Your Tactics Must Change: The Real Estate Cycle of 2016
Your Tactics Must Change: The Real Estate Cycle of 2016

Whether Quick-Turn or Long-Term: Real Estate Always Travels In Cycles

Right now, at the beginning of 2016, the Canadian real estate cycle is shifting. In some regions the cycle is improving, in other regions it is deteriorating quite rapidly. This is not the first time, nor will it be the last.  However, it is a time of change. Changes to the economy lead to changes in the real estate cycle with MUST lead to:

Changes In A Real Estate Investor’s Tactics

Yes, this isn’t the first time we have witnessed and experienced cycle changes. We are not theorists with great marketing profiles.  We are right in the trenches and teach exactly what we are doing, in good times and in tougher times. For those in the hot markets right now, it is important to remember that market slow-downs in other regions can provide you with wonderful lessons of how necessary it is to play both offense and defense with your portfolio choices.  In the hot regions many investors begin to believe that they are investment geniuses due to their results. When, frankly, the market conditions have covered-up any of their bad choices or weak fundamentals.  The cracks in the portfolio only begin to become to become fatal when the market begins to shift (and it ALWAYS does).

You can look at real estate cycles as being similar to a game of musical chairs– it is fun and exciting when the music is on your side, however, inevitably the music pauses and a strategic investors’ goal is to ensure they are positioned properly when the music pauses. By building a portfolio positioned for both defense and offense it won’t create enough excitement or drama for a TV show – but it sure provides the strategic investor a LOT of time and financial ability to find excitement in all other aspects of my life.

Are You An “Investor” or are you a “Strategic Investor?”

All levels of investors understand that emotions play a role while investing. The difference is that ‘investors’ allow these emotions (either positive or negative) to take over.  A Strategic investors feels the same emotions, understands that emotions exist around all investment situation. The acknowledge the feelings but use tactics and strategies to mindfully ensure that the emotions do not take over or control investment decisions. (Is that easy? No  – is it critical? Yes).

Here is a graphic view of the different risk profiles that occur:

The lower on the scale of knowledge, the more impact that emotions have on decisions. As you move to the top right on this spectrum the lower your risk AND the shorter period of time that emotions play a role in decisions.  Lower risk AND less emotional that is truly a great place to be.

There is no question that a strategic investor can take advantage of, and profit from, any market conditions.  The key is to know when the change is occurring and to adapt your tactics accordingly. Sometimes it changes suddenly due to an economic Black Swan event while others change with the inevitable shift in demographics or economics.

No matter what the cause of the shift or whether it be a long-term cycle change or a short-term bump in the road. Adapting and adjusting is the only way to success.

The following may seem simple, yet the majority of ‘investors’ seem to ignore it completely. Strategic investing is all about Fundamentals not Emotions. Price does not matter – Yield does. If the property is $1,000,000 and it rents for $2,000 it is going to be a dog in your portfolio… if the property is $1,000,000 and rents for $13,000 you have a winner on your hands.  So it isn’t about property prices – it is about uncovering markets and demographic trends to get IN FRONT of. If you do so, you no longer are on that tiring pace of chasing profits, you find them coming to you with much more ease.

Real Estate Should FUND Your Life Not Be Your Life

If it feels like your real estate portfolio is becoming your life, you’re doing it wrong. If it is funding your life, then you know you are doing it correctly. A portfolio is just a financial vehicle that can give you amazing returns, amazing income and an amazing net worth – but the key is to make the market work for you. It is like surfing – the wave propels you ONLY if you position yourself correctly – if not, you miss it completely and are stuck paddling even more or worse if you position yourself poorly you can be crashed onto the financial rocks.

 

Cycles and Tactics -From Secrets of Canadian Real Estate Cycle book

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. However, with today’s 24hr news cycle, the immediacy of the internet and blogosphere and the thousands of people saying increasingly more dramatic predictions hoping to grab your eyeballs, the economic game clock is often obscured.

In the book I co-wrote with Greg Head, Kieran Trass and Christine Ruptash titled Secrets of the Canadian Real Estate Cyclewe speak about this exact scenario. ‘Secrets of the Canadian Real Estate Cycle‘ is the most technical book I’ve written to date with one goal in mind: to allow strategic investors a more detailed analysis tool as they keep a close eye on their target regions. In order to not be left behind, as the phases of the cycle shift so must a strategic investor’s tactics.

 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. As you build your portfolio it becomes increasingly more critical to sharpen your insight into the phases of the real estate cycle. It is essential to understand why the real estate market reacts the way it does to certain conditions and at the same time 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. Sometimes opening doors of opportunity for quick-turn or creative strategies and other times making the long-term buy and hold option the best choice

As Kieran Trass clearly state, the local and national real estate cycle is “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.”

How Dare You Ask My Age?!?

Population and its growth, and just as important the population’s age and income, are true underpinnings of a local market. But even with this predictable and measurable market support, one must always take into account the speed of growth. Speed of growth, speed of building and speed of confidence. Volatility can result when speeds change off of a normal local pattern.  If a city is used to major population growth and has the infrastructure plan do deal with it, then when it slows it feels like a crawl, which inserts lower market confidence into the equation. And this lower market confidence becomes a drag on the market performance. For instance, Calgary is experiencing this right now, “Yikes, this is way too slow”.  While Hamilton is feeling the opposite “Wow is this ever moving fast!”

So even though this particular market is still growing at a nationally normal speed, it feels to the locals that it is crawling. Just like when you first pull off a freeway driving 120kmh and have to slow down to 50kmh, it feels almost like you could walk faster even though you know in reality it is not true.  That is why a strategic investor continually checks on their market perspective.

The Big Slow Down

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 2008, this situation became clearly evident in the United States and in many other parts of the world in which many regions haven’t fully recovered. Again, it’s fair to point out that political and financial interference contributed to exaggerations in the typical real estate cycle.

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 and never allow yourself to get lazy, assuming that the trends are always in your favour.

Keep “Long-Term Real Estate Formula” graphic (below) handy at all times. It is like having a crystal ball for forecasting your local region’s housing market performance 18 moths to 2years in advance. Having this insight will give you plenty of time to adjust, adapt and continue to profit.  Without it, you will be left behind by the wave of change.

 

 

As we head into this new area of Canadian Real Estate Cycle season, I suggest that you grab a copy of the book “Secrets of the Canadian Real Estate Cycle” so you can start reading your local market signals, forecasting the change long in advance of it happening by simply learning what indicators to watch.

These signals take effort to find in today’s noise, but when you do, it is like looking at your local market in HD, you see everything!

More to come….

Your Tactics Must Change: The Real Estate Cycle of 2016 was last modified: February 3rd, 2016 by Don R. Campbell
 

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2 Responses to “Your Tactics Must Change: The Real Estate Cycle of 2016”

Sam says:

February 9, 2016 at 6:50 am

Don,

That book is a literal crystal ball/paint-by-numbers instruction manual of how to make money no mater what the market is doing. I don’t think people know what a powerful tool you’ve placed in every Chapters store across the country. You’ve made such a huge difference in the financial future of my family – thank you!

 
 
 

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