Kevin O’Leary addresses ‘real estate correction’

By John Tenpenny

Canada’s most-celebrated and controversial investor is offering real estate buyers a word of caution – in addition to his take on market corrections.

“I don’t know if it’s going to be a 30 per cent correction,” Kevin O’Leary, founder of O’Leary Financial Group and long-time Dragon, told BNN in an interview. “Maybe it just goes flat for 10 years, I have no idea. But would I be deploying more capital into real estate now, not a chance.”

His ambivalence echoes that of veteran investors in Canadian real estate as they digest the latest CMHC report on the market, expressing real concern that Toronto is headed into dangerous territory.

O’Leary isn’t necessarily convinced.

“One thing we’ve learned over the past ten years in housing in Canada is that reports and government officials don’t change valuations in housing, markets do,” he said. “I think this report is kind of irrelevant.”

For O’Leary, the condo market, specifically, the market for what he calls “shoebox” condos is the area that will indicate where the market will go. He called them the “canary in the coal mine.”

“If you look at the shoebox condo markets in Toronto, Calgary, Vancouver and Montreal, usually the cracks occur there first. I watch those every month and there has been no change in pricing.

In fact, O’Leary said demand for downtown housing in all Canadian cities is insatiable because millennials and people who are moving there don’t want to live in the suburbs or don’t own cars.

Investors agree.

“In these key markets and in Toronto especially, there is a major shortage of rental units in the downtown core and other highly populated pockets of the GTA,” says Paul D’Abruzzo, The CashFlow Engineer. “The lack of new of ‘purpose built rental buildings’ means that a large portion of the condo units being sold, in these key markets, are filling the gap in the rental market.”

Asked when the correction will come, O’Leary pointed to interest rates. “While you have continued zero interest rates and mortgages under three per cent there’s not going to be a correction in housing. It’s when and if Canadian rates go up, that this asset class will suffer.

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  • by Keith 2015-08-19 11:10:38 AM

    Like anyone else Kevin does not know what will happen and like so many others he views shoe box or micro condo's as being over built. This may very well be, however, one segment does not dictate the whole market nor does one or two cities. It is well known that the population of millennials is now greater than that of the baby boomers and the generational views on housing and life are very different.

    Investing in real estate the right way is not a bad investment now or in the future. If you buy a $300k home now with $60k down payment; in an area with solid economic fundamentals the investor will have positive net monthly cash flow. The tenants will pay down the mortgage in full for you and if it is a 25 year investment and the property value stays exactly the same your return on investment is 400% (300-60=240K/60 which is 4 times your initial investment or 400%). Even if the property value dropped 20% in 25 years to $240K the investor would still see a gain of 300% on their initial investment (240-60=180K/60 is 3 times your investment or 300%).

    Even if an investor had a 10 year time line the tenants would have paid enough of the mortgage principle for the investor to have about 100% return on their $60k investment.

    Actively investing in real estate is not for everyone and neither is the stock market, mutual funds or RRSP's. Since 2005 real estate has outperformed all other investments. Just compare the real estate indexes to the stock market indexes.

    Many people that building wealth through real estate is very lucrative, however, they do not have the time to do all the work it takes to educate themselves and invest in real estate. it is these types of people that become involved in our joint venture partnerships and are seeing their wealth grow and great returns on investment paid for by tenants.

  • by Jeff D 2015-08-19 1:50:07 PM

    Beware "Complacency Bias" - Canadian market is long overdue a correction

  • by RossK 2015-08-19 6:14:14 PM

    Anyone who buys real estate is investing in real estate whether they realize it or not.

    Mr. O'Leary in this one area lacks the expertise or knowledge because when the last housing correction took place Reader Rabbit was just an idea.

    Housing prices must correct and current home owners must take a hit if the housing market is to keep going. It is a structural impossibility of the housing market for things to keep going.

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