According to Calum Ross, a leverage wealth expert and VERICO broker with Mortgage Management Group, real estate investors in Toronto and Vancouver should sell now.
“What I can say with absolute certainty is, as we know from a real estate and investment philosophy, people should buy at high cap rate and sell at low cap rate,” said Ross. “When looking at comparative asset classes and at risk-adjusted rates of return, rates on Toronto real estate are running as low as 2-3%, and if there’s inherent risk of the principal and there’s a lot of extra work, I know that the vast majority of high-yield money market instruments or low-yield bonds have much less market risk. As much as I love real estate as an investment, first and foremost I’m a wealth advisor.”
Last year in Toronto, investors enjoyed about as obvious an aberration as they’ll ever find in a real estate market: Appreciation climbing north of 30% in a single year. However, to ignore that anomaly is to have what Ross calls “delusions of grandeur.”
He isn’t merely talking about individual, unsophisticated investors looking to make a few extra bucks as a landlord. Ross believes the market is charging towards a calamity of some kind, the severity of which remains to be seen.
“If you start to look at high-end real estate and the vast majority of real estate investments, you can see that the actual yields on these—looking at average rent based on underlying value of the underlying security, the gross cap—are so low that the vast majority of people, if they considered maintenance fees, property taxes, default, the incremental risk of mortgage debt, are engaged in speculative-grade real estate,” said Ross.
Buttressing his stance, Ross points to the yield curve.
“The yield curve flattening out has predicted seven of the last nine recessions. Based on the way the yield curve is flattening out, it’s likely we’ll see some form of recession as early as May 2019.”
Ross is not all doom and gloom, though. He is a staunch believer in real estate as a sound investment, but he cautions that investors need to conceive robust strategies if they intend to spending their money on Toronto and Vancouver real estate.
“If people did their leverage wealth investing in any way a real wealth advisor suggests, as long as someone has good cash flow, a balance sheet and a long-term investment horizon, real estate is still a very sound asset class,” said Ross. “However, based on the way values have gone up, almost every single real estate investment client I have is overweighted in real estate holdings.”