experts: real estate column Wednesday, May 28, 2003

Mortgage rates have never been better

At a time when cash creation is increasing and inflation seems certain to rise, hard assets are, even more, your best bet - and low interest rates mean the timing is perfect for purchasing real estate

By Ozzie Jurock

This article appeared in The Vancouver Sun on May 24, 2003

Real Estate markets remain remarkably strong - worldwide. Resorts are selling - expensive resorts. Most Canadian cities are rocketing higher - including Montreal. Most US cities too. San Francisco reported it's highest median price ever at $426,000 US (average price over $600,000). Yet, volume of sales is down. The forces of deflation and inflation are crashing against each other - at least in the minds of the pundits out there. Jurock's Real Estate Insider remains firmly in the 'inflation of hard assets' camp. Very simply, excessive money creation (i.e., inflation) today will subsequently lead to rising prices tomorrow. And we ARE creating cash as never before worldwide. The numbers are staggering. The latest week shows the money supply in the US (as measured by M3 for the technically inclined) up $55.4 billion. If this were to continue, M3 would grow by more than $2.5 trillion in the next 12 months.

Thus - in our view for the last 10 years - more inflation of hard assets: Gold, Real Estate, Commodities. You - dear reader however must make your own decision.

In any case, regardless of the winner - the deals remain out there ... 6% to 11% cash on cash deals. Add in mortgage reduction ... not even allowing for capital gain ... you are on the way to creating that 'unearned income pension plan' all by yourself. However, that means that you should not gamble, but go for the 'sure thing': Strong urban market, strong tenant market, and low price to rental income ratio.

An interesting comparison to 10 years ago. The first quarter 2003 achieved astounding increases in price (up 32% - 55%) and volume (up 39% to 116%) in Toronto, Edmonton and Calgary, much less so in Vancouver. Volume here just barely caught up with the 1st quarter of 10 years ago, while prices are up only 12%.

Volume (sales)
1st quarter 1993 1st quarter 2003 %
Toronto 8,004 17,309 +116%
Edmonton 2,458 3,428 +39%
Calgary 3,767 5,865 +55%
Vancouver 8,196 8,210 0%
Price 1st quarter 1993 1st quarter 2003 %
Toronto $211,500 $290,200 +37%
Edmonton 121,000 160,200 +32%
Calgary 133,200 206,700 +55%
Vancouver 280,800 314,000 +12%

Now think that the average interest rate was 12% (13.4% in 1990) and compare it to the best 5-year term today 4.9% (yep!) and you can see why we have continued strength in the real estate markets. In Vancouver it is actually cheaper to buy that $314,000 house with a 4.9% mortgage than that 280,800 in 1993 was with a 12% rate.

Actually uncertainties this week have produced the best interest rates EVER. (3 Year-4.55%, 5 Year-4.95%, 7 Year-5.5%, 10 Year-5.8%, 15 Year-6.05%, 18 Year-6.2%, 25 Year-6.3%. All best ever!)

Of course, average percentages do not tell the whole story. Inside the sub-markets and the suburbs, there are different pictures emerging. Still, keep your tenants happy and get ready for better incentives as anecdotal evidence seems to indicate that in Edmonton, Calgary, very strongly so in Toronto (even now in Vancouver) - tenants are gaining the upper hand and are harder to come by.

So, what does it all mean? If you believe in deflation, retire all debt ASAP, sell your house, commodity stocks - all hard assets and get into cash. But, you cry: "That's the only thing making me money." Ah, indeed. If you believe in more inflation borrow, and buy hard assets.

We expect interest rates to remain low into the summer as the US and Europe show very sluggish economic recoveries ... and cynically we expect Bush Junior not to repeat the sins of his father and with a wary eye on next November's election will continue to print money (ehm, stimulate his monetary policy).

Thus ...

We expect all real estate markets in Canada to continue its price increases into June.
We expect strong real estate profits across the board.
We expect good recreational markets to benefit. (Sunshine Coast, Okanagan - North and South, Vancouver Island)
We expect 'lumber towns' to come back to life after a US-Canada softwood lumber settlement in June. (Prince George, Quesnel)
We expect a continued, even accelerating, outflow of cash from mutual funds.
We expect the unprecedented amount of cash to continue to sit on the sidelines.
We expect an unprecedented amount of cash going into real estate - worldwide.
We expect good deals to continue ... be selective, but do not be fearful.

We stay the course ... expect more money created, a weaker US dollar and continued rise in hard assets ... with the usual ups and downs.

However ... and ok - broken record ... principles remain. No matter where and what you buy: YOU MAKE THE MOST MONEY IN REAL ESTATE ON THE DAY YOU BUY ... Buy cautiously - don't fall in love with the deal ... because when investing - ANY investing ... there is a new 'train' (as in gravy) every ten minutes.

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