Real estate investment guru Don Campbell blames the media’s sensational reporting for a lot of the confusion that exists today around the real estate cycle.
The misinformation that results from this reporting gives rise, he says, to differing opinions as to whether real estate is a sound investment vehicle. The confusion comes from what he calls moment-in-time reporting that fails to recognize other factors that have influenced how a cycle plays out.
So when the media reports that housing starts are down and interprets the slump to mean the real estate market is slipping, that’s just plain wrong.“There’s a lot of guesswork going on,” Campbell says. “And you have people making bold statements that, for example, housing starts are down so the real estate market is down and those aren’t equative.”
Following January and February of this year, you’ll likely see reports about housing starts being up in Toronto. But don’t be fooled into thinking that the city’s housing market is on the rise again, says Campbell. That’s an example of his moment-in-time theory, when in fact the reason for the apparent hike in housing starts will be “developers trying to slam through major developments before the possibility of a major strike by city workers.”
The influence of, say, a pending city strike or changes to the country’s mortgage regulations or large volumes of foreign money coming into the country can influence a real estate cycle by prolonging a boom, a slump or a recovery.
Understanding how and why cycles work should be top of mind for anyone involved in real estate from buyers to realtors to investors, says Campbell.
“The more time people spend doing homework and understanding the basics of cycles, the more clear and intelligent choices they’ll make when buying their home,” he says. “I think homebuyers need to start thinking as investors do in order to make a good solid decision. You can save thousands and thousands by thinking like an investor.”
The real estate cycle is a relatively simple concept that has a beginning, a middle and an end. At its simplest, says Campbell, the real estate cycle is a number of phases ranging from a real estate bust to a real estate boom. But a deeper, more sophisticated understanding of the cycle shows that it comprises three major phases consisting of boom, slump and recovery.
According to Campbell, a real estate cycle is predictable but its duration is not. A cycle typically lasts anywhere between seven to eighteen years. To more deeply understand real estate cycles, we need to consider key drivers that push the cycle along on its regular path. Key drivers tend to be more long term and supportive such as the job growth currently taking place in Alberta, says Campbell.
Key influencers, however, tend to bump a cycle off its path some by extending the boom or the slump. Campbell cites foreign money coming into Canada as a good example of how that has influenced longer-than-expected upward real estate cycles in Vancouver and Toronto.“Once an investor grasps this, they are no longer worried by influencers such as news headlines,” says Campbell. “I’m telling you this is not rocket science and people truly believe it’s a magic crystal ball. Then you hear sales people trying to justify the market by saying this time it’s different. But the truth is it’s never different. The only time it seems different is when market influencers are pushing the market off its cycle.”
Political influence and financial regulation can heavily influence real estate cycles, says Campbell. Historically, real estate price bubbles occur when governments loosen their financial industries and offer favourable taxes to real estate investors. Given the deregulation of the financial industry in Europe and the U.S. over the past 15 years it’s not surprising that a real estate bubble formed and burst in those countries beginning in 2006. But by comparison, Canada refused to loosen its financial regulations and as a result managed to maintain relatively stable real estate values and a healthy banking system.
Jarek Bucholc, who owns and operates Canada REIC (Real Estate Investors’ Club), says real estate cycles are very important in terms of investing and the more knowledge you’ve gleaned and acquired along the way, the more likely your odds of success. Not only is it vital to learn about the markets you’re interested in, he believes you need to take into account world economies and global politics as well.“If you’re having problems in Europe and the U.S., directly or indirectly our properties will be influenced by these events,” says Bucholc. “We have a crisis in the U.S. and even if our banking system is more powerful and well organized we are still affected by the crisis by our neighbour to the south. Because we are providing resources to the U.S. so automatically if there’s less demand from our neighbour than you see a higher unemployment rate and less demand for workers and migration and the real estate boom goes down.”
The Calgary-based real estate investor encourages other investors to subscribe to his golden rules when considering cycles and how best to spend your money to maximize your return. Bear in mind the kind of cycle you’re currently in so you can best use your marketing strategies. Don’t speculate that the market you’re in will appreciate and consider it a bonus if it does.
It’s important that housing professionals know what drives real estate cycles, says Michael Ponte, owner of Prosperity Real Estate Investments based in Langley, B.C.“For people in the business, it helps them prepare for those things in advance and a lot of agents don’t understand those determining factors,” explains Ponte. “It’s their business and they should truly understand their business. They want to maintain profitability and provide that extra level of service that speaks volumes about their credibility and sees them educating their clients.”
Realtors generally understand the type of market they’re working in, says Ponte. A recovery market is one that is balanced and experiencing steady growth with equal numbers of buyers to sellers and marginal increases in the one to three per cent range. A slump is a buyer’s market and is characterized by an abundance of inventory and a lot of negotiating. Finally, a boom is considered a seller’s market and is marked by limited inventory and lots of buyers.“It can be difficult to get your head wrapped around it but the more you can understand the markets your involved in – by looking at GDP growth and population growth and those key things that will create a boom, slump or recovery scenario – the better off you’ll be. In a lot of ways it’s like having a crystal ball.”
Do you look to real estate cycles when guiding the path of your career decisions? Is this something you discuss with clients? What cycle would you say you’re working in right now? Share with us.
