O’Leary: Real estate makes for a poor asset given current market conditions

by |
Lyle Adriano

In an interview hosted by Business New Network, O’Leary Financial Group Chairman Kevin O’Leary shared his take on the current housing market; he revealed that he does not see the 30 to 50% correction that other industry experts are anticipating, but still considers real estate a very poor investment for this cycle.

"You'd be an idiot to buy a house," O’Leary said during the interview.

He reasoned that investing in real estate is a bad decision, stating that he does not think that homes would considerably appreciate in value within five years. He also noted that buyers still have to pay real estate taxes and transfer taxes on the land, as well as pay their brokers 3 to 5%. All these closing transaction costs make real estate one of the more expensive asset classes to trade.

O’Leary surmised that it would cost investors between 8 to 12% to trade real estate assets. He also added that given the way things are, the chance an investor would enjoy a 12% appreciation over five years on a property is next to zero.

For close to 18 years, Canada has experienced a housing bull market, with perpetually low rates encouraging both homebuyers and speculators to snap up properties with almost zero capital. O’Leary expects that at the very best conditions will plateau soon, slightly improving chances of material appreciation on houses.

He goes on to mention the potential housing bubbles other pundits have observed in areas such as Vancouver, Montreal, Ottawa, and Toronto, where “shoebox condos” have begun sprouting to accommodate the large number of immigrants and/or millennials looking to move into the cities. With too many buyers and speculators participating in these popular markets, only time will tell when the bubbles will eventually burst.

O’Leary suggested that investors look into short duration, investment-grade corporate debt, as he sees it as an even more attractive and safer option than real estate. He also suggested to prospective homebuyers to look into renting instead, so that they can invest their cash into other things.
 
  • David Larock on 2015-12-04 9:37:49 AM

    Based on O'Leary's track record, everyone should run out right now and buy houses!

    This is the same guy who told everyone to lock in to a fixed-rate mortgage in 2012 when they were offered at 3.00%, predicting that anyone who didn't would get "slammed".

    The real mystery is why anyone still listens to this blowhard.

  • rob on 2015-12-04 10:04:17 AM

    for most of my clients, the cost of renting is usually equal to or slightly less than owning a home.

  • David Dickson on 2015-12-04 10:05:59 AM

    There's a major logical error in Kevin's argument. "The large number of immigrants and/or millennials looking to move into the cities" is natural demand, not speculation. To conclude that household formation outstripping the supplying of housing stock is a sign of speculation is just wrong. If Kevin thinks there's too much speculation, state the evidence. I don't think that evidence exists but if it does, let's put it on table and review it.

    He might be right or wrong in his thesis but he has not made any valid argument to support it.

    To conflate a shift out and up of the demand curve with a speculative bubble is a silly syllogism. A professional investor should know better.

  • John Martin on 2015-12-04 10:24:22 AM

    Yes David is right. Kevin is a blowhard. But a very fortunate, wealthy and arguably depending how one looks at him, arrogant one. Would love to have his money any day of the week. Isn't life grand. Merry Christmas to one and all.

  • Ron Butler on 2015-12-04 10:35:51 AM

    Is it a bad thing to posit the idea that houses in the GTA and Lower Mainland may stop appreciating in value? I think it is a completely reasonable point.

  • Foys on 2015-12-04 11:03:04 AM

    Has Kevin sold his own house? I doubt it. If not, then he is a hypocrite.

  • John Meredith on 2015-12-04 11:03:30 AM

    Everyone has forgotten in Toronto prices dropped 40 -50% from 1991 to 1996 when we had NDP goverment. The market is driven by low interest rates which are about to change on the up side started in the US

  • John Van Driel on 2015-12-04 11:19:46 AM

    Kevin, also at one time was a fellow mortgage advisor!!

  • JR on 2015-12-04 11:22:49 AM

    I completely agree with David.

  • Dustan Woodhouse on 2015-12-04 11:41:57 AM

    Sorry Kev, we all have to live somewhere and with record low rates turning 50% of the monthly payment into mortgage paydown (equity) purchasing a property for the long haul is as smart a move today as it was for anybody who bought and held at any time previously.

    The key; buy and hold.

    The subheading to Mr. O'leary's 'idiot' remark should be 'and expect to sell it again at a net profit in 3-5 years'.

    Flipping is increasingly risky as prices hit new peaks.

    Buying, and never ever selling...not so risky. Just smart.

    Live in it.
    Rent it.
    Never ever sell it.

    Happy Friday!

  • James on 2015-12-04 12:20:15 PM

    Has anyone compared real estate appreciation to O'Leary Funds ? Of course KO doesn't want people to buy houses as he doesn't make money when we do. Remember the old ReMax ad ? "You can't live in a mutual fund" Mr O'Leary should stick to what he is good at....how are those 3 O'leary mortgages performing ?

  • G on 2015-12-04 12:46:46 PM

    "Has Kevin sold his own house?"

    As far back as one can Google, O'Leary has said he is a renter.

    Our family has just sold a downtown property that has been passed down since John A. Macdonald was PM and Rutherford B. Hayes was the US Prez. Flipping no. Long term, short of war and revolution, nothing beats well-located real estate.

  • Jessica on 2015-12-04 1:59:16 PM

    Apparently Kevin doesn't know the same people I know!
    Many people have seen huge gains on their properties in the last two years and sold in a short time and made 100K-2M!
    Real estate is a good investment as long as you can afford to hold it in a buyer's market and sell in a seller's market.
    The key is - Much money is to be had if you can afford to hold.
    I'm with Dustan - everyone needs a home!

  • keith on 2015-12-04 4:25:14 PM

    He's a blowhard who is as fake as a three dollar bill. His funds are among the worst performing on the market today, and he is not nearly as wealthy as he claims he is. ALL he has ever been good at is self promotion.

    Given how quickly his own mortgage company failed anyone with half a brain would not take advice about property from this dingbat.

  • Lindsay on 2015-12-04 7:33:20 PM

    I like Mr. O'Leary, however, he is forgetting that real estate is still one of the only investments in which you can highly leverage your money. Your return, even if small, is on the entire value of your home while your investment is a minimum of 5% of the value of the property. When you look at the return on the actual dollars you have invested, it can be pretty awesome and you only incur costs when you sell, so buy and hold. If you have to pay to live somewhere and you are going to be in one place for a period of time, I choose real estate as a solid piece of my investment strategy.

  • Phil on 2015-12-06 3:03:33 PM

    Kevin, didnt make it in the mortgage business.
    Real Estate has out performed the stock market, look at the average annual returns and mer's of funds

    Funds are designed to make the owners of the fund company rich.

    If you get lucky you may out perform the index

    ETFs are better.

  • Greg kats on 2015-12-06 9:52:56 PM

    It feels like all the responses on here are people who've owned a home for quite a while and therefore have made and are sill making a nice return. Kevin is talking now and real estate is really expensive, why are we buying a 1 million dollar home in the GTA and carrying maybe a 750,000 on the avg( being generous there) so we can Give our bank lender say 50% of interest portion payment + Other home expenses that come along with the purchase of your 1st home.
    The juice is just not worth the squeeze when looking at this the past 3 years and on. If we're talking present then I agree with Kevin O'leary.

  • RossK on 2015-12-07 3:33:36 PM

    Here is what Mr. O-Leary told Calgarians in January 2015.
    " My guess would be you’re not going to have a significant increase, in other words maybe a 2% increase in valuation, but not a 30% drop in valuation."

    Of course this supported the REALTORS in Calgary as he was a speaker there.

    House prices were already correcting at that time but it was hidden behind how real estate data is released to the public. Now months later a claimed 5% reduction just took place meaning Mr. O'eary's advice is now out 7% or a nominal equity lose of $28,000.
    Actually prices in Calgary are already down 15% but that will again take months before the public is told the truth.

    Now had Mr. O'Leary made these comments about Stocks with such a flippant and without supporting evidence he would be charged.

    This MBs is the problem all your clients face and why your advice at this time to protect their equity position is so needed.

  • Wayne Campbell, Prince George on 2015-12-07 6:28:44 PM

    You hit the nail on the head Dustan!

    If Kevin figures that it won't appreciate by more than a dime in 5 years, how much return is he going to get on all the rent he pays in the alternative? A lot more than a dime?

  • Theodore Jones on 2015-12-09 9:50:33 AM

    Nobody should be listening to Kevin O'Leary. He is all self promotion and is self serving. Factors he has stated are absolutely not true in terms of return on investment. I sold a home in Nov of 24 that was run down with a leaky roof ( a knock me down) for 1.1 million. I didnt want to sell but was pressured to do so cause I knew the market would continue to rise with wealthy immigrant demand in that area. That LOT is now worth 1.4 million only 12 months later and a new custom home is going to be finished shortly on it with a value of about 2.9 million which will be owner occupied. Any house or knock me down house near a subway will continue to rise in value. In terms of RETURN Kevin please look at the person that paid 1.1 million and 12 months later could have sold the LOT for 1.4 million, a $300,000 profit. Kevin take out your calculator and look at those rates of returns. At the same time I lost $17,000 this year with a RBC Mutual Fund mid risk account. So you tell me what was the better investment. This bubble if it does burst will burst on the homes in the outlying areas not in the core areas of Toronto and Vancouver and I personally don't believe it will burst when we have 250,000 immigrants coming primarily to Toronto and Vancouver B.C . who have money ( not to be confused with the refugees). Kevin needs to go back to school for economics. I have been in money market trading, real estate brokerage/development for 24 years, and have founded several companies. I dont know why people even listen to Kevin O'Leary and his guesses on the economy and its stability.

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