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Steady as She Goes: Cashing in on Canadian Property

The one word that comes to mind when considering the Canadian property market is ‘steady.’  Steady growth, steady returns, steady demand, steady interest rates and a steady underlying economy.  And when it comes to any form of investment, steady is a very attractive word these days!

Following on from the market turmoil experienced over the last couple of weeks globally, and on the back of depressing news about the state of economies in Europe and elsewhere in North America, we’re actually more than happy to report that the outlook for Canadian real estate assets is so calm and solid!

However, if you’re still a little uncertain about the potential sustainability of this stable period in Canada’s property market history, there are alternatives to directly investing which could bring you greater security and peace of mind, whilst still exposing your investment capital to Canadian real estate.

What’s the Current State of Canada’s Property Market?

Back in 2008 we penned a report entitled ‘five reasons why Canada’s property market won’t crash’ and whilst we’ve certainly got some of our predictions wrong in the past, we were wholly on the mark with this particular prediction.

We cited reasons such as the fact that at the time Canada’s property prices were not overhyped or unaffordable, and that mortgage lenders in Canada had kept their fingers out of the subprime pie.  Well today, the fundamentals that were supporting a solid market back then remain in place.

The Canadian Real Estate Association (CREA) had forecast declining sales for 2011, but according to a report in the Montreal Gazette, it now expects them to increase overall in 2011.

The main reason given for their revised predictions is that interest rates have remained low throughout 2011, meaning that the cost of borrowing and home buying has remained within reach for more people.  As rates are predicted to remain low into 2012, so the CREA predicts ongoing steady (that word again) growth until at least the end of next year – with some affordability factors beginning to creep in by then to perhaps put some pressure on the market from late 2012.

Vancouver has seen average home prices rise by 15% over the past year, according to the Royal Bank of Canada Global Asset Management’s July economics report; and since 2009 average property prices in Canada have increased by 31%.

Show me the Fundamentals – Why is Property in Canada a Good Investment?

Currently property in Canada is still hot – it’s in demand from a solid base of buyers who are confident in low interest rates and solid employment prospects.  Talk of increasing rates and lack of affordability going forward is also making investors hot for Canadian real estate.  Their logic being that if fewer people will be able to buy in the future there will be a bigger pool of rental demand.

Furthermore, if they are able to buy now with low interest rates, many feel confident that any rental income will cover at least their costs.  Over the long-term, investors feel that they will see appreciation of their assets.

Canada’s economy is probably in the strongest position of all G8 nations, and it has a well-diversified economy not wholly dependent on exports or even local consumption.  As stated above there is confidence in the employment sector too.  Therefore looking at Canada and comparing it to the likes of Europe, the UK or the USA as a benchmark, Canada should be blowing your socks off in terms of its positive position!

Just last Friday the Canadian Finance Minister Jim Flaherty told parliamentarians that the Canadian economy will continue to grow because Canada has a realistic plan in place to balance its national budget – how many other leading nation’s finance ministers can say the same?

However, as the rest of the world seemingly has fiscal flu, Canada is not going to escape without at least a sniffle…therefore if you’re worried that direct expose to Canadian real estate is not appropriate for your investment portfolio right now, what are your alternatives?

Alternatives to Direct Investment in Property in Canada

The two most popular ways to gain potentially lower risk exposure to Canadian real estate – i.e., so that you don’t have to buy a property and become a long distance landlord – are ETFs and REITs.

ETFs are Exchange Traded Funds which can track a given real estate index, thereby allowing you to invest broadly in the sector.  Your fees are likely to be relatively low and your risk can be well balanced if you spread your investment across an entire index.

REITs are Real Estate Investment Trusts which can be considered a sort of mutual fund, where you pool your investment capital with everyone else’s, to be invested in property.

Real estate is bought and sold and moved in and out of the REIT by its managers, and assuming they do a good job, as an owner of shares in the REIT you get your proportional share of the profits as your share value appreciates.

Both come with different potential risks and rewards, and with fees and charges of course, but either could be worth considering and discussing with your investment adviser if you want to capitalize on Canada’s continued real estate strength, without overly or directly exposing yourself to some of the potential future risks within the sector.

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