By Don R. Campbell
“Don, the way you do real estate seems like a whole lot of work. Economic and demographic analyses, trend forecasting, and treating it like a business. Too much work for me; I’m just going to find a cheap property and wait until its value goes up.”
I have lost count of how many times I’ve heard that statement (or some version of it) over the last two-plus decades of my working with investors. Too many people don’t quite grasp that a little work upfront (most of which is done for you by the REIN Research Department, anyway) dramatically decreases the risk of encountering financial pain when market trends shift. The hunt for the quick and easy buck continues to drive so many of us. It seems that because we can get seemingly anything and everything instantly via our smart phones, we have trained ourselves to expect instant gratification, even in our investments.
Well, I’m here to say that the hunt for quick returns will leave you on the risky side of real estate and make you vulnerable to legislative changes, market confidence swings, and interest-rate increases. Let’s explore how this might play out and how you can mitigate risk.
Government Legislative Changes
There are, sadly, multiple examples throughout history of governments changing legislation with the goal of either rescuing or slowing a housing market. These changes can have a dramatic effect on a housing market cycle, which is why they are called “market influencers.”
In chapter 5 of my book Secrets of the Canadian Real Estate Cycle, you’ll find a detailed list of market influencers, with discussion of exactly what your strategic investor response should be when they occur. Consider reviewing that chapter and putting into motion the strategic action steps.
We are currently witnessing a few government changes that are influencing markets. The foreign buyer tax caught a number of Canadian high-end property speculators with properties and big mortgage payments, because foreign demand has dried up. We are also beginning to feel the impact of the tighter requirements placed on high-ratio homebuyers by CMHC, forcing them into lower-priced properties, which happens to be a price point that is already overheated in most markets.
Both of these changes have negatively affected those whose strategy is to buy and make a quick buck, but they have had a very limited negative effect—and, in fact, have had an unintended positive effect—on those of us who use economics and demographics to choose our regions and types of properties.
Market Confidence Swings
Hot markets cover up speculators’ mistakes. I find it quite amusing to see how big some investors’ egos grow when they are buying in hot markets, as we are witnessing in the GTA right now and previously experienced in Alberta.
These people could have bought any piece of property and it would have gone up in value. And because of this, they allow their property-selection process to get looser and looser, until it gets to the point that they think they are invincible. But then the market inevitably takes a breath. It slows because of the real estate cycle, or it drops because of economic or government factors. Suddenly they are standing there wondering what happened. Warren Buffett famously said, “Only when the tide goes out do you discover who’s been swimming naked.” This situation perfectly illustrates what he is referencing. Those who have not taken the time to study the trends or to extrapolate the impact of market demand are the first to be hurt when the housing-market tide shifts.
Strategic investors understand that all markets have ebbs and flows. They don’t get too high when the market is in their favour, and they don’t get too low when the market shifts. They simply adjust their actions.
The real estate cycle has three phases: boom, slump, and recovery. During each phase, market confidence shifts and can affect demand for your property type. Each phase requires strategic investors to shift their actions in order to mitigate risk and position themselves to win throughout the phase shift. I detail these important actions in chapters 6, 7, and 8 of Secrets of the Canadian Real Estate Cycle to help you quickly make strategic moves as markets shift and never be left behind, swimming financially naked.
In today’s world of information overwhelm, social media swarms, and competition among mainstream media for eyeballs online, it has become increasingly more difficult for investors not to get caught up in the emotional roller coasters that consumers feel during market phases.
That is why it is critical, especially now in 2017 with all that is going on in the world, that strategic investors continually stop and take a breath. They need to take a step back to assess whether they are using economics and demographics or are being drawn into the fray of emotion the market is projecting. My philosophy? Stay out of the fray and you’ll own the day.
Media speculation about interest-rate changes is way out of proportion to reality. Strategic investors understand that interest rates always fluctuate; it just so happens that we haven’t experienced major swings in more than a decade. Will interest rates increase in the future? Of course they will. But spending an inordinate amount of energy trying to guess when that will occur throws you right back into the fray.
Strategic investors know that actual interest rates have already jumped in the last 12 months as prime-rate discounts have been slashed. Sure, the rates haven’t officially moved up much, but the reality is that the net interest rates have already moved.
When official interest rates eventually begin to head upward, consumer confidence will wane as the headlines scare consumers into sitting on their wallets. Strategic investors understand that this will proved to be a long-term positive, since it will keep more people in the rental universe, providing the investor with more potential “customers for their business,” while reducing the amount of competition on the property-purchase side of the equation.
I distinctly remember paying interest rates of 16.25% on one mortgage, 12.75% on another, and 11.25% on a third... and still making money on these properties. Interest rates have historically reflected the economic strength, and inflation rates of a country are just one piece of the puzzle. In today’s market, most home buyers and investors have only ever lived in an ultra-low interest-rate environment—hence the fear that surrounds a small interest-rate increase.
However, if you want to think and act strategically, you’ll need to factor in all aspects of the market—demographic, economic, physiologic, and historic—so that you can make smart decisions based on reality, not on hyped-up memes.
Sure, it will take a little more work, but if you do it, your excitement will come from other aspects of your life, not from the stress of unforeseen market shifts. And frankly, you may not want to be standing financially naked just because you didn’t put in a mere 10% extra effort before jumping into the market.
Don R. Campbell began his investing career in 1985 with a house purchased in Mission, BC. He is the Senior Analyst at the Real Estate Investment Network and currently owns nearly 200 doors in BC and Alberta. A seven-time bestselling 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.