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Today I received a magazine in the mail that read on the cover “Why Canadian Real Estate Will Plummet 20% and Stay Down For Years”. After seeing the title, I immediately stopped what I was doing, put my schedule on hold and had to read the doom and gloom article.
Canadian real estate is such a broad term that it is impossible to make a general statement about it. Canada is the second longest land mass on the planet after Russia and we cover so many square kilometers that for all intensive purposes, comparing Vancouver to Toronto to PEI to Winnipeg really makes no sense. The Canadian cities are so spread out and so independent of each other that each market is influenced by a completely different set of forces.
The article claims that Canada will plummet 20% and only mentions speculative real estate in Vancouver and Toronto. More specifically, when “experts” talk about Canadian Real Estate, they mostly focus on the Toronto Condo market, which has been red-hot with record sales of 28,000 units and another 240,000 units to be built in the near future.
Detached homes in Toronto were seeing buyer mania with buyers bidding $100,000 over asking price for a detached home. When cheap, dumb money enters a market, idiotic buyers will pay $100,000 over asking for a single detached home in Toronto.
… But what is Cheap, Dumb Money?
Cheap, Dumb Money is cheap because interest rates are at an all time low. Money has never been this cheap in history, so buyers make crazy decisions that they normally wouldn’t. Along with being cheap, the money is also dumb because it comes from someone who is ignorant and uneducated about the market making a speculative play on a piece of real estate. In investing, when cheap, dumb money enters a market, it’s time to sell. When the dumb money is leaving the market, it’s time to get in. In investing, being smart is easy - just do the opposite of what the stupid people do!
When we compare Canada’s real estate to the USA’s markets, Canada has been steadily climbing since the early 2000’s while the US took a nosedive in 2006. Many uneducated people think that Canada and the US are so similar and so connected that Canada is due for a crash as well.
However, what we don’t consider is that the US did not really have a housing crash. What the USA had was mass mortgage fraud. The prices that homes in the US sold for in 2006 were completely fictional and fraudulent prices that shouldn’t have happened in the first place. Cheap, Dumb Money entered the US market via NINJA borrowers (No income, No Job, No assets) and suddenly clerks working at Safeway could own 5 brand new homes in the suburbs where they were planning to “flip” them for a profit. Everyone was speculating with Cheap Dumb Money and prices went insane. The banks underwrote mortgages on completely insane lending standards and lots of fraud happened. The US market crashed because mass mortgage fraud occurred. The low prices we see today in the US are very low compared to the fraudulent prices that were paid in 2006, but they are in line with construction values and rental values in many ways. Real Estate in the USA right now is worth a value closer to the intrinsic value of the actual property and that makes the US market a good place to buy right now.
In my home market in Winnipeg, I write 5 to 25 offers a week and have to acquire a property every 15 days to run my business. I am seeing a divide in the Winnipeg market that has been red-hot for quite some time. Some sellers think that their house is red-hot and needs to sell for an insane valuation; other sellers think that real estate is going down right now and will settle for less. The market is fragmented between those who think the mania that went on in Winnipeg for the last 2 years will continue forever and the realists who think that the market is correcting.
For myself, I think that real estate in Winnipeg will correct in the next 12 to 24 months, and that is only because Winnipeg has been hot for so long. Cheap Dumb Money has been running around in the Winnipeg market for far too long and things have been selling for prices that don’t make sense. It’s not that Real Estate in Winnipeg is “going down” or “getting worse”, it’s just that the mania has to stop. We will likely see less bidding wars, less homes selling over asking price and less insanity in the market.
For myself, I am very happy about this, but I am a professional. Whether the market goes up or down, I’m happy; I can make money either way. All that this means for me, and for you, is that Canadian Real Estate in many markets will be easier to buy in the next 12 months than it has been in the past. Negotiating will be easier, getting discounts will be easier and for myself, the business will become more fun (I love to buy).
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