What is the Best Housing Investment in Today’s Economy?
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- Student Ming Lu
Introduction of today’s current economic climate of Canada
On Jan. 21, 2015, the Canadian Central bank, Bank of Canada, announced that they reduced the benchmark interest rate from 1% to 0.75%, this was the first time Bank of Canada lower the interest rate in the previous four years (Bank of Canada, 2015). With the global economic downturn, Canada is also suffering trouble with recession. Reducing the benchmark interest rate generally was treated as an important tool to hedge the recession. On the other hand, with the price of oil continuously runs in a low-price level, all the Canadian petroleum companies and the stock exchange market shares had been badly affected, as well as the Canadian currency rate.
From Bank of Canada report, (Bank of Canada, 2014) Inflation has remained close to the 2% target in recent quarters. Core inflation has been temporarily boosted by sector-specific factors and the pass-through effects of the lower Canadian dollar, which are offsetting disinflationary pressures from slack in the economy and competition in the retail sector. Total CPI inflation is starting to reflect the fall in oil prices. The globally large decline in oil prices will affect significantly on the Canadian economy. While real GDP growth has been solid and more broadly based in recent quarters, near-term growth is expected to slow as investment in the energy sector responds rapidly to lower oil prices. In addition, trade as Canada’s weakness will have an adverse impact on income and wealth, with implications for consumption and public finances.
This information indicates that people are facing dual pressure of managing their wealth, one is the recession decreases their ability in earning more money in the coming near future, the other one is with such inflation rate, if there is not a good choice of investment, people will absolutely lose their wealth they currently possess.
Major housing investments comparison
When it comes with housing investment, it can be easily split into commercial purpose and residential purpose housing investment.
What is residential purpose housing investment? Residential purpose is an investment on the real estate for lending its right of use to others, and the main purpose of the tenant will be residence not for commercial or business use, while the commercial purpose housing investment is just the opposite.
Based on their basic nature, these can make them a big difference. Take the housing investment in Ontario for example, Law of Ontario would be much more kind to tenants, it has an established system to protect the tenants’ right rather than the landlord, however, the good news is comparing with other province, the investment can be more stable. If an investor decides to invest a commercial real estate, the following leasing activity will be subject to contract law. Comparing with residential real estate it is quite simple. The best thing is there is no limit to the rent increase in commercial leasing. The landlord also do not worry about the payment according to the Commercial Tenancies Act. (Commercial Tenancies Act, 1990). It is totally different that commercial leasing is based on the contract law, which apparently gives the landlord more protection when they are facing commercial dispute.
Generally, the more attractive the market looks like, the more risky it will be, today in Canada, the most attractive real estate market are in the two biggest cities, Vancouver and Toronto, people always say that there must be some economic bubble exist in these two markets, nobody can predict the accurate the date when the foam breakdown, but the investor can avoid investing the above market unless he or she deeply understand the operationmechanism. Generally, in this kind of market, commercial property will be the best choice for investing, it will generate the maximum profit because most substantial market players want to move in the central of an active market, this can optimalutilization of the enterprise not only in the short term but also in a long term prospect. But everything has two sides, the problem is once there is a financial crisis, investor bears the brunt of the problem due to crisis will be the cost reduction, only the top level enterprises have the capability to survive. Most players will escape the market or even fall in bankrupt.
Another difference between residential property and commercial property is the later one need a higher down payment when you plan to get a mortgage from a bank, and investor also has to assume a higher mortgage rate comparing with the home mortgage, it means that the entry and financing is not easy for investors in investing commercial property.
Today’s best housing investment
According to the above analysis, in today’s economic climate, the best choice of housing investment should be residential purpose investment, during the recession, a lot of small and medium enterprise will close, even some big enterprise such as Target and Tiger Direct, some business has to shut down due to price is less than the average variable cost (Exploring Economics, Nelson), while others just want to reduce their cost, therefore, based on this circumstances, investing the commercial real estate is not a good choice, on the contrary, investing the residential purpose real estate has several advantages as follows,
- New immigrants are steadily increasing, no matter at recovery or recession, Canada is one of the best countries in attracting immigrants all around the world. New immigrants and international students comprise a big increasing need of residential real estate. The initial problem they have to face when they come to Canada is living, therefore, as long as the immigration is net inflow, the demand will be never end up.
- People living in Canada are not only facing the economic recession, but also experiencing the currencydevaluation, the exchange rate of Canadian dollar to US dollar was 1.2515:1 on Mar. 30, 2015 (Federal Reserve, 2015), real estate in some sense is a good investment for hedging the system risk during economic upheaval.
- Residential housing investment can give you various return, not only rental income, but also capital gain, although the price on some areas of Canadian real estates are deemed as housing bubble, most real estates’ price in Canada remain acceptable. Investors should avoid the overvalued areas such as Vancouver, BC or Toronto. Focusing on the areas near above mentioned areas is a good choice. In a long term run, new immigrants would like to go outside big cities once they adapt the life in this new country.
- People usually are familiar with this kind of real estate, most people have experience in renting or living a house or a condo, people are well acquainted with the processes involved in this business. Nearly all of them have fundamental knowledge about the usual building systems of a house. However, commercial property will be more complicated comparing with residential property, people always feel baffled when they are facing a lot professional accreditation unless he or she has related career background.
- Other than commercial housing investment, residential housing investment is a low risk investment, this is the basic human need. Compared with commercial properties, residential properties has a much lower vacancy risk, especially in the recession. It is totally different with the residential purpose use housing, investors need to consider much more for their potential clients, they have to evaluate the feasibility of the business at a location, they have to know more about the people living or working around, whether it is possible for this business serving this community, is it the potential market for this business. Moreover, to deeply investigate the feasibility, the investor may take more survey or investigation on his or her investment, other than residential housing, for different business or enterprise, the feasibility may vary significantly, the investor can never find the investment which will fit for every business. Therefore, they have to face unpredictable vacancy problem when the contract goes end, or even the first time leasing. But for residential properties, even if it is not in a good location or good community, maybe it is far from hospital, shopping mall, or highway, it can be rent out easily as long as the investor decreases the price, location is not a big problem.
There’s one risk the investor has to be clear that some investors are engaged in the business of purchasing properties that are in foreclosure. A property is considered in foreclosure when the homeowner has not made a mortgage payment for at least 90 days. These properties can be purchased before the foreclosure auction (pre-foreclosure) or at the foreclosure auction which is a public sale. If no one purchases the property at the foreclosure auction then the property will be returned to the lender that owns the mortgage on the property. ( Levinrad, 2010)
In conclusion, today all the world are suffering in the global recession, it is difficult for people to find an ideal investment in order to avoid the loss of their wealth, in most aspects, housing investment is a good choice to consider, because real estate has its natural advantages such as scarcity, durability and stability, it is good investment especially during the recession. In the housing investment industry, residential housing investment is a good choice for most people, it does not need a high level entry, and nearly everyone knows about it, residential housing investment can provide stable and long term income as return to the investor, although in some part of Canada, the law looks pretty strict to the landlord. In fact, to protect the right of the tenants can be treated as a long term protection for the investor, because they protect the demand of the market, it gives the confident for the buyers. This will lead to a healthy long term market.
Bank of Canada. (2015, January 21). Press Release- Bank of Canada lowers overnight rate target to 3/4 per cent. Retrieved March 30, 2015, from website of Bank of Canada: http://www.bankofcanada.ca/2015/01/fad-press-release-2015-01-21/
Bank of Canada. (2015, February 13). Annual Report 2014, Retrieved March 30, 2015, from website of Bank of Canada: http://www.bankofcanada.ca/wp-content/uploads/2015/03/annualreport2014.pdf
Commercial Tenancies Act. (1990). E-laws-Service Ontario. Retrieved March 30, 2015, from: http://www.e-laws.gov.on.ca/html/statutes/english/elaws_statutes_90107_e.htm
Federal Reserve. (2015, March 30). Current Release. Retrieved March 30, 2015, from: http://www.federalreserve.gov/releases/h10/current/
Bank of Canada. (2015, January). Monetary Policy Report 2015. Retrieved March 30, 2015, from: http://www.bankofcanada.ca/wp-content/uploads/2014/07/mpr-2015-01-21.pdf
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