Shielding real estate investments from various Toronto risks

by Ephraim Vecina01 Mar 2017
While good times are rolling in the high-demand, high-growth Toronto residential real estate market, an observer noted that investors should still take precautionary measures to protect themselves when the housing bubble finally pops.

“The time to do so is now when the market is red hot. Even if you don’t hit the top, it’ll be much better to sell today than to feel the pain afterwards,” markets analyst Nelson Smith wrote in a February 27 piece for The Motley Fool Canada.

Smith argued that selling and renting is still one of the best ways to benefit from the Toronto market’s current climate.

“I realize most people don’t want to sell an asset going up more than 20% a year. I also know moving is a pain. But I still think folks sitting on houses worth $1 million, $2 million, or even more should look at selling,” he said. “Let’s say the Toronto market falls 25% and a homeowner is sitting on a mortgage free property worth $1.5 million. They could lose $375,000. Now moving doesn’t sound like that much of a pain, does it?”

“This is doubly true for homeowners nearing retirement age,” the analyst stated. “If these folks sell and unlock their equity, they’ll have enough to afford a retirement in their choice of tropical paradises.”

Smith added that while not inherently bad options, Toronto lenders are among those that will be most affected by a hypothetical crash, and investors should prepare accordingly.

“If values in the city fall, [lenders] will feel the impact. Investors will likely further exacerbate the problem when sentiment truly goes south,” he explained. “It’s probably a good idea for investors worried about Toronto housing to avoid [mortgage default insurers]. [They] could also get hit if sentiment turns profoundly negative.”

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