By Pooja Tayal, Motley Fool Canada
After a decade of gains, Canada's real estate market saw a significant correction in 2022 and 2023. Home prices fell amid rising interest rates as homebuyers took a wait-and-see attitude. All Canadian real estate investment trusts (REITs) have seen declines in the fair market value of their properties, and some have cut distributions as they struggle to retain tenants. Although the NAV of Canadian REITs has recovered slightly, they have been trading at a discount since April 2022, when interest rates began to rise. What will the Canadian real estate market look like in 2024?
To gain insight into the real estate market, we interviewed Nathan Levinson, founder and president of Royal York Property Management. Royal York is a property management and tenant placement service that helps landlords lease and maintain their properties.
What to expect from the Canadian housing market in 2024
In his 2024 outlook, Levinson said Canada's housing market is still getting its footing.
“While some regions may see further correction in 2024, others may have already reached their lowest point. [When buying a home] Consider local market trends. If you're eyeing a property in an area where the market is still volatile, it might be wise to wait and watch. However, in areas where the market appears stable or where demand is consistently high, waiting may not be beneficial. ”
What will the rental income situation look like in 2024?
Becoming a landlord is the most popular way to earn passive income. If you are planning to buy a home for investment purposes, it is important to understand the rent that the property can offer. Regarding rental yields, Levinson said whether a property can earn rent depends on the region, demand and cost of living. Also, depending on the age of the property, its condition and the terms of the lease agreement, he 10-15% of the rental amount may be spent on repairs and maintenance.
So when you look at properties that are expensive to rent, Toronto, Vancouver, and Victoria are some of the most expensive cities in terms of rent. Speaking about Ontario, Levinson suggested that the immigrant population plays a key role in driving demand. Depending on the location and market conditions, you can consider his 3-5% return on the property price as rent. Demand also influences rental income growth.
I asked Levinson what the average rate of rent growth is and what kind of growth he expects to see in 2024. Mr. Levinson responded: “Historically, annual rent increases in Canada have been around 2-3%. However, given the current economic climate and the influx of immigrants driving demand, rent increases in 2024 will exceed this average rate. I expect it to be possible.”
Potential risks in the real estate market
Although the increase in immigration has some positive aspects, it also poses challenges. “At Royal York, we are observing a significant trend where more tenants are struggling to pay their rent due to financial pressures,” Levinson said. This, combined with rising mortgage rates, creates a difficult scenario for both landlords and homeowners. This is a situation that requires a careful and informed approach for potential home buyers. Understanding these broader market dynamics is critical to making sound investment decisions in the current real estate climate. ”
Should you consider investing in real estate stocks in 2024?
The volatility in Canada's real estate market will continue into 2024, according to insights from Royal York. Are such markets suitable for investment?
I recommend investing in REITs with high exposure to Toronto and avoiding office REITs that are struggling with declining occupancy. Revenue in 2023 rio canrito (TSX:REI.UN), which has approximately 45% of its real estate holdings in the Greater Toronto Area and 2% in Vancouver, has a positive outlook. Mixed lease spreads increased from 9% in 2022 to 10.7% in 2023. (The lease spread is the difference between the new rent and the previous expiring rent).
RioCan REIT increased its distribution 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 on the spur of the moment.
The post Investors: What to expect from the Canadian real estate market in 2024 first appeared on Motley Fool Canada.
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Stupid contributor Puja Tayal has no position in any stocks mentioned. The Motley Fool has no position in any stocks mentioned. The Motley Fool has a disclosure policy.
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