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Smooth Sailing Ahead for the Vacation Property Real Estate in Ontario’s Cottage Country?

Good question and one that we all wish we had a perfect crystal ball to tell us the answer. While we don’t have a crystal ball to say with absolute certainty, we here at Experience-Muskoka.com are avid real estate market followers for vacation property and recreation property. We watch the economy with keen interest so think we can offer some interesting comments to the discussion for our visitors.

It’s the wild cards that affect the short term bumps – and we see a few of them. But long term there are all kinds of reasons to think your investment in recreational property should be safe and strong for years to come – if you can live with some shorter term uncertainty.

How the following issues affect each other is the tricky part but each one will have its own influence on the market.

Real Estate Market Forces – The Wild Cards

Interest Rates

Interest rates are likely to continually move upwards although at a slow pace. But for every nudge upwards, you lose potential buyers. At what point will they stop? That’s hard to say but just take a look at any mortgage amortization chart to see how the affordability of money changes with each little nudge upward.

Whether intended or not, the Fed’s monetary policy after 9/11 up until about 2004 of lowering the cost of money did allow more people to enter the housing market. In fact, we have just witnessed some of the lowest interest rates in over half a century and an unbelievably strong housing market. But all good things come to and end at some time. Will the end be sudden or just a whimper? No one can say – so this is Wild Card No. 1.

Wealth Transfer from Inheritances

Another key real estate market force is an influx of cash. And there is about to be a huge transfer of wealth from aging parents to baby boomers. Billions of dollars in North America will be passed down through inheritances. Here is an interesting quote from Canadian Mortgage and Housing Corporation (CMHC). They predict that Canadians will invest $329 million of inherited money into the “vacation homes/investment property market” in 2006.

What is the net effect of this? Well, a bunch of people with money to spend means higher demand, potentially multiple bids on certain property. It means waterfront property again remains highly desirable but since there are finite waterfront lots available it also means a re-think of what a cottage property is.

Properties that have indirect access to water may do well. Rural backlots may also become the target of hungry buyers. Renovating or winterizing old properties out in the country might become popular. The point is about all one can really say is that with this kind of cash transfer there will be people looking to buy somewhere. The exact ways in which this will play out are up for speculation. This is Wild Card No. 2.

Higher taxes

As cottage properties rise in value so to do the dreaded tax assessments. Many cottage owners are standing up and saying that they are being forced out of their properties by sky high tax bills. What will the net effect be if many cottagers sell? Will it be imperceptible or will it be enough to soften the upward trend? It will probably depend on the demographics and popularity of the cottage area itself. But it is one of those real estate market forces to consider. Ergo, Wild Card No. 3.

Deficit Spending and The US Economy

The US deficit is growing at an alarming rate and it seems paradoxical given that it’s a Republican party in power. Much of this is because of the ongoing war but it is also enhanced by tax cuts as well.

How long can the US run deficits before foreign lenders pull back the reigns? That is a big question and one which will affect the real estate market in a significant way. Will the US pay off their debt by printing more dollars, thus devaluing the US dollar and priming inflation? Will the Fed then be forced to raise interest rates to slow inflationary pressures?

You can see that it becomes one very big question mark and potentially one of the most significant real estate market forces out there. There are a lot of very smart people playing the markets everyday who can only offer educated guesses. All we can say is that there is always a time when you have to pay back the lender. When this happens the US economy is likely to retract all of which will affect the economy which will in turn trickle through the Canadian economy and the real estate market.

So if you are just hanging on barely to your second property, you might be vulnerable during a market pull back and vacation properties are the first to be sold. If you are flush with cash this could be a great time to buy. So this is Wild Card No. 4.

Investment in Infrastructure

The cottage properties whose values will rise the most are likely to be those that are supported by solid infrastructure. This means better access with highways and nearby hospitals. If you see plans for a new 4 lane highway through what was once a hinterland, you can reasonably expect that if its lake country that it is now more desirable because of improved access.

Likewise, if you see a good hospital in a rural area, baby boomers and other retirees will see that as another reason to buy a cottage in the general vicinity. So what are the plans for public infrastructure in your area? This is Wild Card No. 5.

These are not the only real estate market forces that will affect the cottage vacation property market. There are other forces at play as well. But keep these in mind as you investigate the Muskoka real estate market.

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