Investing

Are REITs correlated with housing market?

  • Last Updated:
  • Dec 29th, 2019 8:27 pm
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5 replies
Deal Fanatic
User avatar
Sep 8, 2007
8946 posts
10133 upvotes
Way Out of GTA
The author has no clue what he’s talking about. The term fool is fitting.

Clown statement “Canadian cities like Toronto and Vancouver are experiencing price increases at an alarming rate since the 1980s

A bubble? Since the 1980s? Thanks for the comedy. But the author really is a click bait troll. OP should really research his sources in future not to look..um...foolish...

https://www.fool.ca/2019/12/23/a-2020-t ... should-do/

https://www.fool.ca/2019/12/24/will-td- ... h-in-2020/
[OP]
Banned
Dec 17, 2019
136 posts
71 upvotes
Financial porn is financial porn.
Deal Expert
Jan 27, 2006
16021 posts
8865 upvotes
Vancouver, BC
I agree to a certain extent with @cartfan123... The article's author does two classic mistakes:

1. equate the US housing market to the Canadian one thinking that they are both the same but Canada is the 1/10th the size and a few years behind the US trend. The only thing true is Canada's 1/10th the size... everything else is different. The causes of the US crash weren't overinflated markets (which they were by the way) but lenders making loans based on foolishness causing a loss of 'trust' between the major institutions. We don't see anything like that in Canada at this point.
2. Believing that Canada is ONE housing market and a crash in one location will take down the entire thing like a house of cards. Like most real estate markets, Canada is divided by individual locations which for the most point move in semi-isolation from each other - ie a drop in the Calgary market won't cause the Toronto market to move but both are affected by macro-economic events like interest rates.

Besides, something like CAR.UN is based on apartment buildings which is entirely different than homeownership which is typically affected by a crash. The only similarities that apartments and condos/detached homes have are: people live in both and that someone or something owns them. No-one talks about apartments when talking about housing market bubbles or crashes. The only REIT that I can think of that has things like condos and detached homes is Tricon and they primarily buy in the US market with little Canadian (if any) exposure at all other than the fact that they are based in Canada and trade on the TSX.

Yes, both REITs and housing goes down if rates go up but that doesn't mean that they are somehow connected in other ways besides being affected by interest rates. Utilities and other dividend-paying stocks also go down as rates go up so are they connected to housing? Nope!
[OP]
Banned
Dec 17, 2019
136 posts
71 upvotes
In theory, a reit gives you exposure to real estate. My CA however Said no. Buying a gold mine gives you exposure to gold so a reit should give u exposure to real estate.
Deal Addict
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May 11, 2014
4469 posts
5245 upvotes
Iqaluit, NU
Carcross wrote: In theory, a reit gives you exposure to real estate. My CA however Said no. Buying a gold mine gives you exposure to gold so a reit should give u exposure to real estate.
i would think of it from a more basic perspective.

A house generally attracts loq to high income families with single to dual incomes. The prices do well if employment and income grows and tends to do worse if It doesn't. Generally, family will buy a home where they live and mortgage a large portion of money and payments depend on their income.

A REIT will depend on the type of real estate it holds. Some are commercial prorperties like malls or office space. Some are clinical spaces. Some are apartments. Some are retirement homes. Depending on the REIT, they will develop new spaces in markets management think is prudent. They rely on rental income obtained on the income from renters. If they want to build or buy more real estate, they fund this by issuing debt, more shares or with accumulated earnings (rare).

See how just looking at this makes a difference?

Take just an apartment REIT. If say a recession hits and employment drops, and we have a housing selloff. An apartment REIT might not be as affected. Since some families may no longer can afford their home, they may instead rent an apartment. Demand for rentals may still be decent and rental income stays the same. If the REIT invests in commercial real estate or luxury rental units, this is different again. Perhaps people cant afford these units no longer or retail sales drop and demand for commercial spaces drop.
Then retirement homes or medical office spaces, irregardless of economy, the greying society means more spaces are required meaning demand may still increase despite a recession.

See how quickly just looking at the basic structure we see a huge difference in performance? I say the answer is really no.
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