Canada’s real estate market saw a significant correction in 2022 and 2023 after a decade-long rally. House prices fell amid rising interest rates as homebuyers adopted a wait-and-watch approach. All Canadian real estate investment trusts (REITs) saw a decline in the fair market value of their property, while some even slashed distributions as they struggled to keep their tenants. Canadian REIT unit prices have slightly recovered, but they continue to trade at a discount from April 2022, when interest rate hikes began. What does 2024 hold for the Canadian real estate market?
I interviewed Nathan Levinson, founder and president of Royal York Property Management, to get insights into the real estate market. Royal York is a property management and tenant placement service that helps landlords lease and maintain their property.
What to expect from Canada’s housing market in 2024
In the 2024 outlook, Levinson stated that Canada’s housing market is still finding its footing.
“Some areas will see further corrections in 2024, while others could have already hit their lowest point. [When buying a home] consider the local market dynamics. If you’re eyeing a property in an area where the market is still fluctuating, it might be wise to hold off and observe for a bit longer. However, in regions where the market appears to have stabilized or where demand remains consistently high, waiting might not be beneficial.”
How does the rental income landscape look in 2024?
Being a landlord is the most popular way of earning passive income. While you plan to buy a home for investment purposes, it is important to understand the rent your property can provide. On rental yields, Levinson mentioned a property’s ability to earn rent depends on the locality, demand, and cost of living. And 10-15% of the rental amount could go into repair and maintenance depending on the property’s age, condition, and the terms of the lease agreements.
So, if you look at properties that charge high rents, Toronto, Vancouver, and Victoria are some of the most expensive cities rent-wise. Talking about Ontario, Levinson suggested that the immigration population plays a significant role in boosting demand. You could consider earnings of 3-5% of your property value as rent, depending on the location and market conditions. Demand also influences the growth in rental income.
I asked Levinson about the average rate at which the rent grows and what kind of growth to expect in 2024. In response, Levinson said, “Historically, the annual rent growth in Canada has been around 2-3%. However, considering the current economic climate and the influx of immigrants, which is driving up demand, I expect rent increases in 2024 could exceed this average rate.”
Potential risks in the real estate market
While rising immigration is a plus, there are also challenges. Levinson said, “At Royal York, we’re observing a critical trend: a growing number of tenants are struggling to pay rent due to economic pressures. This, coupled with rising mortgage rates, is creating a challenging scenario for landlords and homeowners alike. It’s a situation that demands a careful and informed approach from potential home buyers. Understanding these broader market dynamics is crucial in making a sound investment decision in the current real estate landscape.”
Should you consider investing in real estate stocks in 2024?
Insights from Royal York show the volatility in Canada’s real estate market will continue in 2024. Is such a market suitable for investing?
I would suggest investing in REITs with high exposure to Toronto and avoiding office REITs as they struggle with lower occupancy. The 2023 earnings of RioCan REIT (TSX:REI.UN), which has about 45% of its properties in the Greater Toronto Area and 2% in Vancouver, show a positive outlook. Its blended leasing spread increased from 9% in 2022 to 10.7% in 2023. (Leasing spread is the difference between the new rent and prior expiring rent.)
RioCan REIT increased its distributions by 2.8% while maintaining a payout ratio of 62%. The stock is still trading 18% below its April 2022 level, making it a stock to consider buying at the dip.
