In my usual Sunday evening round-up of all things real estate related on the interwebs I came across this dandy piece of writing in the Globe and Mail. In my mind anyway, it's a must read for everyone watching the market.
Here are the key points:
- Listings are up, sales are down, and even the always bullish industry executives are predicting lower prices in the coming year.
- “Real estate is the drunk driver on the economic highway” Tom Barrack, the CEO of real estate investor Colony Capital
- Residential real estate markets can be volatile: the cycles are generally long while memories are always short. The most recent trend, up or down, is assumed to be sustainable
- Buying decisions are often steeped in emotion and based on non-economic factors
- Houses are easy to borrow against - high potential for overindulgence
- Leverage is involved - real estate prices are sensitive to changes in interest rates. Purchases are often financed up to 90 (or more) per cent with debt, so mortgage payments are a key factor in determining prices
- For almost 30 years, we’ve been in a bull market for interest rates and with every tick down, property values have gone up. Given that we are somewhere near the end of the rate declines, investors have to recognize that a huge tail wind is swinging around
- The farther prices stray from their fundamental value, the bigger the downturn will be
- House owners deploy a strategy that is at the core of hedge fund investing – buy long-term assets with short-term financing
- If the continuing income from a real estate investment is barely covering expenses, and the long-term supply and demand outlook doesn’t justify current prices, then I am flat out speculating. When I’m ready to sell, I’m betting a greater fool will pay me an even more uneconomic price