WHY MY REAL ESTATE IS IS CRASHING?

According the Knight Frank's global house price Index there are been some major shakeups in the worldwide real estate market.



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.

Employment Diversity and Effect on Job Loss during the Recession

Thanks to Don Campbell for keying me on this fundamental.

When the Conference Board of Canada publishes its quarterly economic outlook for Canadian cities we take a particular interest in how they rate the diversity in the amount of industry groups for the town.

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.