experts: real estate column Wednesday, February 12, 2003

War threat brings confusion to rates

In spite of turmoil, North Americans still want to own their homes

By Ozzie Jurock

This article appeared in The Vancouver Sun on February 1, 2003

There is a war coming. Interest rates a will soar. Interest rates will stay the same. The dollar is soaring. Inflation, deflation. So much confusion, so many questions. The big one: "Have I missed the boat?" Of course no one can say they have the definitive answer. Forecasting is never easy - particularly when it is about the future.

But - yeah, yeah, broken record - but - we have been there before. The Dow Jones crashed by 40% in 1974, real estate markets rose and fell market by market cyclically, currencies gyrated and there were Asian crises, Russian collapses, South American debacles and of course wars. Through it all the average price of a home in Vancouver rose from $13,600 in 1966 to $301,000 this December. Add to this, the leverage that people received when they bought their home and you have had one of the finest investments ever. And yes, it will continue. Yeah but, what about deflation isn't there a 'tug of war'? Aren't we, this time for sure, going into an outright depression?

And the reality is that we have a little of both. It is a New World, as we shift from an industrial society into the information age. Look, if you were the president of a vinyl record company in 1985 you were king of the world, part of a 10 billion-dollar industry - today you are in a depression - no one wants what you are selling. If you started as a young guy in the CD business in the same year, today you own the company and you are in a boom, five times larger then the old record industry (but in 5 years you will be the dinosaur).

Yes, manufactured goods are cheaper - even deflating, but technology, know-how, services and hard assets all are higher - much higher. You can make a convincing argument for both inflation and deflation, because they are both present. However betting on deflation hasn't been successful since the 30s. In our view - what you need to know as a real estate investor is this:

  1. All urban real estate will almost always have a use and hence positive asset values. Real estate in metropolitan areas anywhere in Canada will continue to be a good investment.

  2. There is a new phenomenon - the two-pension income household. They have more money to spend than ever before. They are not downsizing; they are buying that second recreational home.

  3. And a hard one: interest rates do not determine market value. In 1978 the average price in Vancouver was $78,000 in 1981 it was 180,000 - at the same time interest rates rose from 9.5% to 16.5 % (5year term). From 1990 - 2000 interest rates fell from 13.4% to 5.5% and in Vancouver it did not motivate us at all to buy. Prices and volume fell. Yes, it affects the market volume but not necessarily prices.

  4. Cash is being created at unprecedented rates worldwide. That will in the end be more inflationary.

  5. Not all markets will go up. Natural resource based towns as well as towns dependent on government employees will continue to have a harder time.
Now, of course, nothing goes up in a straight line. Real Estate is cyclical. We are concerned about Toronto's condo market, Edmonton's overall market (Kyoto agreement uncertainty) and Calgary's huge run up in prices and a somewhat rising unemployment in the high tech sector. We are concerned about Vancouver new condos that, under the banner of the hot market, are being sold without parking spaces. All markets excess on the downside and then on the upside. Three years ago, I told the same story; I could not convince anyone to buy. Today, I say caution - you still make the most money on the day you buy and people run out and buy anything without any research, often without common sense.

OK, having said that there is another reason why The Lower Mainland, the Island, the Okanagan will still go higher. Look at these numbers:

Year-To-Date Sales
1992 2002 %
Toronto
41,700 74,759 +79%
Edmonton
12,800 15,619 +23%
Calgary
19,200 25,054 +30%
Vancouver 38,800 34,910 -11%
Fraser Valley 20,600 16,106 -28%
Vancouver Island 7,191 6,149 -16%

Prices
1992 2002 %
Toronto
214,900 275,000 +28%
Edmonton
110,000 150,200 +36%
Calgary
128,400 198,000 +55%
Vancouver 245,200 301,000 +23%
Fraser Valley 212,000 278,500 +31%
Vancouver Island 148,000 159,000 +07%

It is easy to see from the above numbers, that volumes for both Vancouver and the Fraser Valley while strongly higher are still not back to the banner record years of 1992, while in comparison ALL other markets in Canada are substantially higher. Vancouver still clocked in some 12% lower than 1992, Fraser Valley's 16,600 sales in 2002 still clocked in some 10% lower than 1992's 20,600 unit sales. At the same time prices in Toronto rose from an average of $214,000 to $290,000, in Edmonton from $110,000 to $150,000 and in Calgary from $128,200 to $203,000 - all records. Vancouver still lags behind 1995's December price record of $309,000 (all time high 345,000 in February 1995).

Major Point 1: Don't worry about whether to buy, but what and where. Worry about having a Realtor that understand his or her local area, worry about being out of the real estate market at the wrong time. Worry about being nice to your tenants (the CMHC vacancy rate survey only includes buildings of 3 or more suites). In Vancouver last year some 17,200 condos (including townhomes) changed hands. If we take an arbitrary number of say 20% to be sold to investors - that means that some 3,400 or so units would have hit the rental market in the Greater Vancouver area. Worry about getting professional realtor - professional advice.

Major Point 2: Overall history is on YOUR side. Yes, it is a New World, yes there will be turmoil; yes, a lot people are spooked on stock markets, but North Americans still love to own their own home, they will live longer and stay there longer, they will need more housing units not less in the future. It may not be as sweet - cash in the bank, slam dunk - like in 1999 to 2001, but the good deals are still out there.

Major Point 3: Beware "irrational exuberance". Nothing goes up in a straight line forever. At the top, frenzy will make you a bad deal. There are no good no bad markets ... only YOUR deal matters!

The Ozzie Jurock 'Real Estate Action Group' 2003 starts March 10.




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