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Predictably wrong: Forecasts and real estate investment | RENX – Real Estate News EXchange

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In early 2008, the five-year default rate for AAA-rated collateralized debt obligations (CDO) was 0.12 per cent. The Standard & Poor (S&P) rating meant the predicted default occurred only 0.12 per cent of the time, but in late 2008 the default rate came closer to 28 per cent.

This gap between forecast and reality was a gigantic prediction error. In fact, the mortgage-backed securities were extremely sensitive to changes in economic conditions and their defaults triggered the global financial crisis.

At the start of the pandemic, I don’t recall hearing predictions the housing market would be as hot as it is now. In fact, most were pointing in the other direction and there was fear of the unknown.

We expected job losses to drive the economy down, and with it, some adjustment and discount in real estate. Instead, today we see overall debt levels are down (credit card debt and car loans are being paid off and replaced with low-interest mortgages tied to property), and individual debt-to-income ratios are improving while there is a real estate buying spree.

Wrong predictions aren’t new and as the old joke goes, economists called nine out of the last six recessions correctly. So why is it so difficult to make predictions? And what does it mean today for the real estate sector?

There are many reasons why we miss the mark on our predictions – too many to cover in an article, so let’s discuss just two:

– probabilistic vs. fast thinking; and

– failing to prepare to be wrong

Probabilistic vs fast thinking

Daniel Kahneman, in his book Thinking, Fast and Slow (2011), explains two systems of thinking – fast and slow. An oversimplified way of looking at it explains ‘fast’ as quick intuitive gut reactions, and ‘slow’ as analytical evaluations or critical thinking.

Many GameStop investors recently got caught up in the ‘fast’ emotions of seeking quick riches and ignored ‘slow thinking’ fundamentals.  They took a risk on the probability that stock prices would continue to rise “to the moon” based on hype that came after the short squeeze had already happened.

We make most of our decisions with heuristics and emotions and then seek to justify our decisions with a logical reason.

What makes it worse is the abundance of information we now have. The internet has exploded our access to information, social media has decentralized media, and we are now more than ever able to be selective in what information we choose to see.

If we believe in something, we just seek to confirm it by reading only information that supports our view and ignoring that which opposes our beliefs. It is known as confirmation bias.

Reddit users weren’t seeking investment advice that was opposite to their position; they were in a social media-fuelled buying frenzy even after the GameStop stock price multiplied many times over, thinking fast, and getting hyped up on becoming overnight millionaires.

I am talking here about those who saw the stock go from $4 to $300, yet still decided to “invest.”

The emotional tail was wagging the rational dog.

Failing to prepare to be wrong

If S&P had assumed that CDOs were correlated, the impact on the financial industry would not have been as profound and maybe there would have been no global financial crisis of 2007-2008.

In retrospect, the assumption that defaults on some housing would not trigger other defaults seems obviously wrong. If the analysts at S&P had prepared to be wrong on this one assumption, their range of probable default rates would then have been too big to ignore.

And if GameStop investors prepared for an overnight reduction to their investment by 80 per cent, many would not have been in a Wall Street Journal article explaining how they plan to pay off loans they took on for an “investment” – gamble is a better word.

Real estate enthusiasm

Across Canada we are seeing an insatiable appetite for real estate, from homeowners to investors and developers.

That appetite is based on predictions and expectations, but does that mean we could be wrong? Of course. But, it is not that simple.

Traditionally, prices increase more at the core of cities due to urbanization, and then the pressure spills out to the more rural areas. In 2021 we are seeing the opposite because of the pandemic. Urban centre condos are not doing well.

Rental vacancy in Metro Vancouver and Toronto has increased for reasons such as low immigration, remote work, and students studying virtually. At the same time, prices and sales are rising in suburbs and we are seeing a migration of people away from city centres.

We need to admit that we do not know the future of real estate prices or what economic recovery will look like. The government doesn’t know, and neither do the economists and analysts. The economy is so complex that when a butterfly flaps its wings in Brazil, real estate prices go up in Vancouver – chaos theory for real estate.

The years 2006-2007 showed us that when locals start seeing real estate as a “sure thing” investment, and the lending environment allows for speculation, at some point it tips the scales, and our “prediction” of rising prices becomes wrong. We see patterns where none exist and have a very short-term view.

Preparing to be wrong

‘Fast thinking’ in real estate would be to follow the herd and just buy anything. ‘Slow thinking’ suggests making a more disciplined evaluation and preparing to be wrong by asking the right questions – questions that help make our predictions more probabilistic and a little less emotional.

– When are the interest rates likely to increase?

– How quickly do we expect to be back to ‘normal’ at the office?

– What impact will an interest rate increase have on real estate in general?

– What leverage can I handle with my purchase under various scenarios?

And the hard question that really needs to be asked right now is do we expect the current de-urbanization trend to continue post-pandemic?

Once again, we don’t have a crystal ball but if we look at history, we can learn some lessons and make informed decisions. According to economist Ed Glaeser’s comments in Six Hundred Atlantic’s ‘Today, Tomorrow, and COVID-19’ podcast episode (September 2020), despite plagues and pandemics, urbanization has been a constant since the 14th century:

“Urbanization proceeded despite the reappearance of the Black Death in the 1350s. Urbanization proceeded despite the Great Plague of London in the 1660s. All of the great diseases that spread in 19th-century America, cholera, yellow fever, the urbanization just chugged along.

“Even the influenza pandemic of 1919-1920 was followed by a tremendous decade of city building. So, I think our cities have proven to be remarkably resilient.”

As a developer, I am biased toward real estate and think it is the best asset class for my own investments.

We are constantly making predictions, and to make better decisions we rely on detailed pro-forma financial forecasts. This is how our business decides on a “go” or a “pass” for a development project.

For personal investment decisions, I recommend the same analytical approach – whether we are in a pandemic or not. Ask questions, consider many scenarios, base decisions on your financial abilities and, just in case, prepare a downside analysis.

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Hot real estate market sparks warnings to potential buyers as complaints to regulator double

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As home sales in the province continue on a dizzying trajectory, the province’s real estate watchdog and regulator are warning buyers to be wary of what they may be getting into.

The Real Estate Council of B.C. (RECBC) and the Office of the Superintendent of Real Estate said that in the first three months of 2021, they have seen an increase in inquiries and complaints.

Calls to the regulator were up 42 per cent over the previous year, while complaints, such as how offers were made and accepted, were double the number received in the same period in 2020.

“Buying a home is one of life’s biggest financial decisions. There are potential risks at the best of times, but with the added pressure and stress of the current market conditions, those risks are amplified,” Micheal Noseworthy, superintendent of real estate, said in a statement.

 

 

The Real Estate Board of Greater Vancouver says sales in the region have continued at a record-setting pace.

Residential home sales covered by the board totalled 5,708 in March 2021, up 126.1 per cent from March 2020, when the COVID-19 pandemic hit, and up 53.2 per cent from February of this year.

Rural and suburban areas have experienced the biggest spikes.

For the past two weeks, Jay Park has been in the middle of the buying frenzy.

He and his partner are trying to upgrade from their one-bedroom apartment to a two-bedroom condo or townhouse in Vancouver.

“I wish we had done this a month or two ago,” he said.

 

A condo tower under construction is pictured in downtown Vancouver in February 2020. (THE CANADIAN PRESS/Darryl Dyck)

 

Park put an offer on a $1-million condo, $4,000 above asking price.

“To entice the [seller], we put in a subject-free offer, but it wasn’t successful,” he said. “They accepted $110,000 over asking price that was also subject-free.”

The hot market has led to bidding wars. Some would-be buyers have even lined up outside for days to try to get a jump on a property.

Erin Seeley, the CEO of the council, is warning buyers to do their research and be aware of risks before making an offer.

“It’s really important that buyers have engaged with their lender before they’re making offers so they know how to stay within a reasonable budget,” she said.

Seeley said some of the complaints the council has heard from buyers is that they weren’t aware the seller has a right to take an early offer.

“And the seller was really in the driver’s seat about setting the pricing,” she said.

 

Demand continues to outstrip supply for housing in cities like Vancouver. (Rafferty Baker/CBC)

 

Aaron Jasper, a Vancouver realtor, advises clients to avoid cash offers and to include finance clauses even if it may mean they lose a deal.

“There’s a lot of frustration among buyers, feeling pressure to take some risk,” he said.

“You’re better to be delayed perhaps a year getting into the market as opposed to being completely financially ruined.”

Jasper also says realtors are limited in the advice they can give to clients on legal matters, home inspections, potential deficiencies with homes, and financing.

‘Caught up in the craziness’

Other tips from the council include seeking professional advice before making a subject-free offer or proceeding without a home inspection, and speaking to a professional to determine how market conditions may be affecting prices.

Meantime, people like Jay Park say they are still keen to buy. Park has more viewings scheduled and is optimistic.

“It’s a very exciting time for us, but I also don’t want to get caught up in the craziness and make a purchase that’s above our means.”

Source: – CBC.ca

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Black Press Media introduces one of Western Canada’s best real estate platforms helping home buyers Find. Love. Live. that new home

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Need an agent who knows the community?

Or, is it time to look for a new place to live, but you don’t know what’s on the market?

Whatever the real estate need is for residents in the communities of British Columbia, Yukon & Alberta, there’s a new way to do that one-stop shopping – by visiting Today’s Home.

The slogan for the site is “Find. Love. Live.”

“We want people to find their dream home, love it, and live in it,” said group publisher Lisa Farquharson.

Building on the success of Black Press Media’s niche digital platforms – Today’s Home brings the same wealth of knowledge and local expertise to the search for a home, be it buying, selling, or even just daydreaming about what changes you can make in the future.

Search hundreds of listings that local real estate agents have available.

The listings cover properties around the region, from a one-bedroom, one-bath condo for $339,900 to million-dollar acreages throughout the province of BC, Yukon, Central Alberta and beyond.

Click on a listing, and see not only the realtor handling the property sale, but links to his or her other listings and social media feeds. With the click of a mouse, take a virtual tour of the property, find the property’s walking score, and learn about nearby amenities.

There are links available to schedule a showing, or send the agent a comment or question.

Want to share a listing? When you click on the share button, you’ll actually send an attractive digital flyer of the prospective property, not just a link.

There’s even a button to help determine how much you have to spend, courtesy of the convenient mortgage calculator.

Plus, scroll down the page on Today’s Home and find a list of expert local real estate professionals who can answer questions or help with that home sale, Farquharson explained.

Today’s Home offers the advantage of the massive reach that Black Press Media has built throughout Western Canada with its network of community newspapers and online products. That allows the public to tailor real estate searches based on location, price, and other key factors while allowing real estate professionals to gain unprecedented audience reach with their listings.

Today’s Home will dovetail into the media company’s existing print real estate publications.

“Black Press Media has real estate solutions in print and now we can add in the digital component,” Farquharson said.

Watch for expansion of the Today’s Home platform in the near future, she added. That will come as Black Press Media adds a new component – the development community. Developers will be able to reach a huge audience when their projects are ready for presentation.

For information on Today’s Home, contact group publisher Lisa Farquharson at 604-994-1020 or via email.

Happy house hunting!

Source: – Aldergrove Star

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PGIM Real Estate, Revera Affiliate Target UK Market in Newly Formed JV

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Real Estate Sales In September

PGIM Real Estate has been active in recent months providing capital to facilitate blockbuster senior housing acquisitions. Now the firm is looking to capitalize on demand for senior housing in the United Kingdom.

The Madison, New Jersey-based real estate investor and lender announced this week it is entering into a joint venture with Signature Senior Lifestyle, an affiliate of Revera, to develop and operate senior housing communities around greater London

Mississauga, Ontario-based Revera serves 20,000 older adults in long-term care homes and retirement residences in Canada. It is also the majority shareholder of Sunrise Senior Living, one of the largest senior housing providers in the U.S. The company operates a portfolio of 12 communities in the U.K. under the Signature Senior Lifestyle brand, with one community in development that is slated to open in autumn 2021.

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The JV has one development underway — a senior housing community, or “prime care” home, in southwest London. PGIM worked with Elevation Partners, a London-based investor and asset manager in U.K. health care real estate, in sourcing, structuring and executing the venture. Additionally, PGIM will retain the firm to leverage its expertise.

PGIM and Revera did not respond to requests for comment from Senior Housing News regarding details about its development pipeline.

London is emerging as a future hotbed of senior housing development, spurred by favorable demographic growth trends and a lack of available supply, and the PGIM-Revera venture will find competition.

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Maplewood Senior Living CEO Gregory Smith told SHN last month that demand for U.K. senior housing is comparable to major U.S. markets such as New York and San Francisco, where supply has historically been constrained.

Maplewood and its investment partner, Omega Healthcare Investors (NYSE: OHI) are looking to expand its luxury Inspir brand to the U.K., and identified five suburban markets around London with high barriers to entry that are favorable for the brand’s growth.

Revera CEO Tom Wellner sees similar untapped upside potential for senior housing in the U.K.

Source: – Senior Housing News

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