Canada’s housing market continues to defy expectations of a global slowdown. Can this continue or is 2021 set to be the year we see the bubble burst? And how could digitization help property owners continue to increase values and returns?
Canada continues to be one of the world’s strongest real estate markets. Even a black swan event such as a global pandemic closing down many parts of the world has shown no signs of cooling Canada’s housing market, with experts predicting prices may end the year higher than where they started.
Despite a small pause in the late spring, demand for homes combined with tight inventory levels nationwide and historically low interest rates, are driving healthy returns for Canadian property investors.
This should come as no surprise. Property is always attractive thanks to a history of strong returns through longer-term direct investment and lower volatility than other asset classes. And Canadians have experienced a thriving real estate market for a very long time. All the way back to 2003.
Looking at housing data and economic forecasts, core, ‘safe-haven’ income-producing properties in the most geographically-resilient and liquid locations, such as Montreal, Toronto and Vancouver, will likely continue to perform well in the coming months.
Average prices in the Greater Vancouver Area, for example, rose a reported 5.8% year-over-year to CA$1,041,300 in September 2020. Meanwhile, Toronto home prices hit a new record for the month, with the average selling price in the city rising 14% year-over-year to CA$960,772.
Many experts agree. Speaking at Bloomberg’s Canadian Fixed Income Conference (October 14, 2020), former Bank of Canada governor Stephen Poloz even went so far as to say he’s “not really” concerned about Canada’s housing markets right now even as sales and prices heat up in the largest cities.
The data certainly paints a rosy outlook in the short term. That being said, the global pandemic is a sharp reminder to all investors of the need to make sure they are positioned for future unknown shocks which could trigger a long-term downswing. As whilst we can’t be certain what the next shock will be, we can be certain it is just a matter of time before one arrives.
Whether you are an optimist or a pessimist, capital markets specialist Raymond Harte, CEO at Mozaic Markets, believes there is a need for increased investor caution and prudent market analysis in these unprecedented times.
“We only have to look back 12 years to the subprime mortgage market in the United States and the timeline leading to the global financial crisis. Warning signals were being fired as early as February 2003 when Warren Buffet wrote to his shareholders to warn of the risks. If the subprime crisis taught us anything, it’s to be vigilant in analyzing data.”
With elevated consumer debt levels and a sharp slowdown in new immigrants, Canada’s real estate market could potentially be considered more vulnerable than some commentators say, with house prices far in excess of what many workers can afford.
Recent research from UBS indicates Toronto has one of the greatest housing bubble risks of any major city in the world. The average house price reached C$975,980 by the end of September, up 11% from the same period a year before.
Elsewhere, a recent Reuters poll of real estate analysts and economists stated whilst Canada’s housing market has rallied more sharply than expected over the summer, house prices are set to rise by less than consumer inflation in 2021 as higher unemployment and lower immigration levels cool the market.
“The housing market will face its toughest challenge in 2021 as the combo of disposable income, low mortgage rates and deferrals, that helped boost the market in 2020, reverse course and work against prices,” Brendan LaCerda, senior economist at Moody’s Analytics, told Reuters (30 September).
What is particularly interesting is how the pandemic has been a game-changer in terms of consumer attitudes towards digital and what this could mean for real estate.
As stay-at-home restrictions forced businesses to close their “physical” shops or offices, life has moved from the physical world, to the digital world. A sharp acceleration of an existing trend which has caught many “non-digital” businesses off guard and will have long-lasting, if not indeed some permanent ramifications.
It is possible extended working from home could see renters and homeowners decide to give up expensive city living and move to cheaper suburban or rural locations. Driving down residential values and eroding returns in traditionally lucrative locations.
And after record governmental stimulus to protect Canada’s economy, the federal government is likely to look for a new source of income to alleviate Canada’s stressed public coffers in the coming year. At a time of rising unemployment and uncertain economic growth and in turn, future job creation, politicians are likely to favour taxing property over labour (income tax), presenting a further possible drag on real estate returns.
Jacques Lepine, founder, Club d'investisseurs immobiliers du Québec (CIIQ) believes a property’s ability to attract financing will likely become a more crucial consideration as lenders increasingly become even more discerning. “I expect in the coming months we will likely see a more squeezed lending environment. Lenders will not consider all real estate equally. In the short-to-medium-term, a funding gap could arise while banks retrench, and non-bank lenders assess their loan books.”
Despite concerns about bank lending appetite, rising unemployment and mixed views on the outlook for Canada’s economy, Mr. Lepine believes the property market is likely to remain buoyant with 2021 a good year for sellers.
“This year, the majority of us have stayed at home almost every day. Staring at the same walls, the same space. As a consequence, many people are craving more space or a change of location. If you’re looking to sell, I think 2021 is a good time to do it as there will likely be more people looking to buy than there are homes on the market. Sellers will have the competitive advantage.”
“This is an advantage you can maximise further if you have digitized your property and are able to sell your digital house simultaneously,” added Mr Lepine.
Digitization of real estate is a new way to generate increased returns on property investments. Largely unknown by most property investors today, Martin Prescott, Director at 2030 Group’s Canadian operations, predicts by the year 2030, it will be the norm to own a digital version of your property.
“Technology is transforming every industry and the coronavirus has been basically like throwing gasoline onto a slow burning digital fire. From small flame to inferno. It’s changing the world as we know it – and fast,” explains Mr Prescott.
“Faster than a lot of people realise too. You only have to look at other industries to see just how quickly an industry can change. Like what Uber did to transport, or Airbnb to accommodation. Two industries transformed; and almost overnight. The same is about to happen to real estate.”
I asked Mr Harte and Mr Prescott to help me understand the concept of digitization and digital real estate. Specifically, why would I want to digitize one of my properties and why now?
“Think of it as an easy way to generate more income from the sale of your property. The concept is much easier to understand than you might think,” Mr Harte said, clearly noticing a confused look on my face.
“It can be broken down into three simple steps – digitizing your documents, building your digital house then selling it when you are ready. So, step one, you gather all of the data about your property. Legal documents, financial information, geographic information. Everything a buyer might need when buying a property. This information is digitized, verified and stored on what is call a blockchain. Think of it like bricks of information.”
“Now, we can take these bricks and build a digital twin of your physical house,” explained Mr Prescott. “No, not in a virtual world or Minecraft,” he laughed adding this is something they are asked a lot. “It’s not something someone can go and visit in a digital game. It becomes a financial asset, similar to a security. One that can be bought and sold like other financial instruments on a financial platform. Calling it a digital house is just an easier way to think about it.
“You own the digital house and when you sell your physical property, you can sell your digital property simultaneously. Making money from both.”
“Once sold, the digital property becomes part of the financial market, like Mozaic Markets,” he said pointing to Mr Harte. “And can be sold each time the physical house is sold again. With all investors involved making money on the proceeds of the sale as well as the owner of the physical property.”
Harte added: “The largest amount of money is made by the people who “list” their properties on the financial market. The people who digitized the property first. They get, for want of a better phrase, first mover advantage by being the originator of the digital house.”
So, is this like a pyramid scheme, I asked, or MLM (multi-level marketing)?
“Absolutely not. Once you have sold your digital property, you have sold it,” Mr Harte said firmly. “Your role in the transaction is over same as when you sell your physical property. The digital property is now owned by the purchaser and the value will go up or down depending on both the property market and financial market valuations. It’s more like an ETF (exchanged-traded fund) if you are familiar with those?”
I nod and he continues: “So as you know, an ETF tracks share performance of a company or sector. A digital house is the same, It tracks the performance of the house, its valuation. The technical term for this is tokenization, but we call it a digital house as we think it is easier to explain and visualize. This token, this digital house, is part of the financial market and can be bought and sold by different investors. Same as an ETF.”
It’s not just about a new era of digital houses too. Mr Harte and Mr Prescott explain the entire real estate industry as we know it will soon be revolutionized by incoming blockchain technology. Specifically, the house buying process.
“Canada’s conveyancing process is convoluted and antiquated. It results in lost money for both the buyer and seller through avoidable delays, lost documents and third-party fees,” said Mr Prescott.
“As the world moves from paper to digital in all aspects of life, property investors are increasingly demanding the same “real-time” transaction experience and are unwilling to accept the long processing times, lost information and costs incurred in today’s property buying process.”
Mr Harte, who has approaching 30 years’ global banking experience, explains this is not an issue faced just by individual property investors. Institutional investors, such as pension funds and asset managers, share the same frustrations and are impatient to see tech entrepreneurs turn their attention to revolutionizing real estate.
“Digital real estate is exciting as it not only presents an opportunity for property investors to increase value and returns from their property investments, it allows for an unprecedented level of transparency and speed in the property buying process. It will radically transform the property industry as the world enters a new digital era.”