Have You Guessed The Market Wrong?
Have You Guessed The Market Wrong?

“Don, the way you do real estate seems like a whole lot of work. Economic and demographic analysis, trend forecasting and treating it like a business. Too much work for me, I’m just going to go and find a cheap property and wait until it goes up.”

I have lost count as to how many times a version of the above statement has either been said to, or emailed to, me over the last 2+ decades of working with investors.  Too many people don’t quite grasp that a little work upfront (most of which is done for you by REIN Research Department anyway) dramatically decreases the risk of getting into financial pain when market trends shift.  The hunt for the quick and easy buck continues to drive so many in our society. It seems to be that because we can get anything and everything instantly through our smart phones that we have trained our brains to want 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 the real estate and make you vulnerable to government legislative changes, market confidence swings and interest rate increases.  Let’s extrapolate how this could play out and how you can mitigate those risks

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 and are why these government changes are called “Market Influencers.”

In Chapter 5 of my book ‘Secrets of the Canadian Real Estate Cycle’  you can see a detailed list 7 “Market Influencers”  and exactly what your strategic investor response should be when they occur.  I suggest you review that chapter and put into motion the strategic action steps .

As an example, we are currently witnessing a few changes that are influencing markets.  Foreign Buyer tax caught a number of Canadian high-end property speculators with properties and big mortgage payments because demand has dried up.  We are also beginning to feel the impact of the tighter requirements placed on high-ratio home-buyers by CMHC forcing them into lower-priced properties which happens to be a price-point that is already over-heated in most markets.

Both of these have negatively affected those whose strategy was to buy and make a quick buck, but has had very limited negative effect, and in fact had an unintended positive effect, on those of us who used economics and demographics to choose our regions and types of properties.

Market Confidence Swings

Hot markets cover-up mistakes that speculators make.  I find it quite amusing to see how big some investors’ egos grow when they are buying in hot markets like we are witnessing in GTA right now and had 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 become less stringent, less structured and less designed for risk-mitigation until it gets to the point that they think they are invincible and markets teach them a lesson.  The market will always take its inevitable breath. It slows due to the Real Estate Cycle, or it drops due to economic or government factors. Suddenly those who allowed their system to become less rigid are standing there wondering what happened.  This is the perfect example of the Warren Buffet quote: “Only when the tide goes out do you discover who’s been swimming naked.” 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.

The strategic investor understands 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 away. They just adjust their actions.

There are three phases of the Real Estate Cycle, the Boom, Slump and Recovery. During each phase, market confidence shifts and can affect demand for your property type. Each phase requires the strategic investor to shift their actions in order to risk mitigate and position themselves to win throughout the phase shift. I have detailed these important actions win Chapters 6, 7 & 8 of “The Secrets of the Canadian Real Estate Cycle” so you can 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 the competition for eye-balls on-line by mainstream media it has become increasingly more difficult for investors not to get caught up in the emotional rollercoasters 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 a strategic investor must continually stop and take a breath. They need to take a step back to assess whether they are using economics and demographics or are they being drawn into the fray of emotion the market is projecting.  My philosophy is:

 

“Stay Out Of The Fray and You’ll Own The Day”

Interest Rate Increase

The obsession on interest rates by consumers, stock market and media is enormous. Daily speculation of what ifs can be found, the spotlight that a ¼% increase has given these minor adjustments more meaning than they should.   The strategic investor understands that interest rates always fluctuate, it just happens to be that we haven’t experienced major swings in over 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 happen throws you right back into “The Fray.”

Strategic investors know that interest rates have already jumped in the last 12 months as posted-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 upwards, consumer confidence will wain as the headlines scare consumer into sitting on their wallets.  Strategic investors understand that this will prove to be a long-term positive for their business as it will keep more people in the rental universe, providing the investor with more potential ‘customers for their business’ while at the same time reducing the amount of competition on the property purchase side of the equation.

I remember distinctly paying interest rates of 16.25% on one mortgage, 12.75% on another and 11.25% on a third… and still made 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 and hence the fear that surrounds a small interest rate increase.

However, if you want to think and act strategically, you will be factoring in all aspects of the market; demographic, economic, psychological and history so that you are making smart decisions based on reality not hyped-up memes.

Sure it will take a little more work. But if you do that little bit more your excitement comes 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 simple 10% extra effort before jumping into the market.

 

Have You Guessed The Market Wrong? was last modified: August 14th, 2017 by Don R. Campbell
 

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