Here’s how to analyze how your property will fare
By Don R. Campbell
Merrill Lynch, and now Macleans, have recently come out with predictions of a national real estate calamity. Canadian Real Estate Association and Royal Lepage paint a much sunnier picture. The truth is Canadian investors and homeowners know that the truth lies somewhere between the chick-littles saying that the sky is falling and the pollyannas telling us that this correction is just a blip.
To uncover the truth in this storm of mis-information, it is important to go back to the basics, the facts and figures that actually drive a real estate market either up or down. These basics have held true through decades of up & down markets and those who focus on them when making their decisions will reduce their risk and increase their returns. Here’s how to analyze your property’s exposure to the financial storm buffeting real estate worldwide.
First, it’s vital to remember that property markets are not national; they are regional and local, and even vary widely from neighbourhood to neighbourhood in the same city. Looking at national numbers and coming up with an average is like putting your head in an oven and your feet in a freezer, and saying on average that the temperature is fine. There will always be some hot real estate markets and others that will be cold, but national and provincial figures are much too generalized to be used by Canadian homeowners and investors to make fundamentally sound decisions on their most important asset. So, focus on your target neighbourhood numbers, rather than national or provincial headline figures.
The road to good decisions is via research, followed up with careful analysis. The twelve questions listed below will help you decide if your local area and personal property is poised to go up, stay flat or collapse. Each of these factors can affect real estate prices in any direction, and each is an important component in determining which way real estate values will be going. Overall, to dramatically reduce your risk, ask and analyze these key questions for your target town or neighbouhood. The more “yes” answers you get, the better the market will perform.
1. Is the area’s average income increasing faster than the provincial average?
2. Is the area’s population growing faster than the provincial average?
3. Is the area creating jobs faster than the provincial average?
4. Does the area have more than one major employer?
5. Is real estate booming in the surrounding region more than where you’re looking?
6. Will the property values benefit from a major new development nearby?
7. Has the local and provincial political leadership created a “growth atmosphere”?
8. Is the region’s economic development office helpful and pro-active?
9. Is the neighbourhood located in an area of renewal or gentrification?
10. Is there a major transportation improvement occurring nearby?
11. Is the area attractive to “baby boomers”?
12. Is there a short-term perceived problem (negative stories, short-term layoffs) that will disappear?
Each of these questions, and where to get the answers for your region, is discussed in great detail in the book Real Estate Investing in Canada (version 2).
It is important to remember that current real estate market conditions don’t tell us what the market will look like in the future, it is a direct reflection of what has occurred in the past. Only by addressing the above economic fundamentals can help in making projections of long-term values.
And, in fact, there are thirteen major influences on the long-term value of property. Underlying the local analysis above of your property market is the thirteenth factor: the positive outlook for Canada generally. Our banking system has been rated the most stable of any in the world by the I.M.F., our debt load is one of the smallest of any population in the major world economies, our governments paid down debt during the good times so we are prepared for these next 18 months of economic turmoil and the majority of the major economist around the world are point to Canada as the country that will play a leading role in the recovery.
While the world is undergoing significant economic and financial turbulence, Canada is well positioned to provide other countries with what they need over the coming decade, even during an economic slowdown. These factors are called the three “Fs” of existence: food, fuel and fertilizer.
No matter what the economy is doing, the world needs these commodities. Even with a slowing or recessionary economy, the world will continue to consume these staples, then as the recovery begins to hit and the economic stimulous packages have an impact the demand for these staples will increase. As a stable democracy, Canada will become the ‘safe and secure’ provider of choice. Therefore, generally speaking, the Canadian economy and real estate is among the best positioned to withstand the economic storms that are buffeting property values in many other countries.
However, we must remember that only by analyzing the above 12 fundamental factors for your specific city or neighbourhood can you can properly evaluate your property’s prospects for withstanding today’s financial and economic storms. It’s also the way to sleep better at night, while the winds of economic turmoil howl outside our homes.
