Real Estate Investing During Recession: How To Buy For High ROI

By Pierre Carapetian
October 13, 2022

Thinking about Real Estate investing during a recession? Not sure what to invest in during a recession or what to invest in right now? Waiting for Toronto housing prices to crash? When it comes to the Toronto housing market I would actually consider the current state of the market to be more of a market correction than a crash. And, it’s very possible that we might be nearing the bottom.

As both a Real Estate Agent and an avid Toronto investor the Downtown Toronto condo market is my preferred market of choice. I favour Toronto over other areas in the GTA due to its stability and insulation from economic influences. It’s times like these when we’re in a changing market as it begins to correct itself, that my clients are glad we invested wisely. I get into the details and discuss what to invest in during a recession below.

Why is the Toronto Real-Estate Market Shifting?

Real estate values in and around Toronto skyrocketed during the COVID-19 pandemic, as they did throughout most of Canada, due to historically low borrowing rates allowing home-buyers to stretch their budgets to afford more expensive properties.

However, the Bank of Canada began raising interest rates in March this year, marking a sharp reversal in the trend’s direction. Sales and new listings dropped almost instantly, and buyers were able to be more selective, causing real estate bidding wars to all but disappear.

Mortgage interest payments are amortized over 25 to 30 years; thus, a rise in interest rates is projected to slow inflation and growing expenses, but the effect on home demand may be subdued.

A rise in interest rates has already pushed buyers to the sidelines, increased average days on market, and slowed sales by nearly 50%. As a result, homeowners now face greater monthly and annual mortgage interest payments, marking a tough but opportunistic phase for the real estate market.

However, it remains to be seen how effectively the government’s plan prevents the artificial increase in real estate prices by excluding foreign real estate investors and shielding private purchasers from institutional investors.

The government hopes that the other housing-related budget ideas, together with the tax-advantaged first home savings account (FHSA), would help make residential housing more accessible for Canadians over the long term.

We have our own thoughts on the affordability of the Toronto Real Estate market and discuss this in further detail towards the end of this article.

Key Facts Governing the Downtown Toronto Market

The Downtown Toronto condo market is a strong, stable, and insulated investment choice for many reasons but mainly, high immigration, convenience, lack of inventory, and land constraints. Also a special shout out to the Stress Test and the impact it’s had on market stability. It’s one of the reasons you’re not investing in a recession, but rather a market correction.

Resilience

While the Toronto Real Estate market may be slowing in sales and showing a lower average sale price the Toronto condo market has shown remarkable resiliency. The market may be down from February’s high at a 21% increase in average sale price from 2021 but it’s still up over this time last year at 4%.

Immigration

In Canada, immigration is the engine that keeps the economy humming, the culture and society flourishing, and the city of Toronto expanding and thriving.

Canada accepted a record of 401,000 new permanent residents despite the pandemic in 2021. This figure is expected to creep closer to 411,000 in 2022 as the government strives to reach its lofty immigration objectives.

Downtown Convenience

People will always want to reside in areas where they can walk to work and enjoy restaurants, bars, and activities. The majority of immigrant house purchases in Canada occur in big metropolitan centers like Toronto. Newcomers to a region are often drawn to its urban centers for the convenience of its core and infrastructural opportunities offered. Metropolitan centers will undoubtedly continue to witness a significant surge, and commensurate price increase as people return to in-person employment and immigration opens up again.

Toronto’s Supply of Homes Falls Short

Toronto is simply unable to keep up with demand. There is very little vacant land in the downtown area for further construction and we aren’t producing enough units, period. With approximately 85,000 units under construction and another 36,000 completed this year, we simply cannot keep up. And as interest rates have increased, investors and builders also slowed their role as they wait for things to settle, this in turn just adds to the supply issues.

Condos Are In Demand

Condos may be the affordable option for first-time homebuyers, but they are also the go-to choice for many of Toronto’s Real Estate investors. I believe that condos will continue to hold steady throughout 2022, homeowners are well-funded, so if they don’t get the price they are after they will hold and rent. Investors will move off the sidelines soon enough as the deals continue to fuel their demand.

Plus, with rents increasing at such an astronomical rate, eventually, the delta between buying vs renting will be negligible and more renters will make that leap into homeownership. Not to mention the average price of a detached house in the core has already surpassed $2 million, and the price differential between condos and low-rises has doubled and is fast rising upward.

Some of the things that make Toronto more insulated as a city are the same factors that make it expensive. We dedicated an entire post to the topic, “Why Is Toronto So Expensive?”

Real Estate Outperforms Other Investments

When you consider the questions, “What investments do well during a recession?” and, “The best stocks to buy now?” I implore you to remember that real estate, especially the Downtown Toronto condo market is a stable long-term investment and has historically performed quite well. Real estate just so happens to outperform most other investment options, including the stock market. Most recently the data showed that single-family rental homes outperformed the S&P 500 over the last 20 years.

What To Invest In Right Now In Downtown Toronto?

Investors and buyers react strongly to sudden shifts in the market, and those who purchased at the recent highs may be experiencing some uneasiness about where things are heading. Meanwhile, some investors are waiting for that correction and their moment to start real estate investing during a recession.

Even if recent homebuyers may feel the pinch of depreciation, for the time being, the Toronto downtown market still has a bright future. Strong employment, a rising population, and high demand for property indicate that Toronto’s market will eventually recover and resume its upward trend. You’ll only have a short window of opportunity to invest during a recession or correction. Either way, there are opportunities in the market and I’ve got my favourite picks for what to invest in right now in Toronto.

Landlords Take Advantage of Rising Rents

Even more encouragingly for those who invest in rental properties, rental prices in the city are rising rapidly, up 25% on average year-over-year. You’ll even hear of a few cases where properties have even begun to cash flow, believe it or not.

Under Premier Ford’s changes to rent control, those renters who are occupying or plan to occupy a rental unit that was leased for the very first time after November 15, 2018, are exempt from rent control. This means that landlords can increase the rent more than just the ~2% mandate.

Buyers Could Snag A Deal

Those who are now floating in the correction of the property market because they plan to make a bargain purchase of a home soon have every right to do so. With the interest rate hikes, Toronto’s real estate purchase price has decreased, but that’s not to say it has actually become more affordable from month-to-month.

Even if prices dropped by 30% or 40%, as a worst-case scenario, the market would still be about where it was before the pandemic. And even if prices are plummeting, homebuyers still have to battle it out for the limited inventory in the city.

Tons of Opportunity For Investors

Market opportunities like this happen once or twice in a lifetime and there are some large opportunities on the horizon for anyone who’s been sitting on the sidelines waiting for the right one to present itself. While I like to customize my investment strategy for each client based on their goals, here are a few of my favourite options for what to invest in during a recession.

PORTFOLIO OWNERS: SELL AND REINVEST

Sell? In this market? Yes, you heard me right! Investors, especially those with a Portfolio, there is money to be made in this changing market. For those investors who purchased and have already made a great return on that asset, it might be time to consider liquidating and re-investing those funds into two new assets.

PRE-CONSTRUCTION ASSIGNMENT SALES

There are a ton of assignments on the market right now, many are close to occupancy and you can pick them up for nearly what the buyer paid four years ago. Plus, since they are close to occupancy you’ll be able to take advantage of Toronto’s rising rental rates.

We talk all about why you shouldn’t sell your pre-construction condo at occupancy and what you need to know about flipping condos in Toronto on our blog.

RELATED: What is an assignment?

The Road Ahead: Should You Invest?

When the market changes, so too should your investment strategy. So, what to invest in during a recession you ask? It’s important to remember that not all investments are equal. Simply ‘investing because the market must go up is just not enough. You don’t want an agent who is going to throw every project at you to see if one sticks or pigeon-hole you into only one type of property. You want someone who will do their due diligence and find you the right, lucrative, and stable investment opportunities. It’s important that you consider your Real Estate investments as just that, a financial investment. It requires the right strategy to ensure you maximize your returns while building a lucrative but stable portfolio. The ideal portfolio would change from person to person as everyone’s situation is unique.

If you’re looking to invest in the Toronto Real Estate market this year, we should absolutely talk. Book a call with me here.