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Are Rents in Canada 36% Undervalued?

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The OECD recently said that Canadian real estate prices are overvalued by 33% based on price:income ratio. Will Dunning is an economist who noted that when you use the same premise, you come to the conclusion that rents are undervalued in Canada by 36%. Could this be true? We take a closer look in this episode. PLUS we talk about a new student rental opportunity coming soon in the GTA.

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Speaker 1: Welcome to the True Condos Podcast with Andrew la Fleur, the place to get the truth on the Toronto condo market, and condo investing in Toronto.

Andrew la Fleur: Hi, and welcome back to the show. Thank you once again for listening. Thank you for supporting this show. I really appreciate it. This is episode number 65, hard to believe that we’re already on episode number 65, but this podcast has been great. It’s been a lot of fun to do. It’s also been a lot of fun to hear your feedback, hear your comments from just a wide range of people. Obviously, the primary purpose of this podcast is to talk to, and to educate you, the condo investor, somebody who is already investing in the condo market in Toronto, and in Canada, or somebody who is interested in investing in the condo market. You’re doing your research. You’re doing your homework. You’re trying to understand if this is the right investment for you.

That’s the primary purpose. Obviously a lot of people within the industry itself, the condo and development, and real estate industry, follow along to this podcast, and they do appreciate your support, of course, as well. I receive some great comments from a lot of people in the industry too. Just today, actually, funny enough, I got a great comment just from another real estate agent, who is a colleague of mine, somebody who has been in the business a very long time. A very well respected realtor in the city. They were just saying how they have learned a lot from listening to this podcast, so that’s great to hear, that even somebody who has been in the business for a long time, somebody who has sold a lot of property and a lot of condos, and somebody who I respect, is getting something from this. Thank you very much again for all the support everyone.

Again, for the show notes on this episode, if you want to get a transcript of this episode, or if you’d like to just see some of the links to some of the things that we’re going to be talking about on this episode, and all the episodes, just head on over to, and this episode is number 65.

On today’s show, I want to just talk briefly about just one little anecdote, one little comment that came up on twitter this week. Some of the people I’m following a long. I think this one was from Ben [Meyers 02:12]. Ben was at a housing conference, and he was tweeting some great little factoids about what some of the speakers were talking about. Will Dunning, who is an economist, housing analyst, similar to Ben Meyers actually, he was giving a presentation, I believe at this conference. He had some very interesting things to say. I’m going to hopefully actually have Will on the show. I’ve reached out to him, and hopefully we will have Will on the show, on the podcast soon, to discuss in more detail, but one of the very interesting points that he brought up was regarding this OECD data.

OECD, Organization for Economic Cooperation and Development. It’s obviously an international organization. You’ll often see them in the headlines. It seems whenever something bad is about to happen, you’ll see OECD, or when they think something bad is about to happen, we’ll see OECD’s name in the headline. OECD predicts XYZ to happen. XYZ is always something horrible, interestingly enough. One of the things that they have been trumpeting around a vast number of years, and we’ve talked about it on this podcast before, most notably on the interview with Peter Norman, if you want to go back and listen to the interview of Peter Norman for more background on this, please do. Again, I’ll include a link to that one in the show notes for this episode.

OECD has basically said for awhile that prices in Canada are over valued by 33 percent, or 30 percent, or whatever it is. I think this month they’re saying, 33 percent, prices are over valued in Canada. That’s a head line that obviously will sell a lot of newspapers, and a lot of people will run with that. A lot of people will quote that at cocktail parties, “You know, real estate is over priced, and it’s a bubble” and so on and so forth. Did you hear the latest thing, this mighty international organization came down and told us this information. It must be true. This is what we’re used to hearing from them.

Will Dunning did this interesting analysis where he took the premise behind this statement. He took the premise and he flipped it around. What you find when you take a faulty premise, and you flip it around, you realize how faulty that premise actually is, and how it is flawed in the first place, and we really shouldn’t be looking at that as a legitimate analysis of this, or probably any other housing market, in my opinion. Basically how they come to this 30 percent over valued thing, is they look at incomes, they look at prices of real estate compared to income. They’re doing a ratio of income to price, or price to income. They look at these ratios over time, and when they do that, they come to the conclusion that prices have gone up a lot, I guess, but incomes have not gone up as much, therefore, by their analysis, Canadian real estate, Canadian prices are over valued by 30 something percent.

Will Dunning said, “What if we take that same principle, and we look at it with rent. Instead of income to price, what if we go incomes to rents, income to rent ratio? Very interestingly, I thought at least, he discovered if you use the same principal that they’re using there, then you would come to the conclusion that Canadian rents are under valued by 36 percent. If you’re saying that Canadian prices are over valued by 33 percent, you’re basically saying that Canadian real estate prices are due for a correction, or a crash, they’re way high. If you use the same principle of this ratio, instead of going income to price, you go income to rent, then you should come to the conclusion that rents are actually under valued by 36 percent.

Imagine if you saw a headline in the newspaper that read, “Rents could soar by 36 percent in 2016, economist warns.” We see the headline all the time, “Prices could fall by 33 percent in 2016, economist warns.” That kind of headline we’re so used to seeing, and so many people are used to just soaking that in. Again, it’s cocktail party fodder, water cooler fodder to kind of say, “Oh did you hear, the real estate market is over valued by x percent. Oh yeah, it’s crazy, it’s all going to crash.” The prices are too high, and so on. Nobody is doing the research. No one is looking at the facts. No one is understanding how these numbers are coming up, and realizing that these are faulty premises.

When you flip a faulty premise, you come to a faulty conclusion. Go into more detail about this, and hopefully I’ll bring Will on the show, like I said, to get his analysis of this, which is going to obviously be much better than mine. Basically one of the things he’s talking about is the fact that interest rates are not taken into account in their analysis. The fact is, that interest rates are all time lows, money is cheaper than ever. He goes on to further analysis, and obviously comes to the conclusion, as I have come to the conclusion myself, and we talk about it on this podcast all the time, that Canadian prices, and specifically Toronto condo prices in this Podcast, are not over valued. There is not a bubble situation.

We are not anything like the United States was, for example, a few years back when their market crashed. It’s just not reality. Anybody who is looking at it through that lens is not seeing things correctly, and any investor who is looking at that obviously is completely missing the boat, and is completely missing the opportunity that is before them to participate in a very healthy, and growing market with specifically the Toronto condo market, and investing in Toronto condos for long term rental cash flow, and great returns.

That’s a little tidbit there. It also, I think when I was reading this, it also goes to a long standing premise that I have said whenever I am talking to investors, and people bring up this idea, what do you think? How is the market, are things over valued? Are prices going to fall? What I always say is, if prices ever actually did drop, you look at the rents that we’re getting now as condo investors downtown, you look at the returns that we’re getting. If prices ever did drop with any significance, these kind of numbers, these ridiculous numbers of 20, 30 percent. If prices went down that much, it would just be an absolute gold mine for investors, in the sense that you’re getting the same, or higher rents, as people stop buying, and start renting, you’re going to get the same, or higher rental rates, at a much lower purchase price, which effectively means that your rate of return is going to be much, much higher.

It just doesn’t make any sense. It’s just not going to happen, where you’re going to see prices drop off dramatically, unless, again, what I always say, the caveat of course, is unless there is some kind of major external shock to the system. For example, in Toronto, the two things you might look for, for whenever prices do fall, which of course they will eventually fall. Prices don’t go up forever. Prices will go up and down over time. Long term, they are always much, much higher, if you’re a long, long term investor, which you need to be in real estate, and you should be in real estate.

The two shocks, sorry off track here, but the two shocks I have referred to, one is a recession. If there is a major recession in Canada, if job growth starts to go down. If people are losing their jobs, if incomes are dropping. That obviously is always a negative thing for real estate. Two, immigration to Toronto. Immigration to Canada, specifically immigration to Toronto, if that drops off for some reason, if people stop moving to Toronto. If the city stops growing, then yes, obviously that is a problem. Again, what would cause that to happen? I don’t know. It’s hard to even think of a scenario where people would stop moving to Toronto in the next 10 to 15 years, and the growth of Toronto would slow down. That I think is a far, very, very unlikely situation to happen. Recessions will happen, you can count on them. The city of Toronto, population growths going down, or the rate of increase shrinking significantly, very unlikely to happen in my opinion.

That’s I think plenty on that subject. There’s also another story this week in the newspaper, also referring to OECD, and one of their statements about the Toronto condo market, and how there’s issues with all these unsold units. We’ve talked about this again so many times in the past, so I’ll just include a link to the show notes to that article where Benjamin Tal, who is also interviewed on this podcast, economist from CIBC, he basically slammed the OECD and said, “They’re looking at this completely wrong. They are just looking at it from 10,000 feet. They do not understand the intricacies of our market, and therefore once again, they are coming up with false conclusions that should be taken with a massive grain of salt.” You can look at that as well.

I think the lessons here, again, don’t believe everything you read. That’s the first thing. When you’re reading these headlines, don’t believe everything you read. Even whatever I’m saying to you on this podcast, whatever I’m writing to you in e-mails and articles, don’t believe everything I say. You need to follow a variety of sources for housing information. You need to take a balanced look at what information is available in the market. Don’t just take it from me. Don’t just take it from OECD. You need a variety of sources.

The final point, the final lesson, I think that everybody needs to understand, you need to be especially skeptical of any headline, or any information on Canadian, or Toronto housing that is coming from an organization, or coming from a source that is not based in Canada. Again, it seems to make common sense that when an external, somebody that is not from here, somebody who is not in this market, living here, and working here, it would seem to make sense that whatever they say about the market should not be taken as valuable as somebody who is in this market, who is living here, and working here, and has been doing so for a long time.

For whatever reason, it seems the headlines always are attached to these external sources. Maybe it’s something in our Canadian DNA. We’re always looking for external validation or something of ourselves, but for whatever reason, we don’t seem to realize, let’s take a step back and say, these guys who are criticizing us, are they from here? Do they understand our market? Do they live here? Do they work here? Have they been studying this market from the inside, or are they just looking at it from the outside? Again, I would just say, be especially skeptical of those sources, like the OECD, like the Economists magazine, and others we’ve seen over the years that are just looking at the Canadian market from afar, looking at it through their own lens, and not from here on the ground.

That’s enough for that point there. One other thing I just wanted to talk about on today’s podcast, while I have the chance, is there’s a very interesting opportunity, shifting gears completely here from that topic. There’s a very interesting opportunity coming up, another great investment opportunity in the high end student rental market. We’ve talked a lot about these buildings, on this Podcast, from University Suites in Kingston, to of course, the Academy Condos in University of Toronto, Scarborough campus, and of course Capitol Hall. Capitol Hall is in Ottawa next to University of Carleton. We talked a lot about these opportunities in this podcast.

Another great one, new one coming up very soon, the details are starting to come in. I wanted to let you know about it now, is called University Studios. It is right next to UOIT University of Ontario Institute of Technology, which is in Oshawa. It’s actually very, very close to campus. It’s literally just a couple of steps away from campus, possibly the closest to campus of any of the projects that we’ve seen. It’s very exciting that it’s the same team who put together University Suites in Kingston. Varsity Properties doing the management, Podium PRK Developments are the actual development team, and University Suites in Kingston, of course, 2 buildings there sold out in record time. That project is 100 percent sold out. You cannot purchase a unit there.

The same team now is bringing us a great opportunity here in Oshawa at UOIT. What do we know about the project so far, just briefly? We know it’s the same team. We know the location. We know the name, University Studios. You can probably guess by the name, the entire building is studios. It’s the first of its kind. It’s very innovative, very smart, very forward thinking. Obviously, you know my stance on studio apartments. I own several of them myself. About half of my portfolio roughly is made up of studio units. I’m a big fan of them. I do think there’s a great future for studio apartments. They just make so much sense. You just can’t go wrong with a studio. When it comes to the high end student rentals, what we’ve found is that they are the most popular unit type in these different projects that we’ve worked on.

The team at Varsity and Podium, they basically took their experience from Kingston, and said, “Everybody wanted these studios, and they were so popular, why don’t we just make an entire building of studios?” That is exactly what they’ve done. They’ve taken the most popular unit, that will attract, in my opinion, the highest quality tenants for this particular market niche in the high end student rentals, somebody who wants their own private space. It’s going to be the highest quality tenant in the student world.

What else do we know? The prices are just amazing. It’s hard to believe, but the prices are starting from 149, 149,000 dollars for a condo in the GTA. Again, that’s not a mistake, not a typo, do not rewind the tape, 149,000 dollars is the starting price for these units. They are, obviously at that price, the cheapest condos in the GTA, the cheapest condos anywhere. They are going to fly. They are going to sell quickly. If you are interested, you definitely want to contact me as soon as possible. They are the first of their kind in Oshawa, obviously at the University of Ontario. They are the first project of this type, of the high end student rental with the specific guarantees in place. The first of its type in the greatest Toronto area since the Academy Condos from 2014. That project, also like University Suites in Kingston, sold out within a matter of weeks, and that project is totally sold out. Once again, the offer will be consistent with other projects we’ve seen before.

We are going to have a 3 year rental guarantee. You’re going to have 3 years of free property management. The units will be fully furnished. It’s that great, great hands free, low maintenance, headache free offer that the investor community, and so many of my clients, so many of my listeners of this podcast have taken advantage of. That offer is back. We love it. It’s great, and just really makes a lot of sense for somebody who’s looking to invest in the real estate market, to invest in condos, doesn’t want to have any headaches, no hassles, everything taken care of, but they still want to get a great return. This is it.

What’s very interesting about these, again, the details are just coming in. We don’t have everything yet, but from what I’ve seen so far, the sneak peek, that I have seen, the units come with some very interesting built ins, some very custom millwork, where you’ve got … For example, you have a wall bed, a Murphy bed, that when it’s down, obviously it’s your bed. It’s like a double bed to sleep on. When you fold it up, it becomes a dining table, a work table that can seat a few chairs, and that’s your dining room. It really has this multi purpose, very interesting furniture, all included. This type of furniture that they’re including at no cost, is typically costing you anywhere 5,000, 10,0000 dollars in other projects that we’ve seen with this type of furniture included.

For all the information on this, to get the investor package, if you’re interested on University Studios, just head on over to for the show notes on this episode, which is episode number 65, and you can download it there. You can also just go to and search for University Studios, and you can download the investor package there.

Thank you very much for listening to this episode. I hope you enjoyed it. I hope you learned something. I look forward to talking to you again soon next week. Till next time, have a great week.

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