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Good News for Landlords

2018 forecast: New mortgage rules could be boon for investors

The new mortgage stress test, in addition to rapidly escalating housing prices, is keeping an increasing number of people in rental accommodations, and that’s good news for investors.

“A+” tenants—people with high incomes and good credit—used to rent for about a year before purchasing their own homes, which would repel investors, however, they’re becoming long-term renters.

“With the mortgage rules changing, what we used to consider an A+ tenant, who would usually

 only stay in a rental unit for about a year and then move onto purchasing their own home, are now staying for two to four years on average,” said Crystal Ross, owner of Investors Property Management.

“It’s very good news if you’re an investor. Investors used to back away from A+ tenants because they’d have to find new tenant the following year. I think they’ve given up on the idea of owning a home and decided there’s comfort in being long-term tenant. They’ve accepted the lifestyle.”

 Ross noted that the Greater Toronto Area housing market has normalized, but the new mortgage stress tests will remove about 40% of middle-income earners from the purchasing market. Coupled with a rental shortage in Toronto, they’re looking elsewhere.

“We’re seeing a lot of renters are willing to go outside big cities,” said Ross. “There is a lot of construction and building development being done on the outskirts of big cities, like Toronto and Hamilton.

Peopled aged 25-39 are increasingly putting roots down in smaller towns like Grimsby, Beamsville and St. Catharines.

That doesn’t mean Toronto’s condo market isn’t still the best real estate investment in the region.

“I think the condo market will remain strong because it’s the only market younger people can afford; it’s the first step to getting into the real estate market,” said Engel & Völkers Toronto Central’s Owner and Broker of Record, Anita Springate-Renaud. “Investors will buy them to rent them because there’s a shortage of rentals.”

Springate-Renaud is confident the market will assimilate the new mortgage rules and that market fundamentals, like the GTA being the fastest growing region on the continent, will carry the day.

Montreal has recently emerged as a hot market and Springate-Renaud says that will continue provided things don’t change.

“Montreal is still going up,” she said. “It was depressed for a long time and things would take 

time to sell, but now it’s a hotter in-demand market. As long as the government stays stable and the separatists don’t win, it’s going to stay strong. Montreal is a great place, a fantastic city, and a lot of people are investing there as well. There’s surprisingly a lot of development going on.”

2016 Outlook – INTEREST RATES – OIL PRICES – CANADIAN DOLLAR

“It’s still a humdrum outlook for the Canadian economy,” says Avery Shenfeld, Managing Director and Chief Economist, CIBC World Markets, “but we can blame the tepid global economy for part of that. The bright spot is that 2016 should be a bit better than 2015, as we move past the steepest declines in oil sector capital spending. And we’ll get the first leg of some federal government infrastructure spending in the latter half of 2016, so the sectors of the economy that benefit from construction spending should be healthy.”

Shenfeld calls investors’ attention to six major factors in planning for this year.

1. The promising U.S. economy. “The brightest spot for Canadian exporters in 2016,” says Shenfeld, “is the big market to the south. The U.S. isn’t as affected by the sluggish pace in emerging markets, because its own domestic market is so critical.” Plus, Americans have been getting jobs so they have newfound income to spend. Shenfeld thinks the American consumer “will provide the engine to drive 2.3% real GDP growth in the U.S. in 2016, similar to the 2015 pace.”

For Canadian exporters, this is good news. Everything from autos to lumber to engineering services will benefit from a continuation of a relatively healthy U.S. economic expansion.

2. The lower Canadian dollar. The lower dollar, which is actually close to its historical norm, notes Shenfeld, is a major reason for the Bank of Canada’s positive outlook on recovery. It’s also a signal that it may hold our interest rates below those of the U.S., to prevent a return to a stronger Canadian dollar. “The evidence is that we need a currency at this level to boost exports,” says Shenfeld, “so we’re unlikely to see much of an appreciation for the year.”

3. Tourism. In addition to the Canadian services exporters who gain from a lower dollar, our tourism sector benefits. For winter sports enthusiasts, the lower dollar makes skiing in Western Canada an attractive alternative to resorts in the U.S. Similarly, for both Canadians and Americans, the Maritime provinces and Newfoundland offer a more reasonable summer vacation than destinations in New England.

4. Interest rates. The Bank of Canada’s only tool is “a blunt instrument,” says Shenfeld. “You’re not going to raise interest rates to cool Toronto and Vancouver housing prices … and then chill the whole economy in the process.” If anything, the burden on the Bank of Canada is to keep interest rates low, to provide off-setting momentum and to fill the hole left by the retreat of capital spending in energy and mining.

The U.S. Federal Reserve has raised interest rates, which could push up Canadian five- and ten-year rates marginally. “But if you’re thinking: When will we get back to the day I earn 5% on a GIC?” says Shenfeld, “The answer is: not soon, and certainly not in 2016.” The economy is showing that it needs low interest rates to achieve even modest economic growth. Not just in Canada, but globally.”

5. Oil prices. Some signs indicate oil prices are too low to be sustainable; U.S. drilling is cooling down, putting downward pressure on supply in 2016. But Shenfeld argues that American shale oil has now jumped ahead of the Canadian oil sands in the queue, so it will be the first to come back onto production as prices rise. One day, the world will need an expanded supply of our more expensive oil. “But that is not likely to be a story for 2016, or perhaps not even in 2017,” says Shenfeld.

6. Emerging markets. Emerging markets, including the BRIC (Brazil, Russia, India, China) countries, had a difficult 2015, although overall long-term growth possibilities are higher than those of established economies. “The growth engines of China are shifting away from industrialization and construction to the service and consumer sector, which doesn’t help to drive our raw material exports,” adds Shenfeld. “China was the world’s largest consumer of base metals when it seemed like they were building a new city every week, but those days are fading fast.”

Opportunities and Challenges

A well-balanced, diversified portfolio always makes sense, particularly so in an uncertain world, says Shenfeld. “Canadian equities have had a rough year in 2015,” he adds, “but we see some upside in the non-energy, non-materials part of the Canadian equity market. It’s been collectively undervalued because there have been question marks in global investors’ minds about Canada. Some see us as another Saudi Arabia with the whole economy resting on oil, and that’s a long way from accurate.”

“In fixed income markets,” says Shenfeld, “long-term bond yields may start to creep higher because they are moving up in the U.S. So we lean toward somewhat shorter-term bonds to avoid the capital depreciation, or price depreciation, that you get at the long end if rates rise.” He recommends talking to your Investment Advisor about fixed income alternatives in 2016, given that yields on government bonds and GICs are so low.

Shenfeld is still cautious on gold. “You need either a material inflation escalation or a plunging U.S. dollar to really get the price of gold moving,” he says, “and we’re not seeing either.”

Shenfeld cautions Canadians not to be totally out of any asset class, nor restricted by a single geography. “Canadians should think of their retirement and travel plans and consider whether they have enough money in countries where they might one day spend a considerable portion of their year. If you’re planning to spend your winters in Florida when you retire, but have no U.S. dollar assets, you’re actually betting that the Canadian dollar will appreciate,” he says. “You can hedge that risk by having some of your portfolio in U.S. currency.”

It’s always a good practice to connect with us early in the year to discuss your financial goals – consider putting a reminder in your calendar for the beginning of the year. As always, if you have any questions about your accounts or any of the information contained in this newsletter, please contact us.

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