How To Determine Where Canada’s Real Estate Is Heading
How To Determine Where Canada’s Real Estate Is Heading

Some hot questions keep pouring in to my office. They can be categorized as:

  • Given all of the turmoil in the world, how do we determine where we are in the the Canadian real estate cycle?
  • With so many  “Influencers” playing such a strong role can we still analyze the market as we always have (via economic indicators)?
  • Is now the time to sell or buy my property?

The real estate market works in cycles, and the tactics you are going to employ for your investment business are going to be dependent on the phase that the cycle is in. Just like on the gridiron, the amount of time on the clock has a say in which play you’re going to run. Bt, with today’s news cycle, the game clock is often obscured.

In my book titled ‘Secrets of the Canadian Real Estate Cycle‘ we speak about this exact scenario. Below is a short excerpt and is part of a new series to assit you in reading the clock accurately. The first part of the series starts today. ‘Secrets of the Canadian Real Estate Cycle‘ is the most technical book I’ve written to date, and with it I intend to give you a much more detailed picture of what is happening with the real estate cycle and how it will affect you for the future. Enjoy part one of the series and be sure to check back for the follow-ups.

 

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), 1988-2010

 

 Real estate investing involves a lot of variables, so minimizing your risk is imperative. The best offense is a good defense, and making sure you’re informed and on top of the latest trends and research is going to keep you ahead of the curve. Be proactive – get out there and find as much information on your specialized region as possible. This is going to give you the confidence to make the right decision when you need to most.

Secrets of the Canadian Real Estate Cycle will give you insight into the economic fundamentals that you may not have realized before. Make sure to look out for the next post in this series, coming out next week. Good luck and happy investing!

Cheers,
Don

For Daily updates to the cycle Follow me on Twitter @DonRCampbell

How To Determine Where Canada’s Real Estate Is Heading was last modified: June 29th, 2015 by maddy
 

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3 Responses to “How To Determine Where Canada’s Real Estate Is Heading”

Leslie Brlec says:

March 17, 2016 at 3:05 am

Love your blog. I will bookmark it. You are very knowledgeable.

 

Patricia Reilly says:

April 10, 2016 at 5:40 am

Good article and I also enjoyed your book.

 
 
 

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