The following article was published in an earlier version in The Province on December 28, 2016. It has been penned by a prominent financial advisor and is intended to offer a vivid alternate perspective to the market.
Over my lengthy 45-year career as a financial advisor, I have been a strong advocate of owning apartment buildings.
Yet now, as much as it pains me, I am recommending to clients not to buy any further residential revenue properties in Metro Vancouver. More importantly, though, I am also recommending to them to consider putting their apartment holdings on the market to take advantage of this overheated apartment feeding frenzy that we are currently experiencing.
This decision has not come lightly, nor did I wake up one morning and decide to sell. Many of my colleagues have been shocked that I, as a financial advisor and experienced real-estate professional, should have come to this conclusion. My detailed research and the current geopolitical climate have made it obvious to me that the values associated with apartment buildings just do not make any economic sense. To quote Judge Judy, “If it doesn’t make sense, it cannot be true.”
Is there a bubble about to burst? No. Is this a crisis similar to the U.S. sub-prime fiasco? No. Then where has my epiphany come from?
Many of you who own apartments believe this market will continue for many more years, and you may very well be right, but this is where I see the issue. When you decide to sell and cash in, there may be no bids – they may just disappear — and this could happen overnight. There will always be buyers out there, but they may only be scavengers taking advantage of fear.
In my view, it’s not a matter of if, only of when. It has happened in the past, and it will happen in the future. History repeats!
The rewards that you have experienced have been amazing, but as my father once said, “Never argue or complain about a gain, even if you have to pay the tax, and leave something on the table for the next buyer, or there won’t be a ‘next buyer.’”
Here are my specific reasons that the market will change:
Vancouver and many of its close suburbs have or will become homes either to wealthy immigrants or to older retired or semi-retired professionals who have owned their properties for many years. This is evident in the fact that schools, especially on Vancouver’s Westside, are losing students. The VSB is experiencing large budget shortfalls because of declining enrolment. When no children are entering elementary schools, it means that there are no young families. Demand starts at the bottom, not the top.
Lifestyle choices are in shift also. People balance their work and family lives with more weighting toward family. They’re just not going to put up with these long commutes from the eastern valley to get jobs in Vancouver. Young professionals are moving out of Vancouver to other parts of Western Canada, even to Toronto where housing is far more affordable than here. Think about it: would you pay rent of $3,000 a month for a two-bedroom condo or $7,500 a month for a four-bedroom house? No, of course not.
Young people want homeownership, not a 900-SF two-bedroom condo that consumes half a paycheque just to make the monthly mortgage payment.
Jobs will disappear. Companies will relocate where young employees have access to more affordable housing – and $4 per SF per month is not affordable rent!
As demand for $2,200-per-month one-bedrooms falls, what happens to the value of your apartment?
It’s always the economics. Why would anyone buy an apartment building at, say, 2.5% to 4% cap (after renovations and market rents are achieved), especially with rising interest rates almost a sure bet? Where is the upside? There are so many other vehicles that produce better returns, equally advantageous tax treatment and better liquidity, without the worries of toilet overflows and bed bugs.
Financing is becoming much more difficult: lenders want more equity and better covenants, and they’re demanding terms and conditions.
Geopolitical forces are skewed against owning residential rental properties. With rent controls, restrictive demolition permits and tough zoning, landlords will always lose politically because they get outvoted by their tenants.
Rising interest rates always mean that cap rates don’t lag far behind.
If government can pass the 15% foreign buyer tax (which certainly has an impact on demand), then what else can it pass? Trust me, you won’t like it. Nothing good happens to entrepreneurs when government starts to mess with a business they know nothing about.
Given all that, if you own a rental property, sell. List your assets sooner than later.
This article is by Larry Jacobson of McDonald, Shymko & Company Ltd., Fee Only Financial Advisor. Phone number: 604-687-7966. Email: firstname.lastname@example.org.