties compiled by real estate brokers.

Net operating income: 

This is the income generated by an investment property after operating expenses have been deducted.

Option period: 

A specified timeframe during which a buyer has the exclusive right to purchase a property, as outlined in their offer.

Offer: 

A prospective buyer’s bid to purchase a property.

Pre-approval: 

A commitment from a lender stating that they are willing to provide financing up to a certain amount, based on the borrower’s credit history and income.

Principal: 

The amount of money borrowed or remaining on a loan, not including interest. This number is important to know when calculating your return on investment.

Property tax: 

A tax imposed by a municipality on real estate based on the property’s assessed value.

Purchase agreement: 

A legally binding contract between a buyer and seller for the sale of a property.

Refinancing: 

The process of taking out a new loan to pay off an existing one. An investor may use this strategy to take advantage of lower interest rates or to free up cash for other investments.

ROI: 

Return on investment, a measure of the profitability of an investment. Investors use ROI to compare the expected profitability of different investments.

Sale price: 

The price at which a property is sold. This value may be different from the assessed value or appraised value.

Seller’s market: 

A market in which there are more buyers than there are properties available, resulting in higher prices.

Title search:  

A review of public records to confirm that the seller is the rightful owner of the property and there are no outstanding claims or liens against it.

Variable rate mortgage:  

A mortgage with an interest rate that can change over time. This depends on factors like the prime rate and market conditions.

Vendor take-back (VTB) mortgage

A mortgage in which the seller of a property is also the lender for the sale. With a VTB, the buyer makes payments to the seller instead of to a traditional third-party lender, such as a bank.

Zoning: 

The regulations set by a municipality dictate how the land can be used. Depending on the property, it can be zoned as residential, commercial, or industrial.

These are just a few the of the many, many real estate terms.

As humans, we tend to fall victim to different biases when making financial decisions. Let’s take a look at behavioral finance and explore how we can circumvent these common pitfalls.

Steve Huebl, June 3, 2024     published  by Canadian Mortgage Trend

While the odds of a Bank of Canada rate cut this week have risen, some experts admit the decision could still go either way.

Bond markets have priced in over 80% odds of a quarter-point rate cut on Wednesday following the latest GDP data showing Canada’s economy is slowing.

However, some economists remain unconvinced the BoC is ready to start easing just yet.

“We forecast a hold and put higher odds on a cut in July—or later. Sooner and bigger cuts face higher risk of becoming policy error,” wrote Sotiabank economist Derek Holt. “There is nothing to gain from rushing into a cut at this meeting. There is much to be gained by a more complete assessment in July.”

Rate expert and mortgage broker Ryan Sims recently published a blog post critical of Statistics Canada’s latest downward revision to fourth quarter GDP data, and the implications of the Bank of Canada cutting rates in a technically rising GDP environment.

“There are too many conflicting indicators right now to justify a 25-bps reduction,” he wrote. “Should the BOC cut rates, they risk fanning the inflation flames, and undoing all of the work they did over the last 28 months to try and cool things off.”

James Orlando, senior economist at TD Economics, points out that the Bank of Canada hasn’t given any indication it’s ready to lower rates just yet.

“This central bank has a track record of clearly communicating its intentions before implementing monetary policy changes,” he explained. “To maintain this transparency and forward guidance, we anticipate that the BoC will hold rates steady [this] week and use the meeting to set the stage for a potential rate cut in July.”

“Nonetheless, expect some surprises, as the BoC’s decision could go either way,” he added.

Indeed, there are compelling arguments for both a rate hold and a rate cut this week. Here’s a look at some of them:

Reasons why the Bank of Canada may cut rates

• Softening inflation

Recent data show inflationary pressures are easing, providing the Bank of Canada with more room to lower rates without stoking inflationary fears.

The Bank’s preferred measures of core inflation have posted four consecutive months of decline. And as National Bank and others have argued, if mortgage interest costs weren’t included in the BoC’s CPI calculations—a measure known as CPI-X—inflation would have been below the Bank’s 2% inflation target since February.

• Sluggish economic growth

Canada’s GDP growth flat-lined in March, resulting in a slower-than-expected growth rate for the first quarter. At the same time, StatCan sharply revised down previously released fourth-quarter growth from +1% to just +0.1%

Together, this indicates underlying economic weaknesses and “removes the last potential barrier preventing the BoC from easing off the monetary policy brakes with an interest rate cut next week,” wrote RBC Economics assistant chief economist Nathan Janzen.

Scotiabank’s Holt adds that the lagged impact of rate cuts on growth and inflation are one reason in support of easing rates sooner rather than later.

• Rising unemployment

A rate cut could help stimulate economic activity and job creation, addressing concerns over Canada’s unemployment rate, which has risen to 6.1% as of April from 5% just a year ago.

High unemployment rates are a leading contributor to higher mortgage delinquencies.

• Household debt relief

Lowering interest rates would reduce the debt-servicing costs for households, providing relief to consumers and, in particular, mortgage borrowers.

With 76% of outstanding mortgages expected to come up for renewal by the end of 2026 and payment shock expected to lead to a rise in mortgage delinquencies, the longer rates remain elevated, the more financial strain households are likely to experience.

Assuming no change in interest rates by then, the median payment increase for all mortgage borrowers would be over 30%, while fixed-payment variable-rate borrowers would see their payments rise by over 60%, according to Edge Realty Analytics founder Ben Rabidoux.

“I think things are about to get ugly if we don’t see [Bank of Canada rate cuts soon],” he said during a recent presentation at the Canadian Alternative Mortgage Lenders Association symposium.

Reasons why the Bank of Canada may delay cutting rates

• Canada’s tight linkage to the U.S.

Canada’s economy is closely tied to the United States, its largest trading partner. Significant deviations in monetary policy between the two countries can have substantial implications for the Canadian economy.

While the U.S. Federal Reserve has compelling reasons to maintain its rates for a few more months—high inflation and a robust job market south of the border—the Bank of Canada has to carefully consider the potential risks of diverging too quickly or too drastically from U.S. policy.

One major risk of the Bank of Canada moving ahead with a rate cut too soon is a potential depreciation of the Canadian dollar. While a weaker dollar might benefit exporters by making Canadian goods cheaper for foreign buyers, it can also increase the cost of imports, fuelling domestic inflation.

Diverging from U.S. monetary policy could affect investor confidence. If investors perceive Canada as taking a more aggressive approach to rate cuts, it might lead to capital outflows as investors seek higher returns in the U.S.

• Tiff Macklem’s own guidance

As mentioned above, Bank of Canada Governor Tiff Macklem generally tends to provide forward guidance to markets ahead of key shifts in policy.

In recent testimony before the House of Commons Standing Committee on Finance in early May, Macklem said the BoC would be “closely watching” the evolution of core inflation in the months (plural) ahead.

“The June 5 decision will only be one month since he said that, and so he would significantly contradict his own guidance if he cut now, which wouldn’t help the central bank restore some credibility around its forward guidance tool after the experiences during the pandemic,” noted Holt. “If he wanted to tee up June cut pricing, then he either wouldn’t have made such a reference or would have made it sound more imminent.”

• The benefit of additional economic data

Delaying a rate cut until July would give the central bank the benefit of an additional month’s worth of economic data, providing a clearer picture of economic trends and conditions. This extra time would allow the Bank of Canada to assess more recent data on key indicators such as inflation, employment, consumer spending, and business investment.

“By the July meeting, the BoC will be able to evaluate two more rounds of data on inflation, job growth, wages, April GDP, and several other lesser readings,” Holt noted. “That’s a big data advantage over the June meeting and—if all goes well—would tick Macklem’s requirement for ‘months’ of further evidence.”

Introduction

When it comes to passive real estate investment, Ontario, Canada, stands out as a premier choice. The province’s robust economy, substantial population growth, and the dynamics of housing supply and demand make it an attractive location for investors. This article delves into the reasons why Ontario is an ideal destination for those looking to invest in real estate passively.

1. Economic Strength and GDP Comparison

Ontario is not just the most populous province in Canada; it’s also an economic powerhouse. As of Q4 2023, Ontario’s Gross Domestic Product (GDP) was the largest among Canadian provinces, contributing significantly to the national economy. This economic strength is a crucial factor for real estate investors as it directly impacts the real estate market’s health and stability.

Comparison with Other Provinces:

• Quebec and British Columbia, the next largest economies, have considerable GDPs but fall short of Ontario’s economic output.
• The diversified economy in Ontario, including sectors like finance, technology, and manufacturing, provides a stable backdrop against economic fluctuations.

2. Population Growth Dynamics

Population growth is a primary driver of demand in real estate markets, and Ontario is experiencing significant growth. Statistics Canada reports show that Ontario’s population growth rate is one of the highest among the provinces. This growth is fueled by immigration and inter-provincial migration, with many people moving to Ontario for its job opportunities and quality of life.

Impact on Real Estate:

• Increased population leads to higher demand for housing, both rental and owned, which can drive up property values and rental rates.
• Urban centers like Toronto and Ottawa are particularly attractive, creating hotspots of investment opportunity.

3. Housing Supply and Demand

The balance between housing supply and demand is a critical factor for real estate investors.

Supply Challenges:

• Ontario has faced challenges in keeping up with housing demand, partly due to regulatory constraints and land availability issues.
• This supply shortfall, especially in high-demand areas, has led to an increase in property values over time.

Demand Factors:

• Demand remains strong due to the province’s economic opportunities and population growth.
• The trend towards remote work has also increased demand for housing in suburban and rural areas, expanding investment opportunities beyond major urban centers.

4. Diverse Investment Opportunities

Ontario offers a range of real estate investment opportunities.

Residential Properties: From high-rise condos in downtown Toronto to single-family homes in quieter suburbs, there’s a variety of options to suit different investment strategies.

Commercial Real Estate: The province’s strong economy supports a healthy commercial real estate market, with opportunities in retail, land, new home development and industrial spaces.

Conclusion

Ontario’s combination of economic strength, population growth, and the dynamics of housing supply and demand make it a prime location for passive real estate investment. The province’s diverse economy and range of investment opportunities offer something for every investor. As with any investment, it’s crucial to conduct thorough research and consider local market conditions. However, for those looking to invest in Canadian real estate, Ontario presents a compelling case.

Diversification in investing is a strategic approach that plays a crucial role in balancing risk and potential returns in a portfolio. This strategy involves spreading investments across various asset classes, industries, and geographic regions to mitigate the impact of market volatility and economic downturns.

In the Canadian context, diversification is especially significant due to the country’s unique economic and market conditions. For example, during periods when the Canadian stock market may experience a downturn, having investments in bonds or alternative asset classes like real estate can provide stability. Real estate, particularly Mortgage Investment Entities (MIEs), serves as a compelling example of passive investing that can diversify an investment portfolio. REITs allow investors to gain exposure to real estate without the need to directly manage properties, thereby spreading risk and unlocking growth opportunities in different market cycles.

The concept of diversification extends beyond just mixing different types of assets. It also involves understanding and managing the correlation between assets, ensuring that the portfolio includes investments that don’t all move in the same direction under similar market conditions. This approach is particularly relevant in Canada, where the S&P/TSX Index is heavily concentrated in a few sectors like financial services, energy, and materials. Therefore, achieving effective diversification for Canadian investors often requires looking beyond these dominant sectors and considering international stocks, different industry sectors, and a mix of large, mid, and small-cap companies.

Long-term investors in Canada can benefit significantly from a diversified investment approach. While it might not offer the highest short-term returns, it provides a foundation for steady wealth accumulation and risk management over time. However, the path to achieving effective diversification can be complex, and it’s often advisable to seek professional guidance to tailor a diversified portfolio that aligns with individual risk preferences and financial goals.

In summary, diversification is not just a method of risk mitigation; it’s a comprehensive strategy that enhances the resilience and growth potential of an investment portfolio. By judiciously selecting a mix of equities, bonds, alternative assets like real estate, and considering geographic and sector diversification, Canadian investors can navigate market uncertainties more effectively and work towards long-term financial stability and growth.

References:

• MoneySense: “What is diversification?”
• Westgroup Financial Management Inc: “Investment Diversification: Spreading Risk for Long-Term Growth”
• DO Wealth: “Diversification – Beyond the Basics in Canada”
• Sun Life Canada: “Diversification: What Is It And How Can It Help Reduce Your Investment Risk?”