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Monday, June 14, 2010

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The Real Estate Market: What’s on the Horizon?

If the recent number of new home listings is anything to go by, Canada’s real estate market is showing all the signs of a hot market. According to the Canadian Real Estate Association, there were 233,204 new listings in the first quarter of 2010 – more than any other first quarter period on record.

Much of this activity is being propelled by the introduction of the HST in July, which will affect new homes with purchase prices above $400,000 in Ontario and $525,000 in B.C.. In addition, Nova Scotia will see an increase of two percent, bumping the province’s HST to 15 percent – the highest in Canada. Homeowners in B.C., Ontario and Nova Scotia are starting to list their properties during the robust spring market, in the hope of closing new home real estate transactions before the impending July 1 deadline. While this doesn’t impact homeowners outside of B.C., Ontario and Nova Scotia, that still represents a significant percentage of real estate transactions (even with the rebates offered on the first $400,000 of a new home purchase price). Those located outside of major urban centres will be largely unaffected, but new homeowners in major cities like Vancouver and Toronto will be deeply impacted, since the average purchase price for new homes is much higher.

In addition to the HST, rising interest rates that are already affecting five-year fixed mortgages are prompting new home buyers to lock in now, before expected rate increases continue to play out over the coming 18 months. This is causing considerable turnover in the market, as homeowners accelerate plans to upgrade to larger homes before interest rates prohibit their ability to do so. While some forecasters are worried we might be in the midst of a mini-bubble, others suggest that the rising inventory on the market will help to normalize prices in hot markets. Once the HST comes into effect in July, the market should also begin to stabilize during the second half of 2010. Then again, real estate market trends have historically defied many conservative predictions, so expect some new twists and turns as this volatile market continues to evolve in the coming months.

The potential impact on commercial real estate is of greater interest to small business owners, especially those in the manufacturing and retail sectors where the demand for significant commercial real estate is high. With the rise in interest rates, retail establishments can expect the cost of their tenancy to increase, as property owners get hit by commercial real estate mortgage rate hikes. In dense urban areas the demand for these choice real estate locations is also increasing, further driving up rent increases that are putting greater pressure on less established retail businesses. Even established retail operations are not immune to rate hikes, with many electing to make the risky move of relocating otherwise thriving businesses in sub-prime locations.

So what’s the best approach for dealing with a highly volatile real estate landscape in 2010?

  1. Consider Your Total Exposure: Remember, as a small business owner, your level of risk in the housing market is directly tied to your stake in the commercial real estate market. Before making the decision to buy or sell both a home and a piece of commercial real estate, think about the long-term consequences of higher interest rates. You might be able to fund the impact on one of your properties, but not both.
  2. Don’t React to Short-term Fluctuations: As soon as rates start to rise, both homeowners and business owners start to panic. But the fact is, only a few times in the past 30 years have fixed-rate mortgages actually been more cost-effective to carry than a variable rate mortgage. As long as you’ve negotiated your variable rate mortgage to lock in at any time, there’s no need to panic when relatively minor rate increases take effect.
  3. Think About Other Ways to Reduce Commercial Real Estate Needs: If you’re feeling nervous about the market, consider other ways to run your business. For example, partnering with other companies to share office space can be highly economical. You might also consider remote working arrangements where employees leverage their home office instead of coming in every day. Also, more open office plans with shared work spaces might not be ideal, but you can significantly reduce the operating footprint of your business with some innovative planning.
If the real estate market is leaving your business feeling vulnerable, you’re in good company. Whether now is the time to expand your business, sell your commercial holdings or lock in your commercial mortgage rate, take your cues from the market before you act.