By Ozzie Jurock
This article appeared in The Vancouver Sun on August 31, 2002
For some reason I get more e-mail on the 'stock market effect' and on 'whither inflation' than on any other topic. Quite rightly people wonder about what impact the stock market reversals will have on real estate and then there is inflation.
Now please note this: I am like Manuel of 'Fawlty Towers' who yelled: "I know nothink, nothink". I have no crystal ball that is better than that of (highly paid) economists of the world. (Both Mick Jagger and Arnold Schwarzenegger studied economics and see what happened to them!) I simply try to come up with the best scenario, guided by experience with a healthy dose of personal bias. My sense is that inflation is always more palatable to governments - that the current basket of items that make up our reported inflation numbers (Canada and the US) is understated. Further that it doesn't include meaningful comparative numbers - in fact have little relation to the basket used 10 years ago.
Also, in addition to the 'more inflation scenario' - the consensus seems to be that the continuing stock market crunches will see all the capital flow into real estate. An easy assumption to make. After the 1987 crash, pension funds increased their percentage of holdings in real estate from 2% to about 5% of their total portfolios and there are indications that again they are increasing the percentage.
Further the fact that large portfolios are held by few owners (in Vancouver out of the 34 largest office buildings 31 are owned by 5 institutions like Bentall, Cadillac Fairview, Great West Life, etc.) decreasing available investments in major cities in Canada. Realtors tell us that the rental apartment building market and the investment market under $2 million have dozens of buyers but few offerings.
As we said at the Jurock Real Estate Outlook 2002 conference on September 15, 2001: "This (event of Sept. 11) will result in a 'Psychology of war', which will affect our civil liberties and will create - unlimited funds, unlimited military spending, unlimited construction-rebuilding spending." As well we said that governments around the world would try to stave of panic through low interest and adding massive liquidity. It is interesting to note that our fine Central Bank of Canada is taking the public position that interest rates are as low as they are going to be. Why? They worry about inflation! All the signs are there, worldwide - massive strikes (wage push), inventory rebuilding, retail sales soaring ... commodities to follow?
In fact, today's oil and gold price increases and general commodity price stirring remind me of the early 1970s. So, maybe, there is no worldwide housing bubble at all. Maybe housing is just one hard asset among many that is signaling a coming inflation. In a macroeconomic environment in which oil, gold, and numerous other commodities are rallying strongly and steadily - and in which long-term interest rates are climbing - and in which the U.S. dollar is turning lower, one might easily deduce that a new inflationary cycle is underway. We argued for years that hard assets are rising, homes are just another hard asset. A few months ago we reported on the world wide real estate inflation phenomena, where prices jumped year over year at tremendous pace (8% to 15% increases country by country) Maybe the soaring home prices are telling us that the CPI is about to start climbing a lot higher." Moody's also observes: "The fastest rate of home price inflation in 14 years, as well as 2002-to-date's price advances for industrial metals, oil, and gold may be the precursors of a higher rate of poor CPI inflation."
OK, so, more inflation and more buyers taking up inventory - good for real estate right? Well, yes and no.
Yes - more money is coming in - shrinking availability - good for price stability.
No - because many corporations are losing their shirt and shareholders (through their pension and union funds) are much poorer. Trillions (yep!) have been lost in the last 6 months.
So, companies will downsize office space, FURTHER lay off employees (who may be forced to sell their homes) and much capital will not 'shift into' real estate, because it simply has been lost.
Major point 1: Short term? What drives markets - all markets is collective confidence. Investors currently have NO confidence in the markets, employees none in its corporations, the general public, in fact - in ANY leadership. If this crisis of confidence continues, we will have our recession and recession will dampen enthusiasm for real estate as well…in the short term.
Major Point 2: Long term? Real estate will do well, because we believe inflation is underreported, cash is being created at unprecedented levels and - simplistically - more inflation means higher prices for all hard assets.
So keep that in mind. Remember that 'peaks' are always sharp and not a 'plateau'. We have been at new peaks for a while. Time to reflect. Time to buy only real 'deals'. Time to use only a professional Realtor. Time to get good sound unbiased area advice. Time for keeping some powder dry.
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