There is a lot of investment capital out there that has been building up waiting to be spent, and a significant amount of that money is now flowing into real estate.
Is that a good thing or a bad thing?
If you’re scratching your head and asking, “Why are home prices going up?” part of the answer is: because you’ve been sitting at home for 18 months not spending anything.
There was also a lack of housing built in the past five years, especially in the U.S., so now the market is trying to catch up.
The result is that prices are shooting up, driven by lower interest rates (though rates are projected to rise somewhat), not enough supply, and lots of demand.
Housing a good or bad investment?
Does that make housing a good investment? Well, today it does.
If you own your own house and somebody is knocking on your door trying to buy it, it’s probably worth substantially more now than what you bought it for.
But what happens from here? If you have inflation, which we believe is here now, then your house should also be worth more money in five years.
That’s a good thing for property owners.
The same phenomenon is affecting the apartment building market. Again, there is a lot of money chasing apartment blocks right now.
As a potential investor, how do you determine what this means?
Well, a cap rate is generally what investors look at when they consider buying a property – it’s how you measure whether or not you should be buying a property. Many apartment blocks have been traded at cap rates around five per cent, while in bigger communities cap rates have been in the three per cent range.
The hunt for good product
If I own a property which was acquired at five per cent and cap rates have compressed to three per cent, I have made money if I want to sell that property.
With lots of money chasing real estate deals, that means you’re going to make money if you have the product.
But it’s very hard right now to find good product. When investors do find good product, there can be a feeling that they should grab it, whatever the cost may be.
On the other hand if you’re a value investor like I also am, I’ve been sitting very, very quietly on the sidelines. Somebody described me as a “lonely” investor because there’s no such thing as a value investment today.
That’s not a phenomenon that’s exclusive to real estate. There are many, many other examples.
Similar issue with consumer goods
For many higher-end consumer goods, if you go into a store today and find something you want, you have to buy it at full price or someone else will.
Take Rolex watches, for example. Everybody wants a Rolex. When you look at a Rolex Daytona, prices have increased from approximately $17,000 to $50,000 from a reseller. There is not enough supply and demand is huge.
Another example is the vehicle market, where it can take 12 months to take delivery of a new vehicle. You’ll pay more, too. If you used to pay $110,000 for a Cadillac Escalade, now it will cost $160,000.
Carmakers are dealing with chip shortages and labour shortages and can’t produce enough vehicles to meet demand.
If fashion is your passion, and you want an Yves Saint Laurent or Balenciaga bag, not only are they limited in supply, but because of the demand, companies like The RealReal are buying used products and selling them at high markups.
Again, high demand and low supply is driving inflation.
Circling back to real estate
I was introduced to RealReal by my daughter. I walked around the store and was looking at a pair of old sneakers. I’d never put my feet in a pair of old sneakers somebody else had worn.
She asks, “Dad, how much do you think this is worth?” I reply, “I don’t know, I probably wouldn’t pay five cents for it.”
She says, “Yeah, this pair is worth $10,000.” And I respond, “What? A pair of sneakers?”
The demand for old-style nostalgia is crazy.
As we relate this all back to real estate, the point is there’s a lot of money out there chasing very few products which makes it difficult trying to be a value investor.
I wonder if there truly is a “value investor” any more.
If you want an apartment building, a retail building or even land, and there’s no availability and the vendor tells you he wants $1, he’ll likely get $1.10.
So, if you’re a value investor, you’re left sitting on the sidelines. Good luck, because you are probably sitting in a chair somewhere, lonely all by yourself.
If you want to be an active investor it’s time for you to write the cheque. As awful as it sounds, that’s how it is.
TORONTO – One expert predicts Ottawa‘s changes to mortgage rules will help spur demand among potential homebuyers but says policies aimed at driving new supply are needed to address the “core issues” facing the market.
The federal government’s changes, set to come into force mid-December, include a higher price cap for insured mortgages to allow more people to qualify for a mortgage with less than a 20 per cent down payment.
The government will also expand its 30-year mortgage amortization to include first-time homebuyers buying any type of home, as well as anybody buying a newly built home.
CIBC Capital Markets deputy chief economist Benjamin Tal calls it a “significant” move likely to accelerate the recovery of the housing market, a process already underway as interest rates have begun to fall.
However, he says in a note that policymakers should aim to “prevent that from becoming too much of a good thing” through policies geared toward the supply side.
Tal says the main issue is the lack of supply available to respond to Canada’s rapidly increasing population, particularly in major cities.
This report by The Canadian Press was first published Sept. 17,2024.
OTTAWA – The Canadian Real Estate Association says the number of homes sold in August fell compared with a year ago as the market remained largely stuck in a holding pattern despite borrowing costs beginning to come down.
The association says the number of homes sold in August fell 2.1 per cent compared with the same month last year.
On a seasonally adjusted month-over-month basis, national home sales edged up 1.3 per cent from July.
CREA senior economist Shaun Cathcart says that with forecasts of lower interest rates throughout the rest of this year and into 2025, “it makes sense that prospective buyers might continue to hold off for improved affordability, especially since prices are still well behaved in most of the country.”
The national average sale price for August amounted to $649,100, a 0.1 per cent increase compared with a year earlier.
The number of newly listed properties was up 1.1 per cent month-over-month.
This report by The Canadian Press was first published Sept. 16, 2024.
MONTREAL – Two Quebec real estate brokers are facing fines and years-long suspensions for submitting bogus offers on homes to drive up prices during the COVID-19 pandemic.
Christine Girouard has been suspended for 14 years and her business partner, Jonathan Dauphinais-Fortin, has been suspended for nine years after Quebec’s authority of real estate brokerage found they used fake bids to get buyers to raise their offers.
Girouard is a well-known broker who previously starred on a Quebec reality show that follows top real estate agents in the province.
She is facing a fine of $50,000, while Dauphinais-Fortin has been fined $10,000.
The two brokers were suspended in May 2023 after La Presse published an article about their practices.
One buyer ended up paying $40,000 more than his initial offer in 2022 after Girouard and Dauphinais-Fortin concocted a second bid on the house he wanted to buy.
This report by The Canadian Press was first published Sept. 11, 2024.
