Across the country, we are seeing the real estate market rise out of reach for the majority of Canadians.
With fear of interest rate hikes, Canadians are flocking to investments with a far lower barrier to entry. Such as the Canadian stock market, crypto currency, art, and alternatives, focusing on high free cash flow yields relative to interest rates. With the Fed putting all of their attention on cooling this influx in property pricing, there is even greater justification for Canadians to park their capital in these investments that are better positioned for potential rate hikes.
With inflation on the rise, there are plenty of index funds traded on the Toronto Stock Exchange (TSE) positioned to do well during inflationary times, which invest in assets such as finances and natural resources. With nearly a 5% Consumer Price Index (CPI) increase year over year in December 2021, other Canadians are beginning to take notice and following suit. Especially with Index Funds like Horizons S&P/TSX 60 Index ETF Class A (TSE:HXT) posting a 28% year over year return in that same time frame. Combining high annual returns with the low barrier to entry and a much more liquid asset, other Canadians are beginning to take notice.
While the Bank of Canada has kept interest rates unchanged following their January meeting, the Fed has made it apparent that interest rate hikes are on the way. Royal Bank of Canada (RBC) has released data that shows that 19% of homebuyers in Canada currently own multiple properties. A rise in interest rates with over leveraged Canadians who were distracted by historically low rates to combat the pandemic could create a recipe for disaster.
The price of housing has climbed significantly in the country’s more populated areas. According to the Toronto Regional Real Estate Board, the average home price throughout the Greater Toronto Area was $1,157,000 as of December 2021. With the Real Estate Board of Greater Vancouver publishing an average property price of $1,230,200 in December 2021.
Younger Canadians who have been patiently waiting for the last 2 years for a pull back to enter the market have no choice but watch pricing soar, or find other avenues for investment as the current real estate market has effectively abandoned them.
One way Canadians can look to get their foot in the door without the high barrier to entry associated with purchasing tangible real estate is through Real Estate Investment Trusts (REIT’s). These REIT’s allow Canadians to reap the rewards of the booming real estate markets. Funds like Coachwood Capital are building a bridge for ease of investment in the U.S real estate markets. Our American counterparts are also planning on raising interest rates by a smaller percentage paired with tapering by the American Fed, slowing down the purchasing of bonds to boost their equity markets that were hammered during the early stages of the pandemic.
This tapering will cool off the rapid growth seen across U.S equity markets, showing increased flow of capital into tangible assets like real estate. With Coachwood Capital’s ease of access to these markets, Canadian will be able to enter low barrier private U.S based real estate funds, that will aid in the diversification of their portfolios in a higher return market.