In an industry not always known for integrity, a few stand out
SEPTEMBER 26, 2012
Below is a video I shot recently with my good friend, Bruce Joseph. We shot a number of segments and the discussion was wide-ranging. The clip below is one segment.
Bruce owns a mortgage brokerage in Barrie, Ontario (north of Toronto) and has been one of my best front-line contacts who has helped me understand what lending really looks like in Canada. There are other very excellent mortgage brokers, lenders, and realtors who I work closely with, not all of whom want to be mentioned out of fear of repercussions from their industry peers, unfortunately.
I strongly encourage consumers who are thinking about taking on a mortgage, restructuring their existing mortgage, or buying/selling property, to give their business to people in the industry who are willing to openly discuss potential risks to the market and engage in this healthy and much-needed dialog. It's my experience that very few are. Any broker or realtor who at will not at least acknowledge the potential risks at this point in the credit and market cycle simply does not deserve your business. Period.
If you are considering buying/selling in some of the larger Canadian markets, particularly Vancouver, Toronto, and Calgary, and want the name of some excellent industry professionals who I would highly recommend, feel free to email me. Ben(at)theeconomicanalyst.com
Full disclosure: I receive absolutely no compensation for these recommendations. Though I may expect them to pick up a round of golf at some point.
In a related vein, some real estate professionals who were formerly quite bullish are now recognizing the obvious. Better late than never as many of their colleagues will shout their tired memes all the way down. Enter Vancouver realtor, Ian Watt. The segment below is most insightful because of the reference to rents generated from Vancouver condos. And as I have argued extensively before, it's these rents that ultimate determine the intrinsic value of a dwelling. If you're not familiar with that concept, please read the post below for a refresher:
Note this is not necessarily an endorsement for Ian Watt. I've never spoken to Ian personally, but I have spoken to some very fine realtors in the Vancouver region who I would recommend in a heartbeat. I just thought this particular video was quite telling.
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9 Comments
Another great column - 2 good videos. I checked up on David Madani - I remember his report in the FP a few months ago, and thinking - this is a guy who TOTALLY gets it.
Thank you, Ben
I also watched the clip where you predicted detached home prices in Toronto would hold up better than condos. I disagree. As condos get cheaper, folks at the margin that might have bought a townhome or small detached will buy condos instead, thereby causing detached sales and prices to fall. While the fall may start in the condo market, the effects will ripple through all linked markets until a new equilibrium is reached.
On a related note, I once read this study of the 1980's house price boom and crash in San Diego. It showed how prices first went up for the best properties and neighborhoods followed by price rises for increasingly worse properties and locations as people got priced out of the better properties and neighborhoods. Near the peak of the bubble, the worst properties saw some of the biggest price increases. Then, as prices fell, the process went into reverse with the crap falling first and hardest and the best places falling last and least. Would be interesting to see how this plays out in the GTA. Personally, I don't think this is a good time to be a road warrior on the fringes of the GTA (e.g. Milton) or own a house beside a gas station or in serious need of renovations.
The precedent in the Toronto area would be the early-1990s crash, in which condo prices fell much harder than single-family homes. I believe the average price drop 1990-1994 was 25% (over all types of housing) whereas in the condo sector it was 40%.
Yeah, on second thought, I suppose factors unique to condos - such as much higher percentages of investors and unfinished condo projects getting dumped on the market due to developer bankruptcies - could amplify the losses in condos.
Ben, I think you greatly underestimate the media's power to influence the general public's decision making process regarding investment properties. I'll explain why, albeit in a somewhat roundabout way.
Real estate agents are trained almost 100% on selling resale properties to home buyers and sellers, and have almost zero training on selling properties to real estate investors. Consequently, an agent's expertise is getting people their 'dream home'. Agents are all about fulfilling people's subjective real estate wants and needs. The only time actual market data ever really comes into play is with the listing agent. The listing agent convinces the home seller to list the home at a price determined by what comparable homes in the immediate area have sold for recently. This analysis is a no-brainer for the listing agent because all of this data is readily available from the agent's local MLS system or their local real estate board. During this entire process there is never any real insight offered by the agent or asked about by the buyer/seller about the value of the property as an INVESTMENT.
The point is, 99.9% of real estate agents are wholly unqualified to be consultants to real estate investors because of their training and focus on working almost exclusively with end users of properties. Consequently, real estate agents have little or no training on making any rational, objective case for buying a property as a sound investment.
So, as with resale properties, agents try to sell investment properties based on features, pricing and emotion. When consumer optimism is waning, to sell investment properties they use the sales strategies they've used for resale properties to close deals such as pricing reductions, albeit in the form of cash back incentives, platinum VIP early bird pricing, etc., reduced and/or staggered deposit structures, etc.
The end result of all this? Because the typical investor lacks a sound knowledge of real estate market fundamentals due to the lack of good advice from their supposed trusted market experts (IE real estate agents), their decisions to buy or sell investment properties are almost purely based on emotion. Consequently, they can just as easily be persuaded to buy an investment property because of their agent as to panic and jump ship and sell their property or bail on a deal when they read a bullish article on the local real estate market real estate simply because they lack that market knowledge foundation. People who make decisions based on media articles authored by people who don't even work in the real estate industry are just sheep without a shepherd.
I work with an real estate agent who sells investment properties, and he mentioned one of his clients recently backed out of buying a condo simply because the client had read a very bearish article on the future of the Toronto real estate. In fact, this agent has said that typically 40%-50% of his clients who buy investment properties bail on their deals during the 10 day cooling off period. In working with this agent I have seen this fallout first hand, and I have seen it with other agents too.
So it IS in fact very true that the media has a big influence on consumer psychology, and that's only because the public is so poorly educated about real estate investing and real estate markets. I firmly believe real estate "professionals" are the ones to blame for that.
If the typical investor was more informed about these matters their investment decisions would be little swayed by any either bullish or bearish articles in the media because they know they made their investment decisions based on solid market data and solid knowledge of real estate market fundamentals.
Randy Macdonald
Heresy Email Services
http://www.heresyemail.com
Actually much of the blame has to go to the buyer also. If the buyer does his/her homework, which, as you say, most do not, then its an easy decision - you have your spreadsheet, you have your ROI and your high/low as to what you will purchase for. Anything that is too high a purchase price gets cut.
But, as you say, most people do not have the discipline to do that.
You do raise a good point though in that we should also call out Canadian journalists that did their best to provide balanced reporting on the state of the housing market. Unfortunately, until recently anyway, I don't recall seeing anyone who I thought fit that description.
Now for some fair and balanced reportage on the GTA real estate market:
http://www.yourhome.ca/homes/newsfeatures/article/1263142--realnet-expla...
No confidence and no insurance left App.
Like I always said, when the lending stops, everything stops.