For more information on HST's impact on real estate...check out KPMG's report here
Proponents argue that HST is going to beneficial for Ontario as a large portion of our economy is based on construction and manufacturing (industries that require a lot of start up capital rather than labour capital).
Some benefits include:
More construction jobs. A recent C.D. Howe Institute report estimates there was an increase in construction machinery and equipment investment by 12.1 per cent in the Atlantic Provinces after a HST was implemented there. As the purchasing power of a business increased, thanks to the benefits of input tax credits, so did the investment.
Infrastructure construction stimulus. The Ontario Road Builders’ Association (ORBA) have been longtime advocates for sales tax harmonization and say the new HST will help with competitiveness and clarity. With a simpler tax system it will eliminate a lot of bureaucracy and paperwork. Construction is a paper-heavy industry, but having a streamlined tax system will alleviate a lot of that burden.”
For finance, insurance and real estate (FIRE), which are huge component of the Toronto economy, this is not so much of a good thing, especially for real estate investors like us (will it drive jobs away from Toronto?). It will be inflationary and add significant costs to our business. Services such as home staging, legal fees, accounting, maintenance, real estate commissions, new home prices will all go up with no benefit to the parties involved.
"Housing markets in the United States and Canada are similar in many respects,but each has fared quite differently since the onset of the financial crisis. A comparison of the two markets suggests that relaxed lending standards likely played a critical role in the U.S. housing bust."-
Real Experts Comment: its hard for a Canadian without international perspective to understand the magnitude of what happened in the US and Europe. Our banking system is so far from collapse that we are more likely to see a resurgence in Nortel before our banks fail because of bad lending.
Snap shot of the Economic Fundamentals of the GTA by CIBCWM available here.
Notice housing starts and permits plunged from 46k to 26k...Brad Lamb expects another supply bottle neck in 2012 as a result
TD also published their Employment monitor. Ontario gained 27,100 jobs (however according to Ben Tal, Senior Economist, CIBC World Markets Inc., Toronto is still hurting)
The US sub-prime mortgage crisis has led to plunging property prices, a slowdown in the US economy, and billions in losses by banks. It stems from a fundamental change in the way mortgages are funded.
TD bank recently published a Resale Housing Outlook report (see here)
TD comments if the real estate market is in a bubble.
Conclusions:
On a national level, they feel that prices are overvalued 12% based on market fundamentals (income growth, job growth etc).
Most of pent up demand from the sales crash last year should be clear by now
From next year on, we should see the real estate market return to growth based on fundamental drivers (or have price growth slow to catch up to the fundamentals since incomes are expected to go up).
They don't expect prices to fall, in fact their fear is prices may continue to rise.
Real Experts Comment: Yes the market overshot, and people have been taking advantage of rates to get into the market. As more supply comes online in the market (finished condos, and new listings) and as supply of buyers capable buyers fall, prices should level off to a lower growth rate.
After going through the research Ben Myers from Urbanation gave us for the show I noticed something interesting to follow up on a previous blog post. Beginning of this year was real estate Armageddon.
Sales of new condos went down to unforeseen levels. Developers were on average selling less than 5 condos per project for the first quarter...coming from a time when the developers were used to 25+ units sold per project over a quarter.
How would you react if your sales fell to 1/5th of the level it once was? I'd be sweating bullets and slashing prices.
But an interesting thing happened...prices didn't fall (resale went down slightly showing that individual owners panicked more than developers).
Simple economics here....you lower supply to keep prices the same (is life ever this simple?)
Interesting point from George Carras from Realnet, when the recession started last year Toronto was at record levels at inventory. Far outpacing demand.
Toronto builders adjusted strongly and brought inventories down significantly to match demand (George from Realnet feels that we are currently "under supplied" hence bidding wars).
Why did this happen? According to Ben Myers from Urbanation, the Toronto condo market is controlled by a number of well-healed developers (75% of the units in Toronto are built by "large and wealthy" developers).
As a result, the condos built in Toronto are built by financially stronger players than in other cities = no desperation to sell quickly = better able to manage supply = insurance against bubbles.
Great show last week with George Carras from Realnet
He had the below graph that illustrated an interesting point about the Toronto housing market
As can be seen the GTA made a huge transition in 2002-2003 from low-rise (houses) to hi-rises (condo/lofts). This is due to the introduction of the green belt and the places to grow act in 2002 (encouraging intensification).
So when we see all those cranes floating around thinking we are in an over supply situation, we are actually building less units overall YTD...and we may be in a slightly under supply situation (that's why we are seeing bidding wars on downtown condos right now).
Moral: Government regulations have unintended consequences. smart investors see through the hysteria and profit.
According to Robert Shiller, statistical studies of forecasting models for home prices show that roughly half of the variability of home prices can be predicted one year ahead.
In the US (I'll explore this for Canada as well)...you will have just as much luck proving that cities with good feng shui will cause an increase in prices than as you would with building costs, population, or interest rates (see below).
The home price index that Shiller uses is a national index, therefore it doesn't take into account Regional booms that result from the building of infrastructure (services for new land, community centre, schools etc), attracting of new employers (a manufacturing plant) or the addition of better transportation (rail, canals, highways subways).
Moral of the story: study more than just one fundamental when looking to see where home prices are going
Watching the video Baby Baby Baby by Make The Girl Dance I amazed at how the quality of life can be improved by creating more pedestrian friendly zones (I blogged about this previously here)
Imagine transforming your typical strip mall into a pedestrian friendly oasis where you can people watch, hang out and shop.
Here are some cool Ideas
Why is this important?
The new node becomes an attractive place to live, it increases the population density in the area..both of which increases real estate prices to the surrounding neighborhoods.
It's also great for the environment because makes places like Scarborough, Edmonton and Calgary more attractive ;-)...oh yea, less reliance on cars too
This video is a follow up to a previous blog post on bringing in skilled workers who can't get US visa into our major cities.
Vivek Wadwha in the interview illustrates how great an opportunity it is to poach these folks before the go back home to India and China.
Since many of these skilled workers are entrepreneurs, we could be opening up the red carpet to the next RIM in Canada.
More Skilled Entrepreneurial Immigrants = More RIM's = More Jobs + Higher Incomes + Population Increase = Price Increases for Real Estate and more prosperity for our country.
Will Calgary's skyline getting better? Will Calgarians lose all those damn parking lots all over downtown?
It just might: Alberta is the only province without HST and financial services companies are not eligible for any HST tax credits. Think of the iconic buildings in Toronto, they are all home to the financial services industry.
Will we see an explosion of banking, insurance, pension fund management in Calgary and Edmonton because all of these companies in Toronto will see an 8% increase in costs?
We'll have to see how this plays out. Increased costs vs Being in close proximity with the best in your industry and your suppliers.
I can understand Ontario's position, Toronto is the hub of the Canadian financial world but their bread and butter is manufacturing (which will benefit the most from HST)
The Chinese central bank said the country’s economy surged at an annualized rate of 14.9 percent in the second quarter. The United States economy shrank at an annual rate of 1 percent in that period.
Those worried that China was completely dependent on US consumers were wrong. Expect Canadian commodities to start recovering...as a result more jobs in resource towns..which in turn increases population density and raises rent and real estate prices. NICE
As an aside..this is a great example of motivations of government. Because of the massive layoffs, workers in factory towns that export goods started to protest and riot. Chinese government definitely doesn't want a revolution on their hands so pumped $1.2 Trillion to businesses and consumers and forced them to spend it..completely propping up the economy with lightning speed.
US is definitely not in revolution territory and the government doesn't control the banks so things do move as quickly.
"More equity and debt issues hit the market, and REITs on both sides of the border started to deleverage their bloated balance sheets. As a result, REIT units quickly raced off their market bottoms, rising 55% through Friday's close, compared with 43% for the broader benchmark here in Canada, and more than 80% in the U.S. versus 51% for the S&P 500. Simon Property, which plunged to US$25.95 in March, closed yesterday at US$64.77."
With increased liquidity, the Canadian REIT sector is now well positioned to address its debt due in the second half of the year and 2010, said Neil Downey, RBC Capital Markets analyst.
According to CIBCWM, if you invested in a REIT you have earned 34.3% last year.
So who's right?
Seasoned experts who have been waiting for CAP rates to go up have been waiting a long time...in fact, some believe cap rates might go down further because interest rates are at historic lows. Lenders are giving 5 and 10 year mortgages at rates that would knock your socks off 10 years ago.
I know I have blogged that infrastructure improvements (i.e. adding rail and highways) increase real estate values...it's not always a golden rule. In some cases, removing trains and highways can spur a real estate renaissance in a neighborhood because removing them eliminates a barrier or a border vacuum in the city.
Essentially, a highway is a massive single use entity that forms a border..a border that attracts blight to a neighborhood and depresses property values.
Why does a border create a single use entity and why is that no good for real estate investors?
The answer is simple: few uses = few purposes to visit the area = fewer users = fewer future buyers of the real estate in the area. In addition, When borders are added, you start to see increased crime in the area.
Think of places you see graffiti...they are usually in places where there are fewer people to keep an eye out for criminal behaviour (see above). This creates a further negative feedback loop on real estate in the area.
In the Life and Death of Great American Cities Jane Jacob's tells us the following:
"..literal and continuous mingling of people, present because of different purposes, is the only device that keeps streets safe. It is the only device that cultivates (diversity)."
Cities have started to realize this and have begun to re-think the benefits of keeping Urban freeways. Essentially tearing down the highways would re-connect different neighborhoods bringing people into the area and thus make real estate more valuable.
Interesting article from ABC money news that you can take a look at here.
States that university towns are not facing the "squeeze" the recession.
Here's their stats:
Provo, Utah, where the university is located, has added jobs to its economy. Over the last year, there's been a 2.97 percent rise in jobs in Provo; the national unemployment rate has now hit 8.9 percent.
There are also business booms in college towns like College Station, Texas (home to Texas A&M and up 2.06 percent); Baton Rouge, La. (up 2.16 percent), which Louisiana State calls home; and Durham, N.C. (up 2.49 percent), where Duke University have been major drivers of economic activity.
Why?
Research universities tend to be great environments for business, as they're flush with cheap, highly talented labor (recent grads), and the massive research and development budgets universities have. Plenty of the world's top companies, including Dell, Cisco Systems and Google, began in university settings.
So how does this effect the real estate market?
It appears buying in college towns is a good hedge against steep downturns during a recession. Going to Zillow (why can't we have this site in Canada) we can take a look:
The Zindex for Provo shows that prices have fallen 8.8% from last year and about 15% off the peak. In comparison, according the same ZINDEX, America has a whole has fallen 14.2% and 21.8% from the peak.
One of the key things we look at is our real estate is close to a university.
So here we are. The entire world is looking to Canada for lessons to keep the financial sector strong, whose strength essentially saved Canada from a prolonged real estate slump.
While politicians chest thump how great Canada is, and how crappy the US is, we still can't rest on our laurels. There is still a gap in the prosperity of Canada vs the US... and it's time to action to strengthen our cities further to power real estate across the country.
First off, why is there a prosperity gap?
Simply its because of our poor productivity performance. According to Martin Prosperity Institute at the University of Toronto, Canadians do not innovate enough or create comparable value add in our hours worked (take a look at their full report here). Our low dollar has allowed this to happen for too long.
Why is improving the productivity gap important to real estate investors?
First and foremost, increasing increasing our GDP/capita would increase our after-tax disposable income. Which means Canadians would be able to afford mortgages and more rents...increasing the value of real estate.
As can be seen from exhibit 4 from Martin Prosperity, if Canadians close the prosperity gap we would increase our disposable income by $11,500. This increase in disposable income would basically match the total Canadians spend on mortgages.
Finally, what should governments in Canada do to improve our economy?
According to Martin Prosperity, we should take on an attitude of offense and not defense:
Develop a more competitive economy (hello cell phone providers and CRTC)
Encourage business leaders to be ambitious, raise their sights, seek out and capitalize on new opportunities and focus relentlessly on improving how their business opportunities via a tax system that encourages investment and innovation in the long term.
Regain our mindset to be the best...no more Mr Nice Canadian. Think bold and go all out baby
What do real estate investors do?? seek opportunities where cities and neighborhoods are fostering innovation. This will attract high income jobs, increase the population of skilled people from around the world and, in turn, cause real estate to boom.
Take a look at Richard Florida's theory on city prosperity here:
Every town has a great economic development office that talks up a town and sells itself as having a bright future. Examples of passionate people like the folks of Plano will excite you about the future and may cause you to rush off and buy real estate (I have no Idea if Plano is a good place to invest...watching their video inspired me to write).
The problem is: Every city has an economic development office and it's hard to tell if their actions will have an impact.
One key that David A Wolfe, professor of Economic Development at my Alma Mater University of Toronto, uses for measuring the effectiveness of a town's economic development office is the ability to mobilize local resources to tap into national and provincial/state funding.
Why? According to Professor Wolfe, it gives the city the "organizational institutional infrastructure for collaborative action." Examples of such type of infrastructure includes:
When you start seeing an economic development office with a proven track record..then and then only get excited about prospects for the town's real estate.
What are the factors we need to look in order to get a sense the real estate in a town will start kicking butt?
Analysis of real estate markets hard for two reasons:
is the fact you have many factors that drive real estate... they don't add up in a linear fashion (i.e. x+y=great real estate)
There is such a long time lag for the results of the local leaders actions before real estate could change.
Let's take a story of Ottawa and Kitchener-Cambridge-Waterloo area in 1990's. Ottawa hi-tech was on fire, companies like Nortel, JDS Uniphase, and Newbridge Networks were the darlings of the TSX. On the other hand KCW was a region in the middle of no where along the 401.
Flashfoward to now. RIM is on fire and KCW is home to many hot up and coming companies. Ottawa has some small promising startups...but nothing on the level that it once had.
Large companies have a huge impact on real estate, not only from driving up demand for office and industrial space...but in attracting employees for residential space. Understanding where a city will go real estate DOES involve studying the major employers in the area and to understand if they are on solid footing.
Want to learn how become a good landlord in 10 Minutes or less? First thing, treat your real estate as a business. Simple as that. This is a lesson most gain through buy dealing with a lot of crap.
When I bought my first investment property I was so excited. I bought it under market value in high demand tenant area, had a professional landlord tenant lease, checked my potential tenant’s credit and rented it really quickly.
My first tenant was a sweet god fearing old lady, I thought I hit the jackpot because she gave me 6 post dated cheques and she loved the place. In a matter of months this situation changed. Without me knowing, my furnace conked out and I get a call from the city saying they wanted to speak to me because they thought I was a slum landlord. Very quickly, I was facing a tenant who broke her lease and took off, I was facing a court date with the city and I was carrying the mortgage on a property without a tenant. Going through this process I quickly learned the value of systematizing my investment property so I could limit myself from ever going through this again and could protect myself if I ever do.
Trading my war stories with April “The Terminator” Stewart, whose company, Landlord Legal, makes it their mission to eliminate problem tenants as quick and as pain free as possible, we’ve come up with the definitive way to set yourself up for success in managing your investment properties.
1. Be proactive: • Buy legal properties. If you bought an illegal rooming house any landlord tenant contracts may not be enforceable and taking them to court could expose you to city bylaw officers. • Pick the best tenants and do thorough background checks • Know exactly what your competition is doing. When I first bought my first rental. I actually visited competition whenever I see a for rent sign. I was amazed not only by the difference in price, but with the differences in size, lighting, appliances etc. It really taught me how to sell the potential tenants and understand their issues. • Have money in the bank to deal with any maintenance issues. They will come up and your tenants will let you know one way or the other.
2. Always keep in control, enter every landlord tenant situation as if you were going to take them to the board or take them to court. This means you have to create a file for each tenant documenting everything.
• Give your tenants rent receipts each time they pay you. • Teach your tenants to send you every maintenance issue in writing with the proper forms in triplicate (one the tenant keeps, one goes in the tenant permanent file, one stays with you or the contractor have them sign it once complete). Showing that you are proactive landlord will go a long way at the landlord tenant board hearing. • For any complaint advise tenants to document in writing the date, time and how it adversely affected their life. In cases when a neighbor is making excessive noise, this could be used to evict the offending tenant. • Write your tenant dated reminder letters stating that if there are any maintenance issues please let you know. Keep these letters in your file. The burden of proof is on the tenant to prove that you were not proactive dealing with any issues • Do quarterly inspections, have them sign any issues that you saw and fixed (i.e. replacing smoke detector batteries)
3. Keep the relationship purely business. Don’t run over to the property as a reaction every time they call. The only time the tenant should contact you is an emergency, every other communication must be in writing. This separates you from your own emotions, reading the issues allows you to be calm and collected.
Real Estate Market Overview Average price of resale properties listing on the mls has been doing great with a solid and steady appreciation rate.
Sales have declined 11% from last year, but when looking at a historical perspective, they are the second highest level on record. The resale market is doing well for a number of reasons:
1. Hugh price advantage buying old vs. new is about $109,000 (or about 40% higher)
2. Lots of selection
3. Great fundamentals (averages wages up 3%, continued population growth, diversification of economy as mentioned above).
New home market
Housing starts are trending down because of a huge decrease in multi-family sales. When considering your property, Cambridge single detached homes starts are driving the market right now in KCW.
Quick Highlights for Cambridge single detach home sales according to CMHC:
Year
Housing Starts
Completions
Q4 Price
2007
53
266
$446,230
2008
323
90
$380,774
(Decrease of 14.7 %!!!!)
What the above chart tells me is that there is a significant uptake on new homes that are in the construction phase in Cambridge, so we can expect a lot of new homes coming into the market next year. This has a significant impact in uncertain times, as evident in the above chart, in your area, according to CMHC, last year prices of new homes fell 14.7% comparing Q4 of 2008 to Q4 2007. Why this happened? People simply stopped buying in autumn, and builders slowed construction considerably (resulting in fewer completions in 2008) and were offering significant incentives (i.e. decreasing prices 14.7%) to offload the properties that they already started. Builders absolutely cannot have unsold inventory or they will go bankrupt.
It is hard to predict where the prices of new homes are going to be by the time you are ready to sell. Builders won’t react like the general real estate market, they are more open to the economic swings of the day, and that’s why you see such drastic changes. You would be purely speculating rather than buying.
Could prices decrease again? Builders are going to start building even more so people can get a new home before the new HST is going to be introduced (housing starts are at 323 now, up from 53 last year).
What could the impact be when you are buying a home during a time when builders are building the most? What impact will this competition have?
Will the increased supply be offset by more buyers coming in?
Do we really expect more buyers that are able to afford a home $350,000+ when for now KCW residents are their losing jobs, getting a mortgage is harder and most of the people moving in will rent first anyway?
Secondly, despite getting the house at a discount you are already paying for house at a price that is already in the top 10 highest price in the subdivision (of prices already sold last year). When you put the upgrades it will be in the top 5 of actually sold properties in the subdivision.
Now let’s get down to the nitty gritty numbers. Let’s say the following:
You buy the house for $352,000 put the $40,000 in upgrades. You get a mortgage for 281,600 at 4.5% with a 35 amortization on May 1st 2009. On May 1, 2012 your mortgage will be 270,557.49. So here are my calculations.
Sale Proceeds
Selling Price $410,000.00
Less Commissions $16,400.00 4%
Less Additional Costs of Sale $2,500.00
Less First Mortgage Payout $270,557.00
Less Down Payment and Upgrades $110,400.00
Before Tax - Net Sale Proceeds $10,143.00
It seems like a lot for work and lot of risk (Do we know if the house will be worth $410,000 in 2012, will it be worth $400,000? If so you make nothing).
Think that your landlord tenant lease is enough to protect you because of tenant didn’t pay their rent?
Think again. In Ontario, the landlord tenant board stacks the odds in favor of the tenant.
Any property manager and real estate investors who owns cashflow residential real estate can tell you how frustrating it is dealing with a tenant who is destroying your property and NOT PAYING RENT.
Trash everywhere, destroyed walls, stained carpets, damaged doors…and you cannot throw these vandals out on the spot?
Going through this for the first time, I felt violated, helpless, and most of all angry. How can the rules be so stacked against me? How can this be fair? Asking myself these questions over and over was sending me a loop. I can see why most people feel burned and never want to invest in real estate, the loss is so personal.
Going through these experiences early in my career was a blessing, because I now know how to play the game to win, I know how to set up the systems preventing me from ever getting to that breakpoint again. Thanks to April “The Terminator” Stewart, whose company, Landlord Legal, mission is to save to save landlords and real estate investors from ever reaching this breaking point I’ve compiled the Top 10 ways to prepare and win at the Landlord Tenant Board hearing.
Don’t accept excuses for late rent: serve an N4 as soon as they are late
Follow directions exactly on all Board forms – 100% accuracy is a must
Serve the documents by accepted methods as listed on COS
Pay attention to Termination Dates! Again 100% accuracy!
Don’t Go Blind: Obtain legal advice or representation prior to the Hearing
Make sure you have up to date evidence and records ready in triplicate
Provide a copy of your evidence to the opposing party before your case is called, preferably at the start of the Hearing Block
Consider mediation at your hearing – for a result that can’t be appealed
Address the Member as Mr. Chair or Madam Chair
Show respect for the other party and the Board Member at all times
In today’s market place, everyone is talking about the negative impact the recession has had on people’s wealth and standard of living. All you hear is how businesses are losing money, laying off workers, investors losing their savings and the list goes on and on.
However, nobody is talking about the massive opportunity that this recession presents to everyday people like you and me. For example, if you look at the price of stocks and real estate, they are down significantly. Currently, the focus is on how these assets have performed recently.
Nobody is talking about the fact that there are rock solid companies trading at dirt cheap price or that one can pick up prime real estate properties 10-20% below current market value.
While the mainstream media may not be pointing out these opportunities, astute investors have identified this opportunity and jumped on it. Here are a few examples:
1. Warren Buffet (one of the most successful investors of our time)has spent tens of billions of dollars buying banks and insurance companies in 2008 and 2009.
2. Oil companies have used the price correction in the share price of their competitors as a buying opportunity and purchased them completely. Suncor purchased Petro Canada for more than $20 billion dollars. However, at today’s market price, Suncor got Petro Canada at a 30% discount compared to the peak share price of the company a year ago.
Today, Sinopec (a state controlled Chinese Oil Firm) purchased Addaxx Petroleum for $8 Billion.
3. Bank of America purchase Citywide Financial close to a 90% discount from its peak valuation in 2008.
4. Nokia just entered into an agreement to purchase Nortel’s Wireless unit at a fraction of what it its worth.
5. Fiat is buying Chrysler for below book value. By the way, Fiat is not like your ordinary North American auto company. They are thriving relative to their competition and have the money to buy their broke competitors.
So the question becomes:
Why are these large sophisticated investors and companies spending billions of dollars buying assets in today’s recession?
Do they know something the rest of us don’t know?
Why didn’t Warren Buffet, Suncor, Bank of America and Nokia buy these companies when times were better and economy was growing at 3 % a year? Was then not a good time to buy instead of now?
The answer is:
1. Astute investors make decisions based on fundamentals and strength of the asset, not on emotion and fear. They are able to see past today’s recession and see long-term opportunity for growth.
2. They know that the best way to make money over the long term is to buy solid assets at deep discounts. For them, this is a ripe season to pick up such assets and profit handsomely when the market starts growing again. An excellent example of this is when Donald Trump bought 40 Wall Street (office tower) for $1 million dollars during the 1980’s recession. Now its worth hundreds of millions of dollars!
3. They realize that you can’t get discounts on stocks, companies and/or real estate when times are good.
So when you are presented with an opportunity to buy any investment in today’s economy, don’t be shackled by the fact that we are in a recession. Do your homework and make sure that the investment you are buying is of high quality. Once the market turns, these high quality companies or properties will make you a handsome profit. Also, be comforted that you are buying quality assets at a discount. Which opportunity would you rather choose buy quality assets at high market value or buy them at significant discounts. Your choice will dictate your success.
I rather chose the second option. Happy investing!
One question that I always ask: How can we find the towns where growth will be strong before anyone else knows about it?
To find up and coming markets is a difficult task, there is no one answer because there are multiple different factors working together...lots of research by Ajay and I helps us understand what's going on to spot trends.
What we have learned over all of our research: what a city and its residents do today will have a huge impact on its real estate for years.
So what does this have to do with the synchrotron? Everything.
In 2004, the synchrotron was built in Saskatoon for a cost of over $170 million. The synchotron in Saskatoon is world class and has many different applications. Companies from computer engineering to medical research rely on the synchrotron for their research; as a result, high paying skilled jobs are being created now and expect more in the future...which is great for real estate in specific neighborhoods in Saskatoon.
Right now change is happening at an accelerated pace as governments are spending their way out of the recession. A communities ability to mobilize local resources to get provincial and national funding will be key to it's future success.
While most cities realize this, they don't always make the right choices (hello Windsor...how does it look in hindsight building your schools around Chrysler).
Research what's happening around your town and see how you can profit from it.
Toronto is home to the largest re-development in the western world. I've been to a number of the consultations over the past two years and I'm pretty excited for the future.
I think people get pretty frustrated at the speed governments do things. I think we should consider the impacts of hasty decisions and not doing full studies and consultations...as highlighted by Infranet Lab in a recent blog post
They note that sometimes when things move too quick, politics trump utility:
…the places that are most critical to the country’s economic competitiveness don’t get what they need. The nation’s 100 largest metropolitan regions generate 75 percent of its economic output. They also handle 75 percent of its foreign sea cargo, 79 percent of its air cargo, and 92 percent of its air-passenger traffic. Yet of the 6,373 earmarked projects that dominate the current federal transportation law, only half are targeted at these metro areas.
WaterFRONToronto seems to be doing things right and I can't wait to see how it get's translated. I appreciate the world class vision they have (examples: make the best street in the world at Queens Quay and make the largest urban park in North America Lake Ontario Park - set to be bigger than central park).
Watch for areas around the gentrification, all the changes will have a positive impact on surrounding real estate.
Don Campbell was recently on the Hour telling us Torontonians why Hamilton would be a better place to invest than Toronto. Crazy? No
Picking up on my GDP example from my previous post I remembered an article I read in the Hamilton Spectator. the article noted that Hamilton ranked 7th of all the cities in Canada to do business (see here). Toronto didn't even break into the top 10.
Here's why: it costs too much in Toronto to do business. The article states:
It would cost a 300-person insurance firm or IT company at least $2 million more a year to operate in Toronto than in Hamilton.
So jobs are more likely to be created, real estate is generally cheaper...won't this increase the population? Won't more people working in a town mean more tenants (driving up rents) and more demand for housing (driving up prices). Amid the bad news, take a look at the back pages to find the opportunities (I mean for clips like this, not the classifieds)
Here's another reason why it's important to have a long term perspective when investing in real estate: You can spot trends that indicate that prices are going up in a particular area.
Every bank is predicting that Alberta will lead the country in GDP growth in 2010. BMO currently bases their GDP numbers on a $52/barrel of oil in 2009 and $65/barrel in 2010. Currently oil sits at over $70/barrel. As oil price increases, we can expect the GDP number to be higher in Alberta.
GDP growth is a good signal for the an economy's performance because when GDP goes up we can expect consumption, investment, government spending and net exports to be higher. Going through a conceptual example, let's say the is a new road built in town (government spending), this allows a business to open a location that was previously undesirable. The business buys a warehouse and equipment to set up shop (investment), this new business exports goods to the US or gets used at home (net exports) and provides jobs for people (and for new people moving in the area). People use the income from their jobs to buy stuff like buy real estate, and to pay rent...driving real estate up (consumption).
Taking a look at the change in the number of jobs available in Alberta vs Canada illustrates the effect GDP has on jobs. So it's no surprise that every bank expects Alberta to lead in GDP growth will also forecast that the province will lead the country in job creation.
The reason why no one tells you to look at the GDP of the region you buy real estate in is because its not sexy. Sales people know that investors want the nonsensical no money down deals or just look to buy as much real estate as possible...this is not a focused plan to achieve your goals. Study the fundamentals...buy for cash-flow, buy when no one else is buying, and buy under-market value.
After setting a goal you will have perspective on how to invest...Being consistent and persistent in your wealth creation is so empowering. It simplifies your life because you can make a decision on whether something works for you very easily.
This is why I love making 5 year plans for my clients. While people often overestimate what they want in a year...they underestimate what they could do in 5.
I think we have established that simple supply and demand drives real estate prices. So the key to my business is to understand what drives supply and demand.
On the demand side, one of the key drivers is jobs and incomes.
Lets take a look at the latest research from people who don't care if you buy real estate: CIBC.
CIBC World Markets measures employment quality through its employment quality index (EQI). The EQI measures the distribution of distribution of part-time vs. full-time jobs; self-employment vs. paid employment; and the compensation ranking of full-time paid employment jobs in more than 100 industry groups. Basically it measures if people are leaving high paying jobs to go into McDonald's (McJobs) or starting a new network marketing business.
From the latest EQI stats, despite employment has decreased 2.1% (or 356,000 jobs) the EQI has decreased 0.2%.This is quite different from past recessions where the EQI falls faster than the jobs.
From the report:
During the 1991 recession, the 3% drop in overall employment coincided with a 7.7% drop in the quality of employment.
So what is happening?
Most of the job losses have been in low paying jobs (gasoline station operators, real estate, textile and accommodation services). These are basically jobs by younger people who are less likely able to buy real estate (which won't drive down prices significantly).
So what is going on regionally? Western Canada EQI is falling faster than the rest of the country because the high paying jobs in construction and in the Oil/Gas industry has fallen dramatically. This is perfect for people seeking opportunities in Alberta because these are the sectors poised to gain the most in 2010 and beyond.
Ontario EQI has fallen only a limited degree (despite losing high paying manufacturing jobs). Quebec and Atlantic Canada (Halifax real estate is kicking butt).
The National Post posted an interesting article about the different homicide rates for different neighborhoods in Toronto. In the article they mention neighborhoods with similar demographics have very different homicide rates.
Why?
Urban observer Jane Jacobs gave a compelling case that neighborhoods are structurally created in such a way that promotes crime.
I saw this first hand in Rochester seeing how crime festers through the way roads, services, businesses, and community infrastructure is designed. This results in significant costs to policing and social programs (both of which are in the top 3 in Toronto spending).
Many investors who dream of finding that one property cheap in a neighborhood that is transitioning should understand two things:
Because there is some development (i.e some infrastructure spending, new condo's etc) in a neighborhood doesn't mean it will transition
Transitioning will slow significantly because of our current recession.
Still think you are on to something?
To avoid being a hero in a market by investing too early or investing in the wrong neighborhood, understand what these barriers are (look at my previous post on the ghetto loop to understand what to avoid).
Think of how many times people have tried to revitalize the downtown East side of Vancouver. Imagine investing there in the past thinking that the millions of dollars going to support the area would change things.
To spot an area that is prime for gentrification and re-development is actually occurring key in on neighborhoods that are pedestrian friendly (what makes an pedestrian friendly will be discussed later).
Take a look at this video from BNN for the positive impacts of making neighborhoods more pedestrian friendly (go to 6:34 mark).
Jan Gehl gave highlights of Melbourne and it's recent revitalization:
Less purposeful use of the city to more enjoyment and livability
50% more pedestrians (2x as many at night)
Cafe's and street patios
All economic factors are up (more turnover, more jobs, higher real estate values, lower taxes)
In the BNN report they gave evidence of the Bloor-Annex (click here to see the study they got their evidence from). Pedestrians outspend drivers (i.e. those going to big box stores) therefore there is more demand from business for the space...creating more traffic in the area and therefore reducing crime and increasing property values. Every city has people as passionate as Jan Gehl..find them, they're even in Edmonton.
(Thank you David Hamilton for being a wealth of information, I'm glad I can we can be sounding boards for Edmonton's future )
Short answer is that the pendulum never hits the mark
Don Campbell (author of real estate investing in Canada) recently had a good analogy about real estate. Prices swing from high and low and very rarely stay in the middle (where prices fairly reflect values). Momentum always develops as the market changes because real estate is an inherently inefficient investment.
What I mean by that, very rarely does capital flow into real estate in a manner that actually reflects the value (creating HUGE REAL ESTATE BUBBLES or Overactive selling). While one could say that about every investment, real estate is particularly vulnerable to inefficiency for 3 reasons
1. One could never have perfect information about what a particular value a buyer and seller hold for a property and once they do their deal...the information on price is not readily available. As a result, investors may overestimate or underestimate the value (it's always going to go up...so if I put an offer over-list I’m ok or its going to crash and I’m going to lose everything....sell for whatever we can get)
2. Supply is very limited and usually only comes in the market in chunks because of the lag in construction and planning. Developers can never actually always stay on top of demand because demand changes a lot quicker than they could stop construction and planning (wouldn't it be funny if we had hedge funds buying up all the real estate in a particular neighborhood when prices are low and then start blowing them up to raise values?...um perhaps not)
3. Lenders and financial markets (especially outside of Canada) don't usually give the right amount of capital to lead to a stable market (i.e. Lend too much cheaply or lend too little very expensively. The flow of money, combined with the fact most collateral for loans are based on land, if land prices suddenly drop the flow of capital drastically slows down...leading to credit crisis that we see now.
In short: Monitor all fundamentals to determine what direction the market will be 2 years in the future.
Diversity is a strong indicator for how resilient the town will be in the future when shocks to the local economy happen.
Resilience, rhymes with Brilliance, is defined as “the power to return to the original form after being bent or stretched; elasticity; buoyancy; ability to recover readily from illness or adversity
During the current recession the oil and gas sector in Alberta had overall job losses as the price of oil faltered and investment in Oil sands was postponed. Edmonton and Calgary have weathered the storm of job losses (in fact they gained 0.2% and 0.4% new jobs respectively) in part because the cities were diverse outside of oil and gas.
Toronto with its massive job market (almost as big as the combined labor force of Alberta and Saskatchewan) is an example of great resiliency. The number of people employed in Toronto has decreased 2.0% vs. the 2.3% loss for the entire province of Ontario (Ottawa has a less diverse economy and lost 4.8% --more jobs than the provincial average).
Toronto has survived the Nortel crash and it has survived the NAFTA transition away from manufacturing in the past...and will survive the global financial meltdown and the auto sector mess today.
As for the anomalies in Quebec and Vancouver...who cares!
I won't even begin to explain Montreal and Quebec City because I would never invest their anyway....one of the most anti-landlord places in North America and Vancouver is currently the real estate bubble capital of Canada because the homes are not affordable.
In closing:
Why should the diversity the local economy is a factor to look at when looking at investing in real estate in a town?
Diversity = More jobs created in good times and less jobs lost in bad times = higher population growth in good times and less population loss in bad times = more stable real estate investments.
Real Experts Inc is a real estate investment company that is focused on delivering above market returns to its investors and to provide in depth real estate market research to the general public. Real Experts Inc is your source for up-to-date real estate market research and information.
Our research looks at 8 key local market conditions and trends that drive long-term real estate value appreciation. We consult with various government groups (local, municipal and federal) and private research organization to compile market data. All pertinent data points and information are analyzed – both the economic and real estate specific variables.
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