Hot Real Estate Topics for Summer BBQ Talk

Hot Real Estate Topics of the Summer of 2008.
A quick overview of the hot topics around the BBQ this Summer.

Suddenly it seems live everyone you meet at a summer BBQ is a real estate expert and they want to share with you all of their extensive knowledge about how the world will end.

If you have seen the Lotto commercial with the two snobby 'rich' people talking about what to where at a BBQ and what to speak about you will understand that the ad is funny because it has a base of truth to it. Their one comment is while at the BBQ with those who haven't won a lotto, "talk about fuel costs because they like that." Well that commercial should now be changed to 'talk about interest rates and property values."

Here is part 1 of an overview of these hot topics and some analysis of each one, I trust you'll find it useful to have some perspective based in the reality of the market.

BBQ Topic #1 Elimination of zero down mortgages and 40 year amortizations.

You would think by some comments I've heard and read from people not really active in the real estate market that this was one of the signs of the apocalypse when in reality the elimination of these came as no surprise at all and not that much of a big deal.

Only a VERY, VERY few investors ever took advantage of these two options during the time they were available, and many banks didn’t even offer the program (despite CMHC's backing). These changes will not have much of an effect on the market. I find it quite entertaining to watch the gyrations and pontifications of people who have never used these products stating that it is the end of the financing world, when in fact it was a brand new product and the market has done very well over the last 100 years without it. It also ensures that the Canadian market won’t set itself up to be like the US and UK. A smart move by all concerned.

Most investors have been taking advantage of the 30 year amortization mortgage to increase cash flow as cash flow is the key in all markets.

BBQ Topic #2 First time in 6 years that average year-over-year Canadian Real Estate price was ‘down’

Anyone investing based on national average prices isn’t really investing, they are guessing and speculating. Sophisticated investors focus on the economics behind a specific market not generalization (like national averages). When prices were up in some areas, they were down in others – hence the reason the overall average is down.

That being said, as we discuss just about every month in REIN – Prices and markets never run on straight lines (although that would make life a lot less exciting ). There will always be fluctuations in the market… it is just that so many beginning investors believe the concept that the markets should skyrocket every year (like they had the last 3 years) and so as soon as the inevitable pause occurs, panic set in. Markets that have gone up at a too fast rate, will always adjust to find their new normal based on the real economics of the region, and then begin once again to build from their new base.

The only way to be a true investor (rather than a speculator) is to study the unbiased economics that we present every month and because we aren’t in the business of selling real estate, and don’t profit whether you buy, sell or hold we can cut through the positive and negative hype and get to the truth. Those who actually understand the importance of research have had an amazingly relaxing summer knowing that their decisions are based on long-term fundamentals – not month to month (or even year-to-year) gyrations of the market. And that is why we have so many members who have been coming out every month for 15+ years!

If you truly want to cut to the reality, take out the goldmine scorecard and re-do the work on your target area. It is designed to protect you in all market conditions. That way if you are feeling fear, following the goldmine scorecard system will make sure you have all the facts (either justifying your fear or eliminating it by just looking at unbiased, non-emotional facts). Another way is to tap into the conference call and interview archives we have in the downloads section of www.myREINspace.com as they will provide you with the facts you need as an investor.

And to get the latest facts, ensure you are on myREINspace.com regularly to read the economic fundamentals. This will help you keep a long term perspective while still keeping a close eye on what is going on today. Then you can make decisions based on reality not emotions.

BBQ Topic #3 What’s next for interest rates, there is talk of rising Bank of Canada interest rates

Financing properties, even for the average home owner is taking more effort than it did over the previous 3 years. So remember not to get mad at your banker or mortgage broker – the goalposts have moved and they are just the messengers of this change.

That being said, as predicted at REIN, the Bank of Canada is between a rock and hard place on interest rates. They need to keep an eye on inflation (and keep a cap on that) by raising interest rates, but at the same time they want to keep them low so the dollar weakens and the Eastern Canada market can revitalize. Raising interest rates may be inevitable (due to food and fuel inflation), but that would have a detrimental effect on the manufacturing based economies in the East.

The good news underlying this situation is that it can only be a gradual increase when they do it, and will provide investors lots of time to lock-in their variable mortgages in the future

Right now, variable rate mortgages are still one of the cheapest and most flexible options available to investors. The gap between variable and fixed can be as much as 1.5% - thus increasing potential cash flow. Recent variable deals that REIN Members have arranged have been prime minus .25% and a more rare prime minus .6%

If you are someone who can’t sleep at night worrying about interest rates increasing, then locking in at a great rate (not the posted rates) is a good option for you, but understand that safety will cost you money on a monthly basis.

BBQ Topic #4 There seems to be inflation on the horizon. What does inflation mean to Real Estate Investors?

During inflationary periods, hard assets perform the best as their values increase along with inflation. Property values ride the inflation wave, rents increase (as many of the rent controlled areas increases are based on the CPI) and as an informed investor you will have chosen your properties in areas where demand is to continue because of job increases and in-migration. The other thing that occurs during times of inflation is that wages increase more rapidly (and there is more labour unrest, strikes etc as more people demand more money to fight inflation).

Inflation also can drive interest rates up, so ensure that you keeping listening at the REIN Workshops as we discuss whether it is time to lock in or not.

The cycles of inflation / deflation / stagflation are somewhat predictable, what has lead to more attention on these items this time around is the 24 hour news and business news that is available to the average consumer (even if they don’t understand what the story means to them.) and #2 the ridiculous lending practices that were being followed in the US and which are coming home to roost right now.

In the next post I’ll be discussing other hot topics of the summer BBQ season:

• The US housing markets,
• The US economy,
• Energy & commodity prices and how they are going to affect certain markets in Canada,
• How a Saudi Arabia investment will affect Canadian real estate demand
• How REIN predicted the massive changes to the automotive industry in Ontario June 5th 2005 and how that past prediction can help you today.
• How market sentiment can affect your property values even when economics don’t change
• And other hot BBQ topics important to investors

Please remember that the Western Canada REIN conference is coming very soon where we will be releasing the BRAND NEW Top 10 Alberta Investment Towns as well as other research revealed for the first time. REIN Members attend FREE as part of their Membership. Here is a link to other details on this annual event.