5 Big Ideas for Real Estate Investors in 2019

Andrew la Fleur: On today’s episode, I’m going to share with you Five Big Ideas for 2019, when it comes to real estate market in Toronto and investing. Stay tuned.

Announcer: 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: Welcome back to the show. It is 2019. This is the first podcast of 2019 for the True Condos Podcast. Thank you, again, for listening. It’s a new year. Hard to believe that we started this little show back in 2014, and here we are in 2019. Once again, thank you very much for the show.

Andrew la Fleur: If you’re new to the show, thanks for being here. Make sure you check out some of the past episodes to get a flavor of what we’re all about here. I think you’re going to find a lot of value in the back catalog there, if you’re interested in condo investing, or real estate investing in general. Glad to have you here.

Andrew la Fleur: If you’ve been listening to the show for a while, and you have not yet left us a review or a rating on iTunes, we’d greatly appreciate if you did that. It really helps get the word out about the show. Thank you so much. If you like the show, if you could share it with somebody that you know, somebody else who maybe is interested in real estate investing, we’d really appreciate that, as well.

Andrew la Fleur: I want to talk to you, as we are jumping into the new year. Obviously, it’s a time of year where we look back. We look forward. We wonder what’s ahead. We wonder what just happened. Some people just wonder what’s going on at all. We always want to be thinking strategically and thinking, what can we expect for this year? I have a few thoughts for you I wanted to share.

Andrew la Fleur: Here are my five big ideas for 2019, with respect to the condo market in Toronto and investing in real estate. Number one is this pent-up demand, pent-up demand, that is growing, that is lurking in the background, that not many people are talking about, but I believe it is a huge issue, and it’s something that’s going to really affect our real estate market, not just this year, but for the many years to come. What I mean by that, and something I’ve been tweeting a lot about over the past year, as well … It’s a theme that I keep coming back to with people, and helping people understand what is happening in the market.

Andrew la Fleur: If you look at the level of sales that happened in 2018, the total volume of sales, so looking at the resale market in Toronto, the volume of activity in the market is down dramatically from what it was at the peak of 2016. The level that we were at in 2018 was the lowest level of total number of transactions since 2008. Of course, 2008 was the year that the Great Recession hit; 2007 was something of a peak year, and then we went into 2008, the recession hit, and it was a major down year; 2008 was a very bad year. We’re at a level just a little bit above where we were way back in 2008.

Andrew la Fleur: On the surface, that is not a good thing, and on the surface, that would tell you something is really wrong or different about the market, if we’re at the same level where we were at a recession year, but the bigger picture here, and again, this is something that people are just not thinking about, is we have added to this region, to the GTA, we’ve added approximately a million people since 2008. We have a million more people living in the GTA. Population has grown by roughly, call it 20% or so. The population has grown by 20% since 2008 in the GTA, and yet we have around the same level of real estate transactions occurring.

Andrew la Fleur: You would expect, naturally, that the number of transactions would be approximately, give or take, around 20% higher, but we’re at a similar level. That is a huge number. We’re in a … Why is this happening again? The main reason why this is happening is the stress test. The stress test … Well, two things.

Andrew la Fleur: One is we’re coming off of obviously a bubble period in the overall resale market in 2016, where prices just went out of control for a short period of time, and so we’re coming down off of that, and we’re sort of the hangover period after that. We’re still recovering from that, but the bigger reason is the stress test, and the fact that the Government is essentially forcing people who want to buy, saying to them, “No, you can’t buy.” They are creating this pent-up demand, this forced demand, forcing that demand to the sidelines, saying, “No, you could buy before. We’re saying, no, you cannot buy now.” It’s artificially restricting the number of transactions that could otherwise have taken place.

Andrew la Fleur: This problem is just getting worse and worse, as our population is growing. Our population today is about 100,000 people more than it was a year ago. We’ve added another 100,000 people. Every day, we’re adding people, but we’re restricting, and then the number of transactions that are taking place are being restricted.

Andrew la Fleur: This problem of pent-up demand, as I call it, is getting bigger and bigger, as more and more people are being added to the market, but people are not able to purchase, primarily because of the stress test. Where does this pent-up demand go is the next question. It has to go somewhere. These people are coming in. Well, naturally, a lot of that is going into the rental market. If you can’t buy, you’ve still got to live somewhere. You rent. The rental market is benefiting from the struggles of the resale market, so to speak, so that’s partly why … reason why we are seeing such huge growth continually, more than two years now of double digit rental growth in the condo market. It’s absolutely been an incredible run.

Andrew la Fleur: If you are somebody, who bought real estate before 2016, if you bought a condo before 2016, especially, you have done very, very well, and your rental rates have risen dramatically. That is assuming your tenant has moved out sometime in the last couple years, because we have rent control, of course, as well, so if you have the same tenant from, say, 2015 until today, the rent that they’re paying you is dramatically under the current market value, and you’re not too happy about that, as well, talking about rent control.

Andrew la Fleur: What’s going to happen with all this pent-up demand? Where is it going to go? Well, it’s going to continue to go into the rental market, but at some point, I mean, people want what they want. Not everybody wants to rent. People are looking for ways, and they will find ways, to purchase, whether that be through private mortgages and other ways. We’re starting to see a growing number of voices, from within the real estate industry and from without the real estate industry, starting to call for the Government to either get rid of the stress test or to at least scale it back, instead of being, say … Some people are proposing, okay, instead of it being 200 basis points, 2% higher than the current rate, well, what if we knocked it down to just one percentage point higher?

Andrew la Fleur: That would certainly open the doors for a lot more buyers to come into the market, which would help a market out, which again is sitting at the lowest level of sales since 2008 recession year. Something’s got to give there. That is a major theme and thing that I’m going to be watching and interested to see how that plays out in 2019. That’s the first one.

Andrew la Fleur: Number two: The second big idea for 2019 is that I believe interest rates will actually come down in 2019, yes, not up, but down. Just as recently at 90 days ago, in late 2018, every expert you talked to was calling for higher interest rates, and not just a little bit higher, but significantly higher, over the next year or so. They were predicting three or four rate increases, and their increases are 25 basis points at a time. Most people were predicting three or four of those in 2019.

Andrew la Fleur: Now, if you ask the experts, and the people who track these sorts of things, they’re basically saying no interest rate increases in 2019, and a few people are saying interest rates will actually be decreased in 2019. I personally, as of this moment, recording this broadcast today … Of course, these things change all the time, but as of this moment, I would be on the side of the fence saying interest rates are going down in 2019.

Andrew la Fleur: There’s just so much negative news in the economy, so many worries of a potential recession hitting. The reality is that, while the economy, overall, is not doing terrible, there’s still a lot of storm clouds on the horizon. There’s still a lot of uncertainty. We’re still in a very slow growth mode. Yes, we are growing, as Benjamin Tao said, and I talked about it on a previous podcast recently. Yes, we’re growing. Yes, the economy’s growing, but it’s growing at a very slow rate, the slowest rate that it really has grown at in a long time. Again, I think that, from where I see it, I think interest rates are actually going down.

Andrew la Fleur: Again, the lesson here for the investor is so many people, not, well not … Granted, not a ton of people, but I’ve had many conversations over the last number of years, where people are not investing in real estate, because they are fearful that interest rates are going up, and that’s going to just kill their investment. They’re going to go from 100 bucks a month cash flow to minus 100 bucks a month, or whatever it might be, the calculations they do in their head, these doomsday scenarios, and they think, “Nope, that’s why I’m not going to buy,” or, “No, Andrew, I’m not going to buy preconstruction, because there’s so much uncertainty. I don’t know what interest rate I’m going to get. I can’t lock in today’s rate for four years.” Right, so again, I’ve been hearing this for 10 years now, 10, 11, 12 years even.

Andrew la Fleur: Interest rates have been low for a very long time. It’s my belief that interest rates will continue to be low for a very long time. We have dug a major hole by creating this cheap money scenario. We’re going to be down in this hole, I believe, for a very long time. Again, my personal belief is we could be here for decades. That’s obviously on the extreme end of things. You talk to 10 different economists, and 10 different people who study these things. They’re going to give you 10 different answers. Sure, interest rates may go up, but look what has just happened here. Our economy, by some measures, is the best it’s been ever.

Andrew la Fleur: You see the stock market soaring. You see unemployment numbers dropping. Yet, here we are. We just raise interest rates three times, not even 1%, and everybody is crapping their pants and scared that the whole thing’s going to fall apart. People are still out there saying we’re going to get interest rates back up to the good old days where it’s 7-8%, and this kind of thing. It’s like, come on, that’s just crazy. We’re in this pit of low, cheap, free money, and it’s going to take us perhaps as much as a generation to get out of it, or we might just be low interest rates, and these kind of low, low levels just might be the new normal for decades and decades to come. Nobody knows, of course, for sure. That’s just how I see it in my opinion on the thing, after observing this for the past 10 or 12 years.

Andrew la Fleur: Again, I always remind people on the flip side, look, if interest rates do go up significantly from 3-4%, if they go up to 6, 7, 8%, where some people are saying they “should be” the natural levels, or whatever terminology people want to use, as if there’s some god of interest rates out there that dictates it must be a certain way, even if they do go up to those levels again, I always point out to people, this is a good thing. Rising interest rates is a good thing.

Andrew la Fleur: The reason why the central banks would raise interest rates significantly like that would be because the economy is flying off the handles, the economy is growing, and inflation is growing at very high levels. Again, that is a good thing. We want the economy to grow. We want more wealth to be created. We want things to become more expensive, because that shows that what we’re doing is working, and that more money and more wealth is being created. It’s a positive thing for the economy.

Andrew la Fleur: Rising interest rates is a lagging indicator telling us that the economy is doing good, right? Again, if the economy’s doing good, recessions don’t happen, real estate crashes don’t happen. It’s a good thing for us, as real estate investors. All things being equal, as real estate investors, yes, we like interest rates to go down, cheaper money, because we can finance properties cheaper. We can get better cash flow on our properties. Yes, we like that. It’s tempting to fall into that thinking, sure, but really, all things being equal, we should be cheering on and hoping and dreaming that interest rates will go higher, much higher, because that indicates, again, the economy is getting stronger, that more people have higher paying jobs, that wages are going up, that people can afford to pay us higher rents, and so on.

Andrew la Fleur: Again, as the investor, if you own the asset, you win either way. If interest rates are going down, if interest rates are going up, if you own the asset, you win either way, either prices go up or rents go up, or both. You’re going to win either way, of course, the exception being if there is a major economic recession or crash. We don’t want to see that. Again, there’s nothing to indicate that that is on the horizon at any … in the very near future.

Andrew la Fleur: Getting off track here a little bit, let’s get back on the tracks before we go too far off, and bring you to point number three big idea for 2019. That is rental rates. Where are rental rates going? There’s a lot of talk in the news this week, at the time I’m recording this podcast, about predictions for the rental market in 2019, and rentals.ca and Ben Myers did a report. They’re getting tons of airplay on that from the major media, because they’re coming out and saying their prediction is that rental rates in Toronto will increase this year by 11%, 11%. It’s a huge increase, but believe it or not, it’s actually in line with the increases in the rental market from the past two years.

Andrew la Fleur: Basically, they’re saying more of the same. Rental market continues to be dramatically under supplied, and we talked about that earlier and reasons for that, and all the pressure that is being put on the rental market because of the stress test. The key thing that … Whether the rental rate, whether it’s going to go up 11% or some other number that’s maybe smaller than that, I think you talk to any expert, Urbanation and anybody who’s tracking this stuff, everyone agrees that rental rates are going to go up this year again. Rental rates are not going to go down. Even though rental rates have increased dramatically over the past 24 or 36 months, everybody still agrees that they’re going to go up. It’s just a matter of are they going to go up big or are they going to go up small? Are they going to go up 4 or 5%? Are they going to go up 10-11%? Well, either way, it’s good news for us as landlords.

Andrew la Fleur: Everyone agrees that rates are going up, and they’re going to go up more than normal, if normal levels are around that 2-3% inflationary levels, which was the normal rental rate increases before the last couple of years. Everyone agrees they’re going up a lot more than that. The key thing that I’m watching here in 2019 is the new supply, the new supply being added to the market this year. Urbanation is predicting that a … potentially a record year for the amount of new supply being added to the market, the condo market. That’s something to watch.

Andrew la Fleur: If we have a record number of new units completing this year, buildings finishing, people getting their keys and occupancy happening, that would seem to indicate that that would be a downward force on the rate of rental increases, if we’ve got a large number of buildings all completing. I believe they’re saying around 20,000 units or so. Hoping to have them on the podcast soon to talk more about it, but I believe they’re predicting somewhere around 20,000 or so.

Andrew la Fleur: Now, the problem with predicting how many units are coming onto the market in a given year is that construction timelines are very difficult to predict, so there’s always delays and things. It’s hard to say what the actual number is going to be this year. Every year, the trend is it’s supposed to be some number, and then by the end of the year the number is always, generally speaking, less than whatever that number was. There’s always delays, and things always take longer than we expect, but that is something to watch for in 2019 is how many new units actually complete. Where we’re typically in the 15 to 18 thousand range, if we get above 20,000, then that is significantly more than what we typically get and what we’ve gotten in the past couple years.

Andrew la Fleur: If we get that increase of new supply, then a lot of those units turn into rental units, and in theory, that would put some cool water on these crazy high rental increases that we have been seeing, but again, this is just one year. We’re, of course, looking at the bigger picture of what happens after 2019, 2020 and beyond, as real estate investors, and the story continues to be, the theme continues to be dramatically under-supplied market, so we do continue to expect big rental increases in Toronto over the next five years.

Andrew la Fleur: Number four big idea for 2019 is prices. Where are prices going to go? Everybody wants to hear about that and wondering what my opinion is on that. Well, if you are … I have a secret crystal ball that’s not really a secret. I look into this crystal ball whenever I want to know where prices are going: up, down, or sideways. The crystal ball, as some of you may know from listening to this podcast over the years … It’s called a sales-to-listing ratio. When you look at the sales-to-listing ratio, it gives you an idea of how many sales are taking place in a given month versus how many actual listings are available in that given month.

Andrew la Fleur: When you track that ratio over time, it gives you a very clear picture of what direction prices are going. There’s a very strong correlation between the sales-to-listing ratio and the appreciation, the price appreciation. When I look at that number, for the last few months, from October, November, December, and we’re talking about in the resale market, the sales-to-listing ratio is still extremely high. It’s still much higher, way higher, than it typically is, which is explaining why prices continue to rise.

Andrew la Fleur: Most recently, in December, I think the number was around 64% for downtown condo market. Again, the typical number we would see in the month of December would be around 30%, and so we’re at 64%, more than double that. The range that we’ve been in is in the 60s and the 70s for the past year or so, and we’ve seen prices go up by double digit amounts in the past year or so.

Andrew la Fleur: My crystal ball is telling me that, over the short term, over the next few months, we do expect prices to continue to rise much higher than typical. If the typical rate of increase is 4, 5, 6%, then we’re expecting them to rise a lot more than that over the next few months. What will happen beyond the next few months? Impossible to say. Our crystal ball does not project out that far, but it is good for looking at the short term.

Andrew la Fleur: In my opinion, I do think prices will rise in 2019. I think that prices will rise at a slower pace than they have risen in, say, 2017-2018. I do think it’s pretty clear, from all the numbers and all the data, and what we’re seeing in the market, that prices will continue to rise at a higher than normal [clip 00:22:37] rate, looking into 2019.

Andrew la Fleur: Number five, the last big idea that I want to share with you for 2019, is the theme of being priced out of Toronto. More and more investors are going to continue to be priced out of Toronto and looking at other markets to invest in. This was a huge theme, as you know, from 2018, with prices just. Again, back in 2014-2015, if you’re an investor, and you call me, and you say, “Andrew, I’ve been listening to your podcast and reading your stuff online, and I want to invest in a condo. Thank you for your help so far. Let’s take it to the next step.” This is what happens every day, and if you’re out there listening, you can reach me anytime, andrew@truecondos.com, call me 416-371-2333.

Andrew la Fleur: Again, back in those … Five years ago, it’s like, okay, we have plenty of great condos downtown between 200 and 300 thousand dollars. There’s lots of great options out there. If you want to go up to say 400 thousand, even better. You get all sorts of other opportunities opened up to you, even better.

Andrew la Fleur: Now, today, if you’re reaching out to me, it’s a very different reality. Prices have risen dramatically. The entry level point in downtown Toronto now is about $550,000, 550. You need around $100,000 to make the deposits for an entry level into downtown Toronto condo market. If you have $100,000 or more, continue to invest downtown Toronto. It’s going to always be the best place to put your money over the long term. Keep it up.

Andrew la Fleur: If you’ve been investing, keep reinvesting and refinancing those properties, and keep buying in Toronto. If you’re a new investor, or if you’re looking to grow your portfolio, and you just don’t have the resources and capital available to get into units that are $550,000 and higher, what are you going to do in 2019? Well, you’re going to do what you continued to do in 2018, which is more and more investors looking at other markets that are poised for growth. I did a big video on this. If you’re interested, you can check that out on truecondos.com, about being priced out of Toronto. Just Google that, or just put that in the search bar, priced out of Toronto. I’ll include a link to it in the show notes for this episode, as well. Show notes you can find at truecondos.com/podcast.

Andrew la Fleur: Again, markets that we’re keen on, that we’re big on, outside of Toronto, would be downtown Hamilton, downtown Ottawa, downtown Kitchener. Those would be the three markets to look at in 2019, and certainly will have opportunities there for you, the investor, to look at, somebody who doesn’t have $100,000. Maybe you have $50,000, and you’re saying, “Where can I invest?” Well, we’ve got great options for you, just not in downtown Toronto. That’s just a reality of the market today. Again, if you have the resources, if you have the means, continue to put that money primarily in downtown Toronto, but if you’re looking to diversify, or if you’re looking for something more affordable, those would be the markets that I would key in on, again in 2019: downtown Hamilton, downtown Ottawa, and downtown Kitchener.

Andrew la Fleur: Okay, there you have it. That is the end of the podcast for now. Hope you enjoyed this episode. Welcome to 2019. I hope it’s a great, great year for you. I hope you achieve your goals and do great things this year. If you’re new to real estate investing, I hope this is the year that you jump in and get started. If you are an existing investor, I hope this is the year that you make even smarter and better decisions, to build your portfolio and grow your wealth, than you ever have before. I hope to be able to help you do that. Until next time, have a great week, happy investing, and we’ll talk to you soon.

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