I’m seriously thinking of buying for personal reasons in a tertiary Southeastern market, that’s made me wonder, where are we in the cycle. It’s obvious where I am that there’s a lot of supply constraint with little single family resi construction until recently and interestingly enough a huge delta in price versus existing. It seems like we are in late innings on the financial side, but earlier on the physical side. What are people’s thoughts? Am I nuts to be looking now?
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The degree of "nuts" definitely depends on your market. In Toronto, people have been saying we've been at the top for like 15 years and it just keeps rising. As someone looking to buy into the market, I'm hoping to coming rate hikes will finally be the tipping point especially given national trends towards a few other growing markets, but at the same time real estate is so hot here from an investment standpoint I'd probably still buy if I found the right deal because the rate increases may not matter.
I’ve heard stories about the GTA market how has it seemingly skated so far away from income growth, same is true with Vancouver. Where I am the striking thing is the delta between existing and new construction, we are looking at paying roughly 60% of the cost of new construction on a comparable new home, to me that’s nuts.
In my opinion, things will just keep going up. People keep mentioning a bubble. A bubble is only created when there is artificial demand vs a finite amount of supply. However, in the world we live in now, there is "REAL" demand vs. a finite supply. In addition, that finite supply I am referring to will continue to see an imbalance skewed towards a worsening supply/demand metric. Interest rate increases may help offset the investors dollars and keep people liquid, but the reality is the real demand of buyers on the residential side simply needing a place to live is getting worse. Multifamily is only going to get worse. Other commercial assets may cool off with rate increases. The problem now is that demand has pushed returns so low that when rates do rise, we will see two types of investors in the market, those holding because they can't exit at a lower cap rate than what they bought in (or cant increase rents fast enough) and those with simply too much money (family offices, pensions). Multifamily will be very interesting going forward. Strong fundamentals but fighting rising interest rates.
I was following your comment until you said "The problem now is that demand has pushed returns so low..."
How does demand push returns lower? Wouldn't increased demand contribute to higher rents leading to increased NOI and presumably higher returns?
demand from buyers for properties pushing property values up and income yields down....................
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