I recently had the privilege of speaking at the mayoral state of the union address. Amidst all of the optimism surrounding our region and the seemingly endless growth and opportunity, I wanted to deliver a dose of practical realism to the group as we move through a predictable cycle. There’s a fortune to be made in real estate if we detach from the emotion, and become strategic and proactive in our approach. This article is an expansion on what I shared with the group. It’s precisely what I am doing inside my own portfolio.
At my firm we are tracking all 17 market drivers and a dozen different market influencers, so that we know exactly where we are in the cycle, and more importantly, what’s coming next. Since the market always moves through 3 phases in the same order, Boom then Slump then Recovery, by pinpointing where we are in the cycle, it allows us to know where we are heading next.
In tracking the financial, demographic, and emotional drivers the data tells us that we are still in the early-mid stage of the boom. A strong inward migration, the crazy construction market (Anyone building a house right now?) And a healthy first time buyer market is all-indicative of early stage boom. Read to the end of this article and find a link to the scorecard we use to guide our own investments…
How long does the boom last? No one knows for sure, however my prediction is that this boom has a fair bit of runway. And I'm not just saying that, I've personally taken on multiple development projects that will take me well into 2018 and sleep like a baby at night.
Real Estate Booms & Bubbles
Anytime you say the word boom, 20% of people hear bubble. These words are far from synonymous. A boom is an amazing thing for an economy; a bubble can have devastating consequences. Since fear sells in the media and a large percentage get their opinion from the media, its any wonder why people are quick to throw around the bubble word. So here are a handful of bullets you can use in a debate with anyone that tries to tell you we are heading towards another crash.
- Firstly our market is Not Speculative, in fact CMHC recently published a stat that in 2007, the height of our last boom, there were 5 times as many people purchasing with the intent to resell within a year. Speculation is everyone becoming a flipper or a condo high-rise investor with dollar signs in their eyes.
- During our last boom, our labor market was in trouble, we were losing all of our skilled youth to the Alberta oil boom without much to attract young talent to our region. Now we are seeing a large diversity in new jobs created in the Tech and Film sector along with good paying jobs in health care and construction.
- Tight lending is what will truly save us from ourselves. Anyone that’s tried to get a mortgage in the past while will know what I’m talking about. To say the underwriting process has become thorough would be a contender for understatement of the year. Contrast that with the end of our last boom in 2007; we had zero down, 40-year amortization, and stated income lending. This basically meant if you could fog a mirror, you were likely approved.
Once you accept that this is a forgone conclusion, you can begin to be strategic and take some proactive steps to ensure that you are prepared to capitalize on the market when it does normalize and enter the slump. As I’ve written in my articles for years, the slump is where fortunes are truly made.
Forecasting A Real Estate Market Downturn
How will you know when? The early stages of a slump are very subtle and can be easily missed if you drink too much of the real estate Kool-Aid. Things to be watching for are
- Overbuilding and Over Supply – If inventory gets much higher than 8 months of inventory it means conditions have shifted in favor of the buyer
- Vacancy Rates Up and Rental Rates down – If vacancy rates edge up towards 4% this signals a shift in the cycle
- Fear & Greed Clues – When the predominate emotion driving real estate transactions becomes fear based, rather than opportunistic.
What To Do Before It Slumps
So what do you do to be in a position to do some serious damage when the market does turn?
- Over the next year or so, if you have investment property, sell anything that doesn’t cash flow. Just take your money and run. If the property value continues to rise for a bit, who cares? You can never get hurt leaving a little meat on the bone for the next guy. Do this before the capital gains exemption disappears after changes by our government.
- Take advantage of the profits in your primary residence by accessing them on a line of credit. This capital will come in handy when there are hot deals again and no buyers to compete with. Finish your reno projects and get the home appraised by your banker, there’s likely a large chunk of change available to you.
- If you are up for a move or a change of lifestyle, this is what we call a downsizers market. Take some tax free capital gain, put the money in the bank and shrink your footprint. Some people might even opt to rent for a period of time leaving them no personal exposure to a falling market. No downside, only opportunity.
If you purchase real estate in 2017 make sure that it cash flows by at least $300/mo per unit. This will stress test your investment against rising interest or decreased rents. To insulate yourself from both of these further, consider purchasing 3 bedroom units, as there will be a zero vacancy for 3 bedrooms for years to come. When financing your purchase, consider locking in to 5 year terms or longer. Its cheap peace of mind.
There you have it, its Cash in or Cash up. No magic here, just some good solid real estate advice that you can use to create multi-generational wealth or, at the very least, make sure you don’t get caught swimming naked when the tide does go out.
For the scorecard we use to determine what time it is on the Cycle clock email us at email@example.com
If you have questions about the value of a particular piece of property you own, use this online market analysis tool. For more professional Kelowna real estate market advice, you can always get in touch with us online or by phone at (250) 717-3133.Posted by AJ Hazzi on