REAL VALUE » recession

Cheers to the Real Estate Bubble!

Marcus Assalone — Sun, 26 Sep 2010 12:15:35 +0000

In the media there are steady reports of Canadian real estate being in a bubble. These reports usually compare the increase of sale prices to the increase of incomes or potential mortgage payments to rental payments. If these reports make you think about the value of real estate and how real estate is valued and can be devalued, that’s great. That is about all they are good for. In my opinion, you can lump these articles together with those emails you get from unknown sources promoting the purchase or sale of various stocks.

Image courtesy of Mike Licht, NotionsCapital.com

The truth is, in real estate the market is fragmented into small pockets, called neighbourhoods. The success of your investment is tied directly to 1. The desirability of that neighbourhood; that is the amenities and security it offers its residents. 2. How well you have taken care of your property. These two elements will go up and go down, but the combination of these two factors will determine the value of your real estate investment. All neighbourhoods are different and respond differently to economic events. These articles lump entire nations, or provinces or cities together in one group. The usefulness of this generality is zero. If you read an article that says house prices in your specific neighbourhood are falling due to the garbage incinerator that is being built next door, that obviously is a different story, you may want to pay attention to that one. When they make general statements or talk about the average house, do your own investigations before you start panicking.

Last month the Canadian Centre for Policy Alternatives put out an article called Canada’s Housing Bubble. I have to admit, it’s the best article I have seen on the subject, the research is well done. Even they must admit that there is no way to tell if a bubble is approaching, so the article concentrates on historical bubbles in Canada, what they looked like and their effect on the market. The article is attached to this one if you have time to read it; it’s the only ‘Doomsday’ article you should bother with.

There is no doubt that demand in Toronto is slowing; young people are buying smaller homes that they would not even have considered 2-5 years ago. These are good things as long as you are aware of them. Ask your realtor about the trends that are happening in the marketplace, and all the options available to you. What I have been seeing is the market is starting to polarize. There are homes with highend finishes, without any flaws, that are selling well and then there are the houses that when you leave you can’t help wondering why the owner doesnt just knock the house down, these are not selling well, or for considerably less money. Remember when you see average sale prices, it lumps these two houses together.

When buying real estate, you need to be careful; there is no doubt about that. You need a realtor to check that previous sales are in line with what you will pay. Buying right is the secret to sleeping well at night. Its so easy to buy, all you have to do is sign over the money. Selling is another question. If you want to bubble-proof your investment all you have to do is buy at a reasonable price in a good area. Don’t get swept up in the emotions and the hype. You want a realtor who will keep you grounded, if you are looking for one like that, I am here for you, contact me any time.

Canadas_Housing_Bubble - article published by Canadian Centre for Policy Alternatives – August 2010

EFFECTS OF U.S. DOLLAR PARITY

Marcus Assalone — Mon, 22 Mar 2010 14:37:30 +0000

On March 17^th 2010, trading of the Canadian dollar rose to just over 0.992¢ in U.S. dollars, bringing thoughts of Dollar parity with the United States. The problems of the United States dollar are well known and documented. Their greatest problem is the historic levels of debt in the nation. Deficit spending is rattling the value of their dollar, because when the government needs money, they simply print dollars, degrading the value of the currency. China has been happy to buy U.S. debt up to now, as the Chinese want to keep their Renminbi more or less pegged to the U.S. dollar. However, the United States is planning on increasing their costs, and thus their deficit, not reducing it. Another source of instability is whether or not China will continue this debt buying policy. Many believe that dollar parity with the U.S. will be an extended period lasting at least many years.

Such a situation raises havoc in Canada as our exports to the United States look less attractive. Canada already had problems convincing U.S. consumers to buy our products because of their debt problems. This is another factor to compound the matter even more. In fact, Canadians are more likely to buy U.S. manufactured goods because parity make them much more appealing. Cross border shopping in New York State has become popular to those of us in South-Western Ontario, and I am sure in other parts of the country close the U.S. border as well. The already reduced prices on the U.S. inventory of homes make them irresistible investments! To us in Ontario, parity is a double whammy, as lower exports will mean, less good paying jobs, and also our real estate will have to compete with properties in the United States.

You may have heard that home prices are based on the previous sale price of a similar home in the same neighbourhood. In practice, this is not the case, especially in a downward trending market. Values of homes have more of a relationship with how many people are employed in the local area. This is why the unemployment rate is so important to real estate investors.

Starting July 1^st 2010, the Bank of Canada will begin to raise its overnight lending rate, causing Canadian banks to raise mortgage rates. Higher lending costs will remove some potential homebuyers from the market and will also begin to impede the mortgage service ability of some who have already purchased their home. Many of them will forced to sell their home. This process will not be an overnight thing, but the sale prices of homes will be forced downward because of this pressure.

Where will house prices end their fall? I personally believe that the gains from spring 2009 to the present date are not caused because of improvements to the economic situation. Wages have not increased, employment has not decreased, trade has not increased, and economic growth has not exceeded anything that we used to attribute to inflation. So, the rise we have seen in home prices in 2009, I believe will be eroded. Of course, I am speaking generally; there will be exceptions to this. There are some asset types in Toronto that I am sure will hold their value, and there are also some property types in the GTA who have already seen an erosion of their home prices. If you want to know my opinion on your specific case, please contact me I will be happy to perform this evaluation for you. In general though, look for the average sale prices of homes to fall.

It has never been more important to use the services of a Realtor than in the current economic climate. Whenever I assist a client purchase a property they know that the performance of the investment is well researched and fits into the goals for their life. I always guide my clients to buy an asset that enriches their life. Together, no matter the obstacles we will find the home of your dreams and a supporter for your future.

BANK OF CANADA CONCERNED ABOUT CONSUMER DEBT

Marcus Assalone — Fri, 11 Dec 2009 02:55:35 +0000

The Bank of Canada released its bi-annual report on Canada’s financial system. According to the report, [and yes, I agree with it] Canada has absorbed the shock of the global recession admirably and has made some initial re-organization in order to return the nation to prosperous times. In fact, many elements of the Canadian economy have improved, all except one. As we go through extended periods of slow growth, the greatest vulnerability in the economy will be consumers who have taken on more debt than they can handle.

If consumers begin to struggle to pay back their loans, this could lead to tighter credit, which would effect everyone’s ability to buy homes, and borrow to renovate or upgrade appliances. Obviously, such a shift would drive down the prices of homes, and household goods.

The economy is currently experiencing a phase of very slow growth, however that growth is at the insistence of a variety of government stimulus programs. There is concern that if this slow growth period is extensive, those who currently have found renewed confidence in the economy, will begin to despair, causing a correction in stock market gains.

There is a lot of instability in currency markets around the world, most notably with the United States. Instability also exists in the interest rates available in different nations. Low interest rates may lead to assets being traded at levels above their true value. [Yes, that includes homes] Trade needs stability, but unfortunately this will not be resolved in the near term.

Overall, the world has responded well to the massive jolt to the global financial system. We are headed toward recovery, but it will be a long road of restructuring and innovating before we can say prosperity has returned to the economy.

The following links to the report are courtesy of the Bank of Canada

Report Highlights Financial System Review December 2009