How can the current trade uncertainties potentially impact your real estate portfolio in the U.S. & Canada?
What at first seemed like hypothetical political rhetoric is now becoming part of reality. The recent headlines on trade spats between the U.S. and its allies, and between the U.S. and China, are creating a new arena of geopolitical uncertainty for businesses. The impact on the tariff-slapped industries is clear, but what could this mean for real estate investors?
- Warehousing and logistics-related real estate particularly vulnerable to trade implications
- Cost increases in the construction and retail sectors pose a threat as consumers are already price sensitive
- Wider economic implications could mean a faster pace of interest rate hikes
Not all sectors are created equal
International trade always produces winners and losers of varying degrees in each industry. It is no different for real estate assets. Changing the commercial dynamics between countries impacts the whole economy, which can subsequently affect the performance of real estate but some sectors are potentially more vulnerable than others.
Take the industrial space. Warehousing and logistics-related real estate (a large component of the industrial sector) is particularly vulnerable. Certain cities that depend heavily on being a cross-border transportation and storage hub are directly impacted by trade relations. Both revenue and occupancy could be reduced with a severed trade deal.
The flip-side is also a possibility. Areas that rely heavily on domestic distribution can experience an uptick as consumers substitute imported goods for what is affordable and available within the country. It is important that real estate investors are aware of their holdings’ exposure to changes in international trade, both geographically and by asset class.
It is all about the cost
The industrial example highlights the loss of business due to trade uncertainty. There is also the case of increased costs resulting from changing trade agreements. The U.S. imposing tariffs on Canadian aluminum and steel will directly impact construction costs, most typically in high-rise construction and other kinds of mid-rise starts. Developers may struggle to pass these additional costs on to the consumer in markets already sensitive to housing affordability.
As for other products in the market place, any higher retail price will add pressure to the already ailing retail sector. While e-commerce might also suffer from the difficulties in maintaining supply chains, price-sensitive consumers will readily avoid certain retailers if prices jump too high due to tariffs.
The ripple effect and what investors can do
Lastly, and potentially most impactful, are the wider implications to the economy. If trade hampers economic and job growth, real estate will subsequently suffer. That can come in the form of lower occupancy in the office space or lower asset appreciation due to a market slowdown. It could also lead to an uptick in inflation due to increased costs to the consumer, putting pressure on interest rate hikes.
The savvy real estate investor can potentially find opportunities in the struggling sector by buying when everybody is selling. Identifying areas that will experience an economic boon from the levies might also prove effective.
Ultimately, trade and political uncertainty highlight the importance of diversifying into different real estate assets–both geographically and sector-wise–to avoid too much exposure to trade issues. At the end of the day, the greatest insurance to avoid the potential problems due to unbalanced trade really comes with having a balanced portfolio.
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“If the Canadian government gets nervous about the number of outstanding home equity lines of credit as well as the increasing balances on these HELOC’s, there is a strong possibility that they may further tighten qualifications or guidelines for lines of credit. Already we have seen the government attack equity mortgages and lines of credit this year, so if you are looking to access the equity in your home via a home equity line of credit, you may want to act sooner rather than later.” – Kyle Green
The outstanding balance of Canadian home equity lines of credit has reached a record-shattering high of $258.97 billion in June 2018, according to a new Better Dwelling analysis of data from the Office of the Superintendent of Financial Institutions (OSFI).
This represented an increase of $2.169 billion in just a month, pushing the annual pace of HELOC growth to 5.52%… CLICK for the complete article
A Canadian housing crash in the vein of the U.S. subprime mortgage crisis a decade ago will not prove entirely disastrous to the nation’s seven largest lenders, according to a new stress test by Moody’s Investors Service.
“Banks are in better shape than two years ago,” Moody’s senior analyst Jason Mercer said during the release of the test’s results earlier this week, as quoted by… CLICK for complete article
Todd Schriber prepares for the rollout of 5G technologies, and makes his case for why real estate investment trusts might be the best play.
Technology and telecommunications companies are preparing for the launch of 5G, the next generation of mobile communications networks. Plenty of exchange traded funds offer exposure to the technology side of the 5G rollout, but there is another way to play 5G: with real estate investment trusts…. CLICK for complete article
“Five of the 11 markets reached a new high in June: Vancouver, Victoria, Montreal, Halifax and Ottawa-Gatineau. The market furthest from its previous peak was Toronto, down 4.8% from its reading of last July…Over the first half of the year (2018) the Toronto index rose at an annual rate of 5.7%. For the condo segment, the rate was 12.1%, for other housing only 2.9%, reflecting a tight seller’s market for condos. The Vancouver story is similar: condo segment up 17.6% annualized since last September, other dwelling types up 4.9%.” (The Teranet–National Bank National House Price Index, July 12, 2018)
Housing prices Canada’s 11 metropolitan areas increased 0.9% in June, as 10 of the 11 urban centers recorded monthly increases, led by Ottawa-Gatineau (+2.0%) and Hamilton (+1.8%).
House prices in Toronto rose 1.2% in June, suggesting that some price stabilization was occurring in the country’s biggest city. The Toronto housing market (excluding condos) recently weakened after the provincial government adopted measures to rein in the market. As well, tighter mortgage rules took effect at the start of 2018 which also hurt housing prices. The Toronto house price index is down 4.8% from its peak in July 2017.
On a year over year measurement basis, however, Canada’s housing prices have been clearly slowing, with the latest aggregate increase at just 2.9%, the lowest increase since October 2013.
As of June, the annual price winners were Vancouver (+13.3%), Victoria (+9.3%), Ottawa-Gatineau (+4.7%), Montreal (+3.6%) and Halifax (+3.2%), while housing prices in Toronto fell 2.8%.
A snapshot of housing prices over the past five years also confirms that a slowing pattern that has emerged.
Over the past five years, average housing prices in Canada have increased about 46%, with the peak rate of increase occurring around mid-2017. Since then, as the second chart illustrates, the average rate of house price increase has decelerated sharply from about 14% per year to less than 3% recently.
In sum, Canada’s recently hot housing market has softened in the wake of four interest rate hikes by the Bank of Canada since July 2017 and the imposition of tighter mortgage rules, though the condo markets in both Toronto and Vancouver have remained quite robust.
Tighter mortgage rules have priced many buyers out of the more expensive single-family home purchases.
The latest Housing and Mortgage Market in Canada report by Mortgage Professionals Canada revealed that stricter government measures are pushing consumers towards a more negative outlook for housing and real estate nationwide.
In particular, the study pointed at increasing interest rates and tighter mortgage qualification requirements as the main factors eroding Canadian consumers’ sentiments, despite many respondents still indicating a belief that real estate remains a good investment.
“We are still seeing a high level of desire in home-buying, especially among young people aged 25-34,” MPC president and CEO Paul Taylor said. “Whether they will be able to make that purchase may be an entirely different matter.”
Read more: Property investment in Canada still showing robust activity, demand
“We support a stress test, albeit at a reduced rate of 0.75%, as it is a useful tool to test a borrower’s ability to make future payments,” Taylor added.
“However, the cumulative impact of rising rates, a 2% or greater stress test, provincial government rules in Ontario and British Columbia, and further lending restrictions are negatively supressing housing activity not just in Toronto and Vancouver, but throughout the country.”
The report warned that federal policies which would lead to a decline in housing prices will trigger a reduction in home equity, thus further wearing down consumer confidence and leading to shrinking spending, slower economic growth, and reduced jobs creation.
by Ephraim Vecina
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