There are some big upsides for equity-rich individuals
The challenges of the real estate market over the last several months have been well documented, with activity and property prices tumbling as interest rates start to spike upwards.
Still, opportunity remains despite those higher borrowing costs, according to a prominent economist who told Canadian Mortgage Professional that those who are in a position to purchase will certainly find value for their money in the current climate.
“Investors generally are well aware that you do best when you look backwards,” said Nick Axford (pictured), chief economist at commercial real estate giant Avison Young. “The investors that do best are the ones that buy into the bottom of a downturn, rather than the ones who try and time it and buy just at the bottom.
“The reason for that is typically the quality of asset and the type of product that you can buy is better whilst the market is still softening because the people who are exiting are doing so because they really feel they have no choice. As soon as people have kind of got to the bottom and things are getting better, the first thing that people do is not sell if they can possibly avoid it.”
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Debt financing is problematic for many borrowers at present, with a sizeable number of lenders also on the sideline for anything other than the very best product. Equity-rich buyers, though, may not necessarily need to utilize debt to finance a deal – and could find themselves purchasing at an amount well below a property’s prior valuation.
When assets are placed on the market because of refinancing or asset allocations that are being impacted by what’s going on in the bond and equity market, “the likelihood is that they will be at quite a significant discount, certainly to the way they were trading before, and that’s an opportunity for people to pick up what they consider to be good, quality, long-term assets,” Axford said. “So absolutely, there are opportunities there.”
The current market cooldown is expected to last well into 2023, although Axford noted that Canada could be at an advantage compared to other economies whose central banks have taken aggressive action against inflation.
That’s because the Bank of Canada has adopted an especially hawkish stance on bringing the inflation rate down, introducing a decisive series of rate hikes throughout the summer aimed at “frontloading” rate jumps and giving them more flexibility later in the year and into next.
Canada’s central bank has raised its policy rate by a total of 3.5% this year, with several oversized hikes including an unexpected jump of a full percentage point in the middle of the year.
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“We expect inflation to slow quite quickly as we come into next year. I think, also, the Bank of Canada has kind of been ahead of the curve,” Axford said. “They’ve actually been frontrunning all the other central banks in pushing up rates at a time when others have been a bit further back. So they’re also recognizing that the interest rates that are already in the system are going to have a knock-on impact.”
While the Canadian economy is expected to slow into the early part of next year, inflation is also likely to start coming down “pretty quickly” according to Axford, with spiralling energy costs unlikely to remain as significant an issue in North America as in Europe.
“We’re seeing consumer expenditure weakening to a greater degree than we’re seeing in many other markets. So it’s kind of an element of the medicine working,” Axford said. “Energy costs are likely to be lower in North America – that’s going to be the real problem that’s going to keep feeding through in Europe whereas in the US and Canada they get the benefit of lower energy costs coming through.
“So expect inflation to generally come down quicker. We expect the Bank of Canada to be in a position by the middle of next year into the third quarter that they can start thinking about reducing rates, which isn’t something that we would expect to see anywhere else until the very end of next year, or more likely into 2024.”
