QUOTE (ThomasBeyer @ Sep 17 2010, 08:51 PM)
QUOTE (bizaro86 @ Sep 17 2010, 07:38 PM)
Inflation is coming, and there will be a spike in prices. One of the things that will spike in price is real estate. And interest rates won't start going up in earnest until that inflation starts becoming visible, in things like higher real estate prices.
We won't get higher interest rates and a huge drop in prices. It'll either be one or the other. If the economy double dips, real estate prices will be lower, but so will interest rates. If inflation spikes, interest rates will go up, but so will prices and rents.
indeed ... we (as real estate investors prudently levered with decent cash-flow and a 5+ year view on any asset) are hedged either way !!
And, as always, if folks and alarmists are on both sides of the fence: neither is right and it will be in the middle of the road .. more or less !!! no hyper-inflation .. but no "great depression" deflation either !!
Thomas, I think you missed the point, prices have dropped in some key markets; in Calgary home prices are still off the market highs of 2007 - home prices in Calgary aren't likely to recover to 2007 levels in the next year or the year after that with inflation a possibility and with it, the corresponding increase in interest rates. Price corrections in Vancouver, Victoria and Toronto are a possibility, particularly in Vancouver. Refinancing will be a problem for persons (highly) levered in these markets and who purchased during the market highs - interest rates will tighten the money supply however the major difficulty investors will face is refinancing (the difference) ` just as in the US. A 15-20% price correction will do it. The CPI strips out real estate; inflation and interest rate increases are driven by the increase in the money supply (stimulus money). Residential real estate prices have traditionally been driven by affordability, or wage increases ` one well-known measure of affordability is the cost ratio of a home to the gross salary of the purchaser, say 1:2 or 1:3 in the past, in most key markets today this ratio is 1:5 or higher. Home prices in the US began the downward trend in 2006, this was asset deflation while commodity prices such as oil/fuel increased at the same time reaching a peak price in the summer of 2008, this was price inflation. So as you can see, asset deflation and price inflation (which lead to higher interest rates) do happen at the same time. You may recall, prior to Lehman interest rates (short and long term) were expected to go much higher. You can cash flow a property and have a 5 year time frame, however if the price of your asset drops below your ability to refinance it, you have a problem - some REIN members have already experienced this. This is the main point.
I agree there will always be renters, even in a sever recession, just as there will always be people employed, even in a depression.