Sep 11
7
We didn’t buy any real estate in 2007 or 2008.
Everyone around us -well it felt like everyone – was picking up property as an investment or even just for the heck of it.
The glory stories were everywhere. Some guy at work bought a place and three months later cashed out and made $40,000. His friend did the same thing twice the year before and pocketed $100,000!
We questioned our skill as real estate investors. How could it be that EVERYONE we knew was buying real estate and we couldn’t find a single deal that made sense?
We made some offers but always lost out to someone paying more than asking price (which was already more than it’s value in our minds!). It was frustrating for us and we became disheartened. We had criteria and after learning some pretty tough lessons in our early years as investors, we knew better than to deviate from the criteria. But we still couldn’t help but question ourselves. We didn’t TOTALLY understand what was going on with the real estate market. The headlines were confusing. So many people said this boom was different … so many said it would continue. I didn’t know … all I knew was that the properties would not cash flow so I wasn’t going to buy them.
After reading one of the books by Kieran Trass, the light bulb came on in a very bright way! I understood what each phase of the real estate cycle looked like and what to expect the media to say. Suddenly the cycle was something I could use to make better decisions. The media headlines were much easier to interpret. It really was like pieces of the puzzle fell into place for me.
As soon as I read that book by Kieran and I was able to clearly visualize each phase of the real estate cycle, I’ve been encouraging every investor I meet to do the same. And now, for the Canadians around here, I can recommend a new book written with the help of Kieran Trass, called ‘Secrets of the Canadian Real Estate Cycle‘. Don Campbell, Greg Head and Christine Ruptash have done a fabulous job of creating a useful, practical and easy to digest book for Canadian Real Estate Investors. It not only explains the real estate cycles but it explains tactics and strategies to use at each phase in order to profit from the cycle! I think we’ll find this book on many ‘MUST READ’ lists for investors very soon!!
Today, I’m super excited to share Chapter 2 from the book for you. Below is an excerpt and then beneath that, you’ll find the link to download the full chapter. It’s definitely got some big words in it which makes you have to work your brain a bit to digest the information (at least that’s what I found) – but it’s worth the effort I promise!
A huge thank you to Don Campbell for inviting us to share this with you … and to all the authors for their hard work on this book!! You guys rock!
Excerpt from: Secrets of the Canadian Real Estate Cycle
Chapter 2: The Phase Determines the Tactics
The real estate cycle is the key to strategic investing. Understanding the cycle begins with a mindset that accepts the cycle’s existence and the fact that strategic investors can identify the specific phases within past and present real estate cycles. The more you invest in residential real estate, the more critical it becomes to sharpen your insight into the phases of the real estate cycle. This is essential to understanding why the real estate market reacts the way it does to certain conditions. It is fundamental to use the real estate cycle to govern your overall strategy and to select investment tactics that are likely to produce the best results during specific phases of the cycle.
The real estate cycle is the term used to describe a succession of similar events that affect the real estate market on a cyclical basis. In Kieran Trass’s book ‘The Housing Bubble’, he defines the real estate cycle as “an irregular but recurrent and predictable succession of causes and effects that the real estate market experiences with resultant impacts on the creation and destruction of real estate wealth.”
Key Drivers
While the progression of the phases of the real estate cycle is predictable, it is not an exact science. Strategic investors improve their predictions by studying what we call the key drivers of the cycle. (Key drivers are the subject of chapter 4.) Individual key drivers illuminate critical trends, especially when studied in combination with other key drivers.
The Trass methodology of studying real estate cycles explains that these key drivers tend to follow a regular pattern and reach peaks of activity at specific phases of the cycle. As a student of the real estate cycle, you will learn why and when these key drivers typically peak at different points in the cycle, as well as their resultant impact on the cycle.
There is hard evidence that the real estate cycle exists in all countries where supply and demand are driven by a free market that is combined with a deregulated financial system and an absence of intervention from political or government forces. The cycle is significantly different if a nation’s economy is underdeveloped, or if its financial system is overly protected by regulation. In that case, market imbalance or volatility can interfere with the progress of what we would define as a natural real estate cycle, which moves from a boom phase to a slump phase to a recovery phase, and back to a boom phase, ad infinitum.
The fact that a natural real estate cycle can be thrown off by political interference or financial regulation is important. Historically speaking, real estate price bubbles have occurred when countries have deregulated their finance industry in conjunction with having a favourable tax environment for real estate investment. The bubble ends when a significant correction in real estate values occurs. This was the case in many parts of Europe and the United States, as regulation of the financial industry was loosened over the last 15 years. That deregulation was a major contributor to the real estate bubble that formed and ultimately popped in Europe and the United States starting in 2006.
In contrast, Canada refused to loosen regulations over the same period of time. As a result, Canada has maintained relatively stable real estate values alongside a relatively healthy banking system.
The Three Phases of the Real Estate Cycle
Before we delve further into the key drivers, we must look at the real estate cycle itself. There is a lot of confusion about the real estate cycle, much of it caused by sensational media reporting that gives rise to differing opinions as to whether real estate is a sound investment vehicle.
For now, the discussion about what the real estate cycle is must be separated from the discussion about when real estate investments present the most lucrative opportunities. At its simplest level, the real estate cycle is sometimes interpreted as a number of phases ranging from a real estate bust to a real estate boom. The historical performance of the real estate market cries out for a more sophisticated interpretation. In our view, that more advanced understanding of the cycle shows that it consists of three major phases: boom, slump and recovery. We use the illustration of the Real Estate Cycle Clock™ (illustrated in figure 2.1) to depict the phases of the real estate cycle.
Figure 2.1 – The Real Estate Cycle Clock ™
Again, the cycle holds whether you are investing in the United States, the UK, Ireland, Australia, New Zealand, South Africa, Canada, Europe or even parts of Asia. Barring political or regulatory interference with the market or finance, the real estate cycle is always at play.
Cycles have been particularly evident since the mid-1980s when financial deregulation occurred in many of these countries. Confusion over the predictability of the cycle arises when the real estate cycle is exaggerated and prolonged by the impact of sustained rises or declines in prices related to supply or demand of real estate. Exaggerated or prolonged phases of the cycle most likely occur as a result of the greater momentum created by larger populations acting in specific markets.
Irrespective of a population’s size, the real estate cycle can be volatile. This volatility can result in periods of time when real estate values rise and fall quickly (see graph 2.1). There have been periods when real estate values decreased to such an extent that a significant portion of the population had negative equity in their real estate (that is, when the owner owes more than the current value of the real estate). This situation occurred in the early 1990s in the UK. In 2011, this situation is clearly evident in the United States and in many other parts of the world. Again, it’s fair to point out that political and financial interference contributed to exaggerations in the typical real estate cycle —which was still in motion.
Graph 2.1 – US House Price Index (% Change), 1988-2001
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(To continue with this chapter you can click here to DOWNLOAD CHAPTER 2.)
If you are a Canadian real estate investor, I HIGHLY recommend you pick up a copy of the book if you haven’t already!! We’ve given a copy to a few of our coaching students and they are LOVING it.
We’re up in Whistler this week … it’s supposed to be smoking hot here so I have an afternoon at Rainbow Park (on Alta Lake) planned so Bram can get his swim on!! Nothing like being a black fur covered creature when it’s hot as all heck! Hope you’re having a FABULOUS week.
