By Ozzie Jurock
Forecasting is never easy ... particularly when it is about the future. Ok, old joke. But, in a normal real estate market however, forecasting - following some time-honoured principles - should be quite simple.
Real estate markets are primarily local in nature. Thus, if one looks at measurable statistics, mixes in some historical performance - one should be able to come up with a fairly accurate forecast. Factors like affordability, interest rates, inward migration, demand and supply determine, or are likely to affect, market values. The intangible - locally - is of course confidence ... but even that is measurable to some extent.
The current problem is that we are not in a normal real estate market.
I have held the multi-year position that we live in the most unreported inflation of all times. Nothing that you and I buy only goes up the 'core' 2% ... nothing. In fact, anything of real value is soaring (oil, gold, food, etc.).
Additionally, it looks like the central banks - in order to stave off panic - are now further flooding - 'liquifying' the system with 'created' cash ...
Oscar Wilde said "Anyone who lives within their means suffers from a lack of imagination" ... and our governments sure do not suffer from that lack right now. Worldwide we are creating cash out of thin air for the last 10 years and are accelerating the 'creation' right now. That cash is competing with the cash that you and I earn and is driving everything of real value higher. Add to this the debacle of the US 'sub prime' market and the worldwide 'credit crunch' - there is no doubt that we are in for an extended period of serious financial adjustments.
These adjustments will affect home buyers (much tougher to get that 'self-employed' mortgage), hungry flippers (much more dangerous, outcome much less predictable) as well as commercial investors (money will be more expensive). Overall, financial institutions will be less flexible and you have to pledge your first born to qualify for the slightest 'off-centre' deal. They will also keep interest rates higher to give you and me the privilege to pay off their mistakes.
Which leads us to forecast even more inflation and with it, much higher real estate prices ahead eventually ... but first we must solve our problems.
We have been there before ... Stock market crashes, Asian crisis, Mexican crisis, currency crisis, Savings and Loans crisis ... and we worked them out. But each time we had to 'go thru the valley of readjusting' before we went on our next leg up. Each time it was a little more difficult. It will not be any different this time. In our view, we will muddle thru, but thru the valley we must go ... and this valley is a morass with a steep cliff to climb at the end.
So what should we do? We have said it before ... just as valid today:
There are such opportunities all across this province. But remember, today you can buy anything you want. But make sure you want what you own. These are crazy times.
When we look at the past ... enormous booms were followed by equally enormous reversals - but even if today we somehow manage a 'soft landing', it behooves us ... as smart investors ... to be professional about our goals and our investments.
Like - insisting that the real estate debt is serviced substantially by the rental income and that the cost - i.e. the mortgage actually gets paid off - eventually. Building equity with tenant's money is a principle that should never be overlooked by investors! Interest only - doesn't hack it. Our ideal mortgage term for an investor remains 17 years. Maximum payback for minimum monthly payment increase.
Vancouver had a spectacular year in 2007. The average home sold in Vancouver clocked in at $811,000. (The average new home sold at $1,100,000) the average condo sold for $407,200 up some 15% over last year. (Even the average used condo came in at $376,000.) Unit sales were 12% higher in December 2007 and listings ... ? Listings were 8% lower than December 2006 at 8,286! Low inventory, strong sales predict a strong spring ahead.
2007 was a very strong year indeed.
The first half of 2008 looks good, but there are landmines. Our prices are VERY high, our affordability is zero. We hear from many sources that the pre-sale condo market has slowed to a crawl, that condo inventory is building, that there are more people looking and making lower offers.
In 2008 we expect:
1. In Alberta, Saskatchewan and after a strong spring - BC ... more selection, selection, selection. All listing inventories will rise. Particularly condo inventories.
2. No Bidding Wars. A change to buyer's market without competitive bidding.
3. Offers will be welcome. Offers over asking price will not be prevalent unless listings are underpriced. Sellers will not be insulted by a lower offer.
4. Realtors will have more time ... and will spend it with you. Today buyers can take their time, look at several homes and think about their decision.
5. There will be fewer investors. It is estimated that one half of all condo purchases in the last 3 years were to investors. These non-owner occupied buyers caused the market to inflate and affordability to decline. In Edmonton we estimate some 1,800 properties - owned by investors - stand vacant. There will be deals in those.
6. People will use craigslist.org more to buy deals and find them. Particularly in the "assignment" sector.
7. Financing will be tougher, particularly in the self-employed sector and the commercial market.
8. Developers and builders will (have already) slowed down their development plans for 2008. This will result in lower housing starts making the headlines.
9. There will be a barrage of bad news about the 'market'. Not just in the US. Prices are reversing in New Zealand, in England, in Australia and in the US. But not in all areas. Real estate is local ... so you will always find a great local deal. The best deals are made in poor markets ... not at the top. Don't worry about it ... you are not buying the market you are schussing out your fine deal.
Canada is not the US. But we are very closely tied economically. As the situation worsens ... stagflation, inflation or recession words will be bandied about ... resulting in all consumers - yep - even us in Canada to start pulling back. As we do ... we may well bring about what we fear.
BC still has a way to go - we have huge capital investment, large foreign investment, low, low unemployment, very low vacancy rates. However, we would not be surprised to see a reversal sometime this year, but remain convinced that 10 years from now we will see prices higher yet.Published in the Calgary Herald, Saturday, March 15, 2007
E-mail this story to a friend Print this story Save This Page to del.icio.us
Recent Articles by this columnist:
Debunking the Myths of Yuletide Home Selling
Mortgage Interest Rates - Whither Do They Go?
Should You Sell Your Old Home Before Buying a New Home?
What's a cap rate anyhow?
Developers ignore Feng Shui at their peril
All articles by Ozzie Jurock
Check out this week's Jurock Real Estate Insider Special deal
Have a real estate question? Ask an Expert