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The Value of Geographic Diversification in Mortgage Investing

 

After years of persistent growth, Canada’s housing market is experiencing its first period of sustained volatility in recent years. With nationwide home sales volumes in decline, investors are once again prioritizing diversification strategies. In the world of mortgage investing, geographic diversification can be an important consideration.

Diversification is regarded as one of the most important investing concepts. It involves spreading investment capital across multiple asset classes to minimize the impact of market volatility in any one area of a portfolio. Whole mortgage investing also requires diversification strategies, with geographic diversification perhaps the most important. 

Geographic Diversification in Current Market Conditions

Geographic diversification, or the process of investing in properties across various geographic regions, helps to ensure the long-term health and sustainability of a mortgage portfolio. It carries greater weight for mortgage investors in the current climate given the moderate decline in home prices being seen across major urban centres in Canada. The decline reflects the softening of demand following the pandemic-era housing market boom, as policymakers make taming inflation the top priority. Since the Bank of Canada began raising interest rates in March, national home resale volumes have fallen 31% and prices are down nearly 6% from their highs. Much of the decline has been concentrated in major population centres across Ontario and British Columbia. 

Related: The Bank of Canada Is Raising Interest Rates. What Does It Mean for Investor Portfolios?

Canada’s geography, economy and population diversity lead to housing markets that are vastly different across the country. As an example, as the national housing market cooled in the early months of 2022, some communities still experienced increases in home values, even in the Greater Toronto Area (GTA). Between the first and second quarters of 2022, Brampton, Mississauga, Orangeville and areas in central and west Toronto saw an uptick in prices, according to RE/MAX. Greater Moncton (New Brunswick), North Bay and Quinte West (both in Ontario) also bucked the national trend in terms of benchmark home-price growth. An analysis of house prices also reveals that the biggest price growth has been outside of Toronto and Vancouver: Hamilton-Burlington, Kitchener-Waterloo and the Fraser Valley in British Columbia registered higher growth than the national average through the first quarter. 

It’s important to note that despite the volatility in home values during the second quarter, prices are still up on a yearly basis. The Maritime provinces outperformed the rest of Canada in terms of year-over-year growth, led by New Brunswick and Nova Scotia. 

These trends signify that Canada’s housing market, and by extension, its mortgage opportunities, extend far beyond just Toronto and Vancouver. A successful mortgage investing strategy could reflect this divergence in price and demand fluctuations if the investment conditions meet the risk appetite of the individual investor.

 

Other Factors

Regardless of existing market conditions, diversifying one’s mortgage portfolio outside of major urban centres is important from the perspective of yield maximization. Return expectations have declined in places like the Greater Toronto Area due to growing competition among wholesale lenders. With so many lenders deploying capital in these markets, yields have become compressed compared to previous years. 

At the same time, regions outside the GTA have seen an abundance of lending opportunities, and often result in higher yield potential. As previously reported, smaller cities and towns across Canada typically have more to offer in terms of yield maximization due to the untapped demand in those markets.  

 

Final Thoughts

Like other forms of portfolio diversification, geographic diversification reduces an investor’s risk exposure. Rather than put all your eggs in one basket, or depend on a single market for performance, a diversified mortgage portfolio spreads the investments across multiple locations. 

CMI Mortgage Investments offers an exclusive full-service program designed to customize and simplify the mortgage investment process. From sourcing to underwriting to portfolio management, CMI investors benefit from strategic diversification across Canada’s mortgage market while adhering to strict risk management practices. Learn more about our investment process or contact one of our investment managers for a free consultation.

Create your customized CMI portfolio today and see why private mortgages are one of Canada’s fastest growing alternative investments.

 

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