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Fred Lum/The Globe and Mail

Scott Baker has a rarefied view of Toronto's real estate market.

"We tend to look at it from 40,000 feet."

Indeed, as the manager of a private pool of real estate assets, he looks at the broader housing picture in North America from that height.

Mr. Baker, a senior vice-president with Toronto-based MacNicol & Associates Asset Management, manages several alternative asset pools. One of those is the MacNicol 360 Degree Realty Income Fund.

Mr. Baker gets a pretty good look across North America through investing in third-party managed funds with "extreme local knowledge."

The Toronto market, he says, is driven by powerful trends that are not likely to end any time soon.

"All the money's flowing into Toronto. Everything looks good."

But precisely for that reason, his firm doesn't own much real estate in Toronto.

"We don't see any value," he says. "That's completely different from the trends. The trends are all positive … that's the paradox."

Looking first at the bulls' view, Mr. Baker recalls how Canada avoided much of the fallout from the global financial crisis and U.S. housing market collapse that started in 2008.

Big money around the world began looking at Canada's conservative banking system with new respect, he says.

"We escaped pretty much unscathed through the recession."

Those investors see Toronto as a secure place to put capital, a global financial centre, a 24-hour city and a cultural powerhouse.

He points to the large influx of immigrants, for example, and the "Manhattanization" of Toronto caused by vast numbers of people choosing to live downtown rather than in the suburbs. Meanwhile, the greenbelt around the city has limited sprawl and the Great Lake to the south prevents expansion in that direction. The City of Toronto and many surrounding municipalities are committed to increasing density.

Builders are also putting up more townhouses and semis on smaller lots because land is so expensive.

"Developers are packing more people into smaller areas."

Condominium towers downtown continue to fill up, he points out – and there are still projects with untold numbers of units on the books.

"Toronto is the condo capital of North America, hands-down."

He expects people will have to get used to living in smaller places because only the top earners in double-income families can afford a detached house approaching the $1-million mark.

Interest rates are low and international capital is pouring in.

Huge institutions such as pension funds and real estate investment trusts have cash to burn, he says. Too much institutional money combined with all that positive sentiment pushes up the risk, in his view.

For a fund to expect a good rate of return, he adds, "you're betting that these trends are going to continue and there's no increase in interest rates."

For the bearish view, Mr. Baker points to the risk to the market if interest rates rise substantially.

People in Toronto are buying single-family houses that suck up as much as 60 per cent of pretax income.

Prices, meanwhile, can't continue to rise faster than the rate of inflation forever. The math doesn't work.

"It just can't sustain itself."

Taking a long view, he doesn't see the risk/reward ratio as very attractive.

"Everybody's very levered here in Canada."

So where does Mr. Baker have holdings?

"We're looking below where the big money wants to be."

After 2008, Mr. Baker says, money managers could invest almost blindly in the United States.

His firm was part of a syndicate, for example, that bought projects in Miami's South Beach, finished them off and sold them.

His fund is not interested in big trophy projects; today they are finding the highest quality and lowest risk in the secondary cities. Jacksonville, Fla., is one city where he's seeing opportunity, along with places in Texas and Georgia.

As for residents of Toronto who are not running money but just wondering whether to buy a place to live, Mr. Baker says that is a question he gets asked from time to time.

One relative who rents a condo recently asked if he should buy.

Mr. Baker says it really comes down to a lifestyle preference. He says the best value now seems to be in 10- to 15-year-old condo projects. If you are budget conscious, look at some of the older ones that are well-maintained, he suggests.

If someone doesn't need to own, he adds, they may be better off putting their savings into other asset classes and waiting for a correction in the market.

Not – he hastens to add – that he is predicting one.

But he thinks it's a good idea for people with a short time horizon to be cautious. Anyone looking to own a place for 20 years or more doesn't need to be as careful. Also, he advises caution about borrowing because no one wants to be under water on a mortgage.

"If you're going to buy a house in Toronto at these fully inflated prices, don't use a lot of debt."

Mr. Baker urges Canadians to remember the pain of the early 1990s. Buyers who bought in 1989 got killed, he says.

"People get lulled into thinking this can never happen. [That] this time it's different."

But he points to the United States for an example of a downturn that blindsided many. Millions, he says, lost their homes.

"In the U.S., virtually no one saw it coming."

For now Toronto remains strong and he agrees with the bulls who see the positive trends continuing. But investors should weigh the risk.

"Be cautious," is his advice.

"I wouldn't be buying those things thinking you're going to get rich. It could be the opposite. You could get poor."

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