Where to invest in real estate now

It's still booming, and there's no bubble. For all those itching to invest, some pointers on whether, where, when and what to buy.

Want to buy a house in Vancouver? Hope you have lots of cash. The average price of a house in Lotus Land hit $490,004 in February. Think about it for a second. That's nearly half a million dollars–and 26.5% higher than a year ago. Put another way, it now takes a household income of $142,000 a year to comfortably purchase a place to live.

Wasn't the real estate market supposed to slow down this year? Apparently not. And it's not just Vancouver that's experiencing double-digit price increases so far this year. Canadian Real Estate Association (CREA) figures show the average home price from February 2005 to February 2006 rose 26% in Calgary and 15.5% in Edmonton, both economic boomtowns of late. But even relatively moribund Toronto saw an increase of nearly 6%, for an average price of almost $354,000. That's a lot of money to put on the line if you're thinking of investing in the real estate market–let alone looking for a place to live.

No wonder people are talking about another housing bubble in the making. Prices continue to soar. Interest rates are on the rise. Vacancy rates are comparatively higher, making renting an attractive option once again. But let's get one thing clear: there isn't a housing bubble.

Let's repeat that: There. Isn't. A. Housing. Bubble.

At least, not yet.

One of the annoying things about the real estate market is that it's difficult to predict or even tell when it gets too overheated. Sure, economists use affordability measures or pricing metrics to get a rough idea of a potential crash. One old rule was that if real housing prices increased 19% over eight quarters, there could be a bubble. But the truth is those techniques are probably only slightly more revealing than the cocktail party rule–you know, the one that holds that you're in a bubble when an acquaintance tells you unprompted that she has just bought two condos, one to live in and one for investing. A close second is when taxi drivers start telling you about the success their friends are having flipping properties.

Some of those signs are already here. But even with the current market uncertainty, real estate investing is still appealing to many. Property ownership is easy to understand, you can do it on your own, and you can physically touch your investment whenever you want, notes Douglas Gray, a former real estate and business lawyer and author of 22 books, including 2005's Making Money in Real Estate. “Real estate traditionally has always been a favoured form of investment and diversification simply because people can relate to it,” says Gray. “The stock market to many people is very intangible, and you're sort of relying on other people to make you some money.” Historically, real estate is a solid investment, returning an average of 5% a year over the past 25 years, according to CREA.

But the question every potential real estate investor wants to know the answer to hangs in the air: Can I still make money, or have I missed the boat?

There's no doubt people have been making money buying and selling property lately, but the housing market goes in cycles, and this run has been a strong one since it began in late 2001. Some form of correction is looming, but the noise you're likely to hear is not the loud pop of a bubble being pricked, but kind of a squishy sound. That's the sound of a soft landing. “A soft landing is where you see progressively slower activity because there's no real correction needed,” says Carl Gomez, an economist at TD Bank Financial Group. “Looking forward, you can read between the lines and see that a slowdown has already occurred in the housing market east of Manitoba, but it's been so soft that it's obviously not going to break the back of the economy as it did in the late 1980s and early 1990s.”

Those were the bad old days of real estate, when industry giants made their way to bankruptcy protection workouts and little guys lost their shirts. Speculators bet that the demand for housing was inexhaustible and fuelled a boom that had annual double-digit price increases not explained by economic fundamentals. Combine that with mortgage rates in the teens, and it was only a matter of time before the whole thing crashed.

This time around, the fundamentals are still good. Yes, interest rates have risen and will continue to increase, but not by much. Paul Ferley, assistant chief economist at BMO Financial Group, sees five-year mortgage rates peaking at a little over 7% in 2008, or roughly 125 to 150 basis points higher than today's rate of 5.74%. That's still near the record lows set only recently. Another factor in investors' favour is that most of the strength of the market can be explained by the shortage of supply relative to demand, says Gomez. “Overall, we see housing price growth slowing to the mid-single-digit levels and sales coming off, but not like they're falling off a cliff,” he adds. “Just a gradual, slow, steady moderation of activity.”

That might be enough to put off more skittish types, but one in six Canadian homeowners still plans to buy an investment property in the next 12 to 24 months, according to a survey by Re/Max in December. And those folks are not all millionaires or experienced risk-takers. While corporate executives and entrepreneurs are expected to be the most active, one in five real estate investors earns $50,000 to $60,000; one in three earns $75,000 to $100,000. “For people who want to be in it for the long haul, real estate is a safe, tangible investment, which the stock market doesn't always bring to the table,” says Michael Polzler, who is regional director of Re/Max Ontario-Atlantic Canada. “That's not to take away from the stock market, but it's that feeling of the tangible investment, the brick and mortar.”

And you get to use other's people's money to make money. That's called leverage. You can get in with a minimal amount of money; as little as $5,000 or less (of course, you'll have to get high-ratio mortgage insurance if that's less than 25% of the purchase price, through Canada Mortgage and Housing Corp. or Genworth Financial Canada) and have renters pay the mortgage. The power of leverage is easily illustrated: say you pay $25,000 down on a $100,000 home that increases in value by 5% in the first year; your ROI is 20%. Paying the full amount using your own money in the same scenario nets you only 5%. “It's better than anything you can get out there in the wild and wooly world of investing in the stock market, unless you're into the scary stuff,” says Gray.

Sounds easy enough, but one of the biggest mistakes neophyte investors make is not treating their purchases like a business, says Polzler. That means understanding how capital writeoffs work, taxation issues, the ins-and-outs of finding the right kind of renters and keeping the place up to snuff. That's why owning real estate isn't for everyone. You've got to live with the knowledge that if the market turns–and it will at some point–you're probably stuck with a large, immovable object. You've got to enjoy fixing toilets at 2 a.m, dealing with sometimes snarky tenants and handling a lot of paperwork. Or you've got to be prepared to pay someone else to do all that for you. “Why on earth would you do this yourself?” asks Gavin Graham, chief investment officer at Guardian Group of Funds in Toronto. “Property is a wonderful investment, but the problem is liquidity. If you're living in it, that's fine. If it's an investment property, you have no attachment to it whatsoever, but you still have to replace the roof, pay the utility bills and all the rest of it.”

Once you're ready to become a mini-property baron, where, when and what to buy become the toughest questions. Turns out, the No. 1 rule of real estate isn't location, location, location. “It's really 'Do your homework,'” says Don Campbell, president of Real Estate Investment Network, whose members have bought $1.3 billion worth of property in Canada; he's also author of 2006's 97 Tips for Canadian Real Estate Investors. “Find out what town and what neighbourhoods have a future, not a past. I don't really care where my real estate is. If the economic fundamentals are strong in that region, I'll go put my money there.”

Fundamentals: good real estate investing conversations always return to the fundamentals. Campbell, like many, doesn't believe there is a bubble either nationally or in the major cities, simply because the economy is buoyant and the demand is there, despite high prices. Even Vancouver, the bubbliest city in the country, is still a good investing market, although, to some, the sheer number of condo towers going up is a little disconcerting.

The trick, says Gray, is to not focus solely on those cities where values have increased in the past three years. That's like buying a stock based on past performance alone. Instead, identify those cities with the potential to grow. That might be the same cities where prices have skyrocketed in the past, but that doesn't matter if there's still room for improvement. Ask yourself: Where are average incomes increasing faster than the provincial average? Where are people and businesses moving? Where are major transportation infrastructure improvements happening?

Answering those questions will lead you to places like Fort St. John, Grande Prairie, and Barrie–most likely a little out of the way, but then most good deals don't just fall into your lap. “People have to get over the emotional attachment of 'Oh, it's got to be within an hour's drive of my house,'” says Campbell. “Once you get over that, you can really make some money in real estate.”

Just remember to never fall in love with an investment property. After all, it's just bricks, mortar and wood. Fall in love with the numbers, not the property.

Fort St. John, BC
Average price January 2006: $105,020 *
One-year change: -5%
Forecasted 2006 sales: n/a
Property tax rate: n/a

Market Drivers: If you haven't heard of Fort St. John yet, you will. Tucked away in the northeastern corner of B.C., Fort St. John is shedding its image as just another outdoor tourism spot, and becoming a mini oil-and-gas boomtown. Don Campbell, president of Real Estate Investing Network, loves this particular part of Canada, which serves as a hub for the region. A brand new gas plant is being built near Dawson Creek, 75 kilometres south–a sign of the fact that natural gas production has doubled in the past 10 years and that the area could hold 50 trillion cubic feet of potential marketable gas. The province is spending $50.3 million during the next two years to improve local roads, which should spur even more people to make the trek north.

* average for the Northern Lights District, which includes Fort St. John

Grande Prairie, AB
Average price January 2006: $205,442
One-year change: 19.8%
Forecasted 2006 sales: n/a
Property tax rate: 1.2%

Market Drivers: In 1992, Real Estate Investing Network's research predicted Grande Prairie, 425 km northwest of Edmonton, was an up-and-comer to be watched, as property values were going to increase by 50%. Since then, property values have tripled, but Campbell still believes there's more upside. “The northwest quadrant is going to be fantastic in the next 10 years,” he says. Grande Prairie was Canada's second-fastest-growing city from 1996 to 2001, fuelled by oil and gas exploration and development. Roughnecks have to live somewhere, and by the end of 2004 housing demand and supply were nearly equal, putting pressure on pricing and stimulating new housing construction. As long as oil is king, investing in Alberta's smaller towns could still be a good move.

Edmonton, AB
Average price February 2006: $211,531
One-year change: 15.5%
Forecasted 2006 sales: 19,250 units
Property tax rate: 0.97%

Market Drivers: When U.S. President George W. Bush decried his country's dependence on oil, he didn't really mean all oil–just oil from shaky regimes. It's no secret that Americans covet Alberta's oil, and Edmonton is where much of the new money is going to flow through. Really, the whole Calgary-Red Deer-Edmonton corridor is worth looking at, although Calgary is becoming expensive. There's $120 billion worth of investment pouring into a province of 3.2 million people, which is sure to attract more jobs and more workers from other provinces. If the government twins the road between Edmonton and the oilsands capital of Fort McMurray, that will make an even bigger difference, as oil workers can then better commute between the two cities.

Barrie, ON
Average price January 2006: $232,450
One-year change: 6%
Forecasted 2006 sales: 4,700 units
Property tax rate: 1.43%

Market Drivers: This city of 100,000 is a bit of a drive north from Toronto, which means a long commute for those working in the big city. But that will change in 2007, when GO Transit extends its train service to Barrie from Toronto, making the trek more bearable. Major transportation improvements are a favourite investing indicator of Don Campbell's. “Once the Go Train gets there in 2007, the ride they're going to be on–no pun intended–between 2007 and 2009 is going to be substantial. There's already a nice demand, a great lifestyle, good infrastructure.” A number of major businesses are slated to open facilities during the next few years, including a 300-job Bank of Montreal call centre. That should keep Canada's fastest-growing city humming.

Winnipeg, MB
Average price February 2006: $146,600
One-year change: 19.6%
Forecasted 2006 sales: 12,000 units
Property tax rate: 2.42%

Market Drivers: Thinking of buying in Winnipeg? Do your homework. Same goes for Regina and Saskatoon. All three markets had unprecedented sales last year, but Campbell wonders what's behind all that activity. “Winnipeg has gone berserk,” says Campbell. “Is it a lot of speculators because housing is cheap, or is there actually something that's going to hold it up long-term?” Housing prices in Winnipeg increased by 14% in 2005, third-highest in the country behind Victoria and Kelowna, B.C. Re/Max notes that most investors are local, but out-of-towners have been coming in, with the most in-demand properties being in the $90,000 to $150,000 range. The majority of investors are buying with a long-term hold strategy of 10 years or more in mind.

Kitchener-Waterloo, ON
Average price February 2006: $233,015
One-year change: 12.1%
Forecasted 2006 sales: 5,800 units
Property tax rate: 1.44%/1.33% *

Market Drivers: Don Campbell calls the Kitchener- Waterloo-Cambridge triangle the “economic Alberta of Ontario–the area has a fantastic growth opportunity.” Higher-paying jobs are moving in, and that's luring more people to the area; Toyota's plant in nearby Woodstock will have a ripple effect on the region as a whole. Re/Max notes that more balanced market conditions showed up in 2005, but there is still plenty of sales activity for homes priced from $250,000. Further down the pricing scale, new condominium conversions–starting at a relatively affordable $150,000–are targeting recent local university graduates who are staying put to work in the region's booming IT industry.

Halifax, NS
Average price February 2006: $197,144
One-year change: 7.6%
Forecasted 2006 sales: 5,800 units
Property tax rate: 1.41%

Market Drivers: Demand for investment properties in the Halifax-Dartmouth area has picked up during the past 24 months, after years of steady sales. Sales of duplexes, triplexes and quadplexes increased 50% in 2004. Many investors are looking at areas such as the Peninsula that have considerably lower vacancy rates because of demand for student housing. And that should only pick up with the expansion of the Nova Scotia College of Art and Design, set for occupation in February 2007. Starting duplex prices in the Peninsula run about $200,000 to $250,000. “We are seeing increased demand in the Halifax region,” says Campbell. “It's not going to be a substantial jump, but you can get a property there with cash flows and a nice slow increase in value.”

Vancouver, BC
Average price February 2006: $490,004
One-year change: 26.5%
Forecasted 2006 sales: 41,000 units
Property tax rate: 0.63% *

Market Drivers: No surprise that Vancouver has the most expensive real estate in the country. The economy is booming, and there's a shortage of available houses across all neighbourhoods and price ranges. Some economists, however, have suggested that prices are increasing faster than even the “robust fundamentals” warrant, and the finger is being pointed at the city's condo market. While vacancy rates are at rock-bottom levels, the soaring price of new condos seems to suggest some speculative activity, which is a sign of a bubble in the making. Higher interest rates could flush out some speculators, while pent-up demand could provide a soft landing for existing investors–at least until the current economic cycle runs its course.

* 2004 rate

Toronto, ON
Average price February 2006: $353,928
One-year change: 5.9%
Forecasted 2006 sales: 79,500 units
Property tax rate: 0.91%

Market Drivers: The city everyone loves to hate has seen better days, but residential sales activity continues to defy expectations, with unit sales and average prices hitting record highs last year, according to Re/Max forecasts. This year should see activity decline and average prices increase a modest 4%. One area to be leery of is the condo market. As one wag commented, a great sign the cycle is peaking in Toronto is that Donald Trump is trying to sell you $1.3-million rooms so you can live in gleaming granite at the corner of Bay and Adelaide. Re/Max says smaller investors are looking at duplexes, tri-plexes and houses with basement apartments in less expensive, peripheral areas. Consider Toronto a slow burner–consistent, if not spectacular.