Greetings Canadian Real Estate Investors,
This has truly been the year of the "emotional" investor...Ups, downs and everything in between.
It has also been the year that proved some people right... and others wrong. So, Did all the scary headlines come true? Did the World end? No, I didn't think so.
Like other recessions before, they feel terrible when you're in them and even worse when you can't see the end. But when the clouds lift...those who had a plan and worked it hard end up standing beside their pot of gold.
I'm sure you noticed that this downturn "weeded out" many pretenders in the market. Investors who were lazy and weren't willing to follow a system designed to protect them. No one ever said Real Estate was easy (if they did they were lying to you), but those who stick with their dream and have a system that works in up and down market conditions always come out the winners. So congratulations for staying true to yourself.
There has been a consistent theme to the questions we have received so far this year. They fit under the 4 Headlines below. The answers to these are important, but even more importantly so is your mind-set around them. We can learn from what just happened - or we will be doomed to repeat it. So here are the 4 Critical questions about today's market and answers you can use.
- How would you categorize the 2009 market? How did it differ from last year?
- What were some of the greatest surprises this year?
- What investment strategies worked in this new market place? What didn't?
- What advice would you currently give to other investors?
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1. How would you categorize the 2009 market? How did it differ from last year?
To date, 2009 has been a year of up's and down's. One day it's good news, the next day it's bad, and this has caused confusion with Real Estate investors. People do not know where to turn for good answers to 'what's going on'.
It all started a year ago with the announcement of the collapse of Lehman Bros. that lead to a domino effect across the financial markets, which spilled over into all markets-including the Real Estate market.
Many investors were rightfully confused and frightened with what was going on and chose to sit on the sidelines and do nothing, with a wait and see attitude. This was the situation for the early part of 2009.
As the year progressed many people came to the conclusion that things are not as bad as they first appeared, and, primarily fueled by cheap money (record low interest rates), decided to get back into the real estate market place and buy homes. This pent up demand, and record low interest rates, have driven some markets up to record summer sales numbers.
To best characterize this year would be to say the market has been emotional. Fear and confusion were the norm for the first part of the year, while in the back part of the year people were, and still are, being overly optimistic.
2. What are some of the greatest surprises of this year?
Interesting the word surprise is used in the question. The biggest surprise for me this year is how much everyone has been surprised by what is going on.
Personally I'm surprised at...
#1 Surprise: How quickly the governments stepped in to ward off an even larger disaster. We witnessed the largest global recession (post world war era) that hit at the exact time that the financial institutions' web of complex financial products all started to unravel. It was a perfect financial storm. Sure, some may argue that this response to the current recession may cause more issues than they are helping. Time will tell, but the days of big Government and Government intervention are upon us.
#2 Surprise: I'm also surprised that others are surprised that the real estate markets are showing signs of life in September 2009. It isn't a surprise at all. When the interest rates hit emergency low levels (like they are today) and that combines with property prices dropping you create affordability...and affordability is what eventually drives the long term market trends. People can afford, they buy. If they can't they usually don't.
Think about this number: The average new mortgage payment in Canada for 2009 is 26% lower than the peak in 2007. This has driven many into the market and thus the uptick in sales figures. True, this cheap money will not last forever and basing a market recovery solely on cheap money (interest rates) is not a very solid economic fundamental driving the current sales numbers. However, it should be no surprise to anyone that markets are showing signs of life today.
#3 Surprise: Canadians are flocking down to the US to buy real estate. There are many Canadian investors still looking at the 'grass is greener' on other side of the fence.
1 in 8 homes in the US are delinquent in their payments. When late payments increase, the foreclosure proceedings increase, and when foreclosures increase houses are sold at a discount. When houses are sold at a discount, there is still pain to be felt.
Plus the forecasted 48% of mortgages held in the US are likely to be 'underwater' (owing more money than their properties are worth) before the end of the housing recession (Deutsche Bank report). And to add to this, the forecasted share of borrowers in the US owing more than 125% of their properties value will be increasing to 28% of all mortgage holders.
These factors lead to further US housing declines (until 2013--- REIN™ forecast). Factoring that in, plus the unfavorable withholding taxes, currency rate risk, CRA clamping down on using Canadian financing to buy U.S. real estate, potentially not allowing for the interest to be written off, all this leads to lots of risk. And why would Canadian investors want to expose themselves to this type of risk when the economic fundamentals are very strong in Canada right now?
If you haven't read our full research paper covering the US Market's Coming Foreclosure Tsunami, you can read it
HERE
3. What investment strategies worked in this new market place and why? What didn't?
Buying real estate (assets) for the income they produce always works well in any market condition. When people look at buying real estate as a speculative investment (only making money if the value increases), and treat real estate like day trading is when they can get caught.
Congratulations to all who didn't get caught up in the get rich quick frenzy. True investors know that the market always follows a cycle and one must be prepared for all points on the curve. In fact, trends are so important we are flying in an International Trend Spotting Expert from New Zealand to share with REIN™ Members on October 2nd in Toronto his latest investigations into Canada's trend lines - and his conclusions are quite shocking.
Facts and figures always win over emotions, but we are still witnessing people buying pre-built condo's (for other than home ownership) with the blind hope that the property will increase in value so they can make a quick buck. Haven't they learned from the past?
What is working very well in today's marketplace is taking your time and shopping. Panic buying is a thing of the past. If you are feeling panicked or pressured walk away, there are more motivated sellers out there today than we have seen in years. The inventory of houses on the market has been greater than normal. Sophisticated investors that take their time and look for the good deals in the economically fundamentally strong regions have been waiting for this slow down for a couple of years now.
People that do not take their time to educate themselves, don't find a good team, and do not buy cash flow producing real estate may struggle with an underperforming asset. Sadly, the same folks will still be chasing their dream when the next recession hits.
4. What advice would you currently give to other investors?
The landscape for investing has completely changed. Investors who embrace the changes, focus on sound investing fundamentals, and take a long term perspective to their investing will come out ahead in the long run.
Staying on top of the economic fundamentals (separating the facts from the opinions), now more than ever before, will be essential to not only survive but prosper in today's market realities.
Education and knowledge will be critical to your success. The most important asset to a real estate investor is their knowledge. In today's era unbiased expert information is the single greatest asset. Keeping on top of, and even ahead of, the 'reactionary masses' is critical for long term success for the Real estate investor.
The best advice I can give someone looking to invest in today's market is to take your time, surround yourself with people who will support you in your goals and get fully educated by people who are taking action.
Calm Before the Storm?
Sep 24 2009, 05:49 PM
