The Greater Toronto Area is leading a nationwide collapse in condominium prices.
According to the real estate board, condo prices have plunged by over 25 per cent since they peaked in 2022.
It’s a setback for big developers who can absorb the loss, but it has been devastating for mom and pop landlords who staked their retirements on the high rents and price increases from past decades.
It’s often the same story, to a lesser degree, for Canadians who put their retirement hopes in other rental properties such as cottages when they could have generated steady, solid, returns from a wide world of other investment opportunities.
What happened?
The primary reason is too much supply and not enough demand in the broader residential real estate market.
But it’s politics that have hit the second-property market especially hard.
In an effort to ease Canada’s housing affordability crisis, governments have been cracking down on real estate speculation and absentee landlords. In just over a decade, measures have been introduced including a Foreign Buyer Ban, Underused Housing Tax (UHT) and provincial speculation taxes.
The Canada Revenue Agency (CRA) has also launched a mammoth effort to target undeclared property flips, which even impacts Canadians who count on their principal homes to see them through retirement.
While a capital gains tax is normally not imposed on profits from the sale of a principal residence, a recently introduced Anti-Flipping Tax treats profits from residential properties sold within 12 months as taxable business income.
Residential property is not a good retirement investment
A recent survey from the Healthcare of Ontario Pension Plan (HOOP) found 62 per cent of respondents said home ownership is “a key part of their retirement strategy, either as a financial investment or a source of stability in retirement.”
Another recent report from RBC found nearly half of wealth accumulation in Canada has been driven by home ownership over the past three decades.
Putting a large retirement nest-egg in one basket can always backfire. The risk from investing in individual real estate holdings, including secondary properties, is concentrated in one sector (residential real estate) in one geographic region (that location).
According to the Canada Mortgage and Housing Corporation (CMHC), the average annual increase in property values over 20 and 30 year periods have always exceeded five per cent since the end of the Second World War.
However, data on home values are based on averages across this great, diverse, country. Individual markets ebb and flow over time. Some appreciate above average, some just hold their value, and others depreciate - all on the whims of a micro-market.
A wide world of retirement investment alternatives
In comparison, investment portfolios of fixed income and equity holdings properly diversified across sector and geographic lines always post stronger and more reliable returns over the long term.
Wannabe landlords can still invest in diversified real estate holdings that generate rental income and potentially grow in value through real estate investment trusts (REITs).
REITs have many real estate holdings diversified by sub-sectors including residential, commercial and industrial.
They are publicly traded companies that own or finance income-producing real estate. They have not been immune from the global real estate slump but the sector is already showing signs of recovery.
One tax advantage a REIT has over a second property is its ability to avoid taxation all together if it is held in a tax free savings account (TFSA).
Another tax benefit allows contributions to a REIT in a registered retirement savings plan (RRSP) to be deducted from taxable income and grow tax free over several years until it is withdrawn.
Annual fees on most REITs are far below one per cent, but investors are normally compensated through annual yields from rental payments.
There’s another stark advantage a REIT has over a rental property. Most landlords know the burden of having to deal with plumbing in the middle of the night, legal liabilities, endless government regulation, and the stress of having to evict deadbeat tenants.
All that becomes the REIT manager’s problem. Administration and maintenance are part of their operating budget.
