Declining Affordability is GREAT for Business!

In many major cities across North America, the rise of home prices has outstripped income growth, eroding affordability. The average person can afford much less home than they could in the past – it has become harder and harder for 1st-time homebuyers to save up the downpayment and qualify for a loan. As an investor – this is great news!

First of all, the significant price appreciation has created a lot of equity in properties already held in our portfolios. The opportunity to refinance and access the capital while rates remain low should be a serious consideration for any investor looking to expand their portfolio. Most people would agree that the recent rates of appreciation are unsustainable, and some would argue that a price correction is coming, but if your property is cash-flowing, then pulling out the equity to reinvest elsewhere does not over-expose you to risk since your properties can carry themselves through a market slow-down. If you can still cash flow after a refinance, then re-deploying that equity into a new property can help maximize your ROIs.

(GTA = Greater Toronto Area, Canada)   
Source: http://www.torontocondobubble.com/2017/01/cmhc-dec... 

Secondly, the declining affordability resulting from rapid appreciation helps increase the pool of quality tenants. As more and more people are priced out of the market, they are forced to rent for longer. Top tenants with good incomes, solid credit, and straightforward lives used to rent for a short time before purchasing their own home. Nowadays, more of these A+ tenants are renting long-term, creating great opportunities for investors. Reducing vacancies, repairs, and overall hassles carries huge financial and mental benefits for landlords.

Thirdly, declining affordability is pushing more and more people outside of major city centres. I’ve always been a fan of investing 50-150 kilometres from the largest cities – striking a balance between affordability and appreciation potential, and capitalizing on job opportunities from a commutable distance. I invest in Hamilton, ON – a city of 750,000 people, 70 kilometres outside of Toronto – a city slightly larger than Chicago. Major highways & commuter trains make it a doable commute, especially for those able to work remotely some of the time, or those with flexible hours who can avoid rush hour traffic.

I purchase single-family homes and add suited basements in order to attract young families who want 2-3 bedrooms and a yard for their kids, or young professionals with a pet that also appreciate the outdoor space. With declining affordability, it continues to get tougher for these types of tenants to make the leap to property ownership. Faced with the choice between purchasing a smaller place with no outdoor space or continuing to rent a home with a larger footprint and green grass right outside the door…I’m not having any vacancy issues, and cannot see that changing any time in the near future.

If price appreciation continues to outpace income level growth, us property investors will be in a great position to reap the benefits.