The Real Estate Doppler Effect

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We are witnessing it again, in Toronto and Vancouver mostly, but in smaller terms in Hamilton and the Waterloo Region, too. In what we have called for the last 20 years, the “Real Estate Doppler Effect.”

To picture the Doppler effect, imagine you’re standing at the side of a pond holding a large stone. Now throw this stone out as far as you can into the pond. There is an initial splash where the stone hits the water. Then, in a perfect circle around this initial splash, a large ripple flows outwards. Subsequently, outside of that ripple another ripple forms, this time a little smaller. This phenomenon continues outwards until the ripples vanish.

This phenomenon occurs exactly the same way in the real estate market. When a specific area has a boom in prices, the real estate in the surrounding areas follows, but often not at the same rate as the initial splash area. The bigger the boom in the main centre, the larger the effect on the surrounding regions. You can use this factor to identify areas that are poised for a strong increase in values and get in front of the wave, instead of always chasing the market.

On the macro scale, for example, when Vancouver is booming and prices are getting untenable, people moving into the region will begin buying in surrounding cities and towns while at the SAME time, those within the city sell into the boom, take their profits and move farther out. We have witnessed it in every boom market through the decades: in Calgary in the 2000s, in Seattle in the 2010s and now we are watching it happen in the regions surrounding Toronto and Vancouver.

The value of the real estate in towns closest to the cities increased at a rate slightly less than the main boom area but still provided a lot of opportunity for the strategic investor. The great news is that these surrounding areas lag by six months to a year after the main area booms.

And now there is a new factor that is increasing the impact of the “Real Estate Doppler Effect”: the accessibility of high-speed or fibre-optic internet. This is increasing the speed at which people are moving out of the boom areas to surrounding communities. With the high-speed internet, small businesses can move out of the expensive regions to areas that are more affordable without losing touch with their team, suppliers and most importantly their customers. Before this, many executives and business owners would have had to stay close to the office and close to their clients, but now it is much more acceptable to be located in remote regions. From this you get a larger positive effect on real estate demand.

The Doppler effect also works on a micro scale. When a neighbourhood is redeveloped or goes through a regeneration, the older untouched neighbourhoods near it also increase in value. A specific investment strategy is to look for these redeveloping areas and then purchase in areas surrounding them, where it is still possible to find good properties at great prices, before the positive boom ripple affects the area.

However, there is one caveat: it is important to note that not all neighbourhoods or towns will be affected by the ripple effect. You must ensure that they fit a number of the other demand factors that drive real estate values and population demand.

The bottom line: look for cities, towns and neighbourhoods where values are already increasing dramatically or redevelopment is occurring. Then look outwards from there until you find an area that has not yet felt the major impact of these changes.

You can see it happening right before our eyes through quotes such as this: “The bulk of our buyers are coming from the Vancouver area,” said Derek Topping, a Gulf Islands real estate agent. “We are extremely busy and we are suffering from a shortage of inventory. We set records for sales in 2015 and so far month-to-month we are up 20 to 30 per cent over last year.” Read more here: http://vancouversun.com/business/local-business/living-the-dream-real-estate-refugees-thrive-in-rural-b-c

began his investing career in 1985 with a house purchased in Mission, BC. He is Founding Partner and Senior Analyst at The Real Estate Investment Network and currently owns nearly 200 doors in BC and Alberta. A seven-time best-selling author, Don’s expertise and passion for teaching Canadians how to create wealth through real estate are far-reaching and have made an impact on the lives of thousands. You can follow his daily thoughts on Twitter – www.twitter.com/ and on Facebook at www.facebook.com/thereinman.

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