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Locks Or Stocks - Part 2

September 02, 2011

urbaneer's latest press

 

Last week PropertyWire.ca published Part 1 of its two part series on 'Investing In Real Estate In Volatile Economic Times'. 

Read on for Part 2, hot off the presses at PropertyWire.ca! 

~ Steven

 

Investing in Real Estate in Volatile Economic Times: Part Two

Heather Wright, Real Estate Journalist

Published on Propertywire.ca, a resource for Real Estate and Mortgage Professionals, September 2, 2011.

 

Although the ups and downs of the stock market have slowed somewhat, the economic news cycle keeps churning, which brings with it some interesting points. Two reports issued this week seem to be, when placed side by side, contrarian.

For the first time in months, the GDP has declined, the economy has contracted, and economists are putting forth the “recession” word again; Meanwhile though, the Teranet-National Bank National Composite House Price Index showed a rise in housing prices.  Not only is the asset value of housing going up in the face of this economic turbulence, the latest set of data show a slow and steady rise in values in all six metropolitan centres reviewed.

The question is, really, housing is built to stand the test of time, but is the housing market built to endure an economic firestorm, at least from an investor point of view?

Bricks and Mortar vs. Stock Ticker

Again, not to suggest the value of one investment over another, but there are certain elements about a property investment that may appeal to certain types of investors, among them the tangibility of the bricks and mortar investment as well as the whole concept, mentally, of shelter.

There is value for some, to be able to touch and feel that which they have placed their money into, over the more theoretical concept of owning a share in a company, for instance.  While both represent possibilities in a diversified portfolio, there are some who are more put at ease by the visual element of a property investment.

As, Karen Filice, Broker of Record/Owner, Cirrius Realty Inc., Brokerage,  says, the concept of brick and mortar carries with it many benefits for those clients: “Bricks and mortar are tangible as opposed to paper which shows as a number in your e account.  I think bricks and mortar as a touchable, seeable product project reality, stability, solidity to the average person, with the knowledge that it pays for itself (if bought right).”

Steven Fudge, Sales Representative, Bosley R.E. Ltd (www.urbaneer.com) agrees that the investment in property benefits, at least mentally, from a duplicitous effect: “There is one fundamental distinction between real estate and stock. We all need, and understand, the value of shelter. Essential for physical survival and a place of safety for our psyche, having a roof over our head is part of the human condition. So unlike stock, owning bricks and mortar provides a return on investment while meeting our basic human needs, which I consider a pretty amazing 'value-added benefit'. It helps explain why 68% of Canadians own their own home.”

“Add the advantage of not having to pay capital gains on the sale of your principal residence, and that your real estate investment will inherently appeal to a target market that is genetically wired to buy makes real estate, in my opinion, a safe, prudent investment. But I'm no stock broker; I'm a realtor who knows bricks and mortar.” 

Interest Rates

Another perspective to consider when there is global financial tumult on the scene is the likelihood that interest rates will be low- at least in the near term.  And, of course, low interest rates will support affordability, and will promote continued growth in the housing market. Typically, when things are unsettled abroad, central banks tend to safeguard activity at home by keeping rates low.

The timing of this is interesting as well, as most had fully expected a rate increase this fall, after months of extremely low rates. Adding to this mix, the US Federal Reserve took the unprecedented move a few weeks ago, of pledging to keep rates low through to the middle of 2013- which is an indicator really, of how fragile- and how battered the U.S economy still is, even three years after the housing market meltdown.

The bigger they are, the harder they fall- and the more difficult it is to rise again too. CREA adjusted their forecast in August for 2011 to reflect expected growth, rather than a modest decline as had been originally anticipated. They too, cited low interest rates, and an expectation that global financial turmoil will continue to force the hand of the BOC- as possible drivers to keep the market here at home moving.

Buy and Hold

In many types of investing, investors are required to employ a “buy and hold” mentality- generally, (and there are always exceptions), that is the way to generate return on investment.  Playing the market, any market, in the short term, seems to have a lot more to do with luck than it does with actual investment strategy. Investors have to employ caution and strategy- and utilize investment principles that reflect both risk tolerance and goals.

Similarly, it may be somewhat misleading to examine returns on a portfolio intended for the long term in short term measurements. The question is is real estate investment best suited for the long term, or do investors run more risk by trying applying short term goals to long term investing?

Fudge says :“The buy and hold mentality for investing is a hallmark of the depression era generation, who moved into their first house purchase when they got married and exited 60 years later in a wooden box. They bought a property or three (maybe a cottage and a commercial building for their business) and held on to them until their golden years. For successive generations the buy and hold approach to property ownership fell out of favour… As housing became its own fashion economy, home buyers bought, upgraded/renovated/staged, and then flipped their residence on to the next. Climbing the property ladder in increasingly conspicuous status markers satisfied the growing need to express oneself and live 'on trend', all while generating a profit.”

 “This trend is changing. As of late, more and more buyers are looking to eschew the status buy-in, bypass the herculean effort and expense of property climbing, and instead find a suitably-sized functional modest residence that can serve as a long term buy and hold (and to be renovated all in good time) family dwelling.   “

Filice suggests that even if the housing market and values drop, there is still wisdom in continuing to build equity, protecting the growth of the asset over time.

“What I advise my clients of is to buy a property where as a minimum, it is earning equity.  So if the value dropped $10000., the mortgage is still being paid, and there is equity being put back into the property by way of tenant rent payments making the mortgage payment.  Unlike paper, which only does what the popularity of the company it is written for, does (by way of financials, etc... of course)  Stocks are based on science after all, not to quote wall street "Bears make money, bulls make money, pigs are eaten for dinner", the manipulations of the chosen few.” 

While there are many outside influences that affect the value of investments, perhaps the greatest impact is wielded by the investor themselves- in deciding what strategy to use, and whether to hold or to sell, which drives home another point- much of the success of investing lies in choice, as Fudge explains:”Our future is unpredictable which guarantees there will always be market conditions to be concerned with. But barring calamity, I believe if all real estate investors steer the course, navigate prudently, and hold for the long term, you're pretty much assured a profit. Remember, the only people who 'lose' money on real estate are the ones who 'have to sell', not the ones who 'choose to sell'.”

Opportunity Knocks

If informed choice is the key ingredient for investing, than it would appear that the role of a realtor can be clearly defined in the face of economic tumult.

It is about sharing your market knowledge and experience with your client as a measure of trust in uncertain times. It also comes down to knowing your client, and helping them articulate their needs, as Fudge says: ”Diligent realtors with foresight discuss both the risks and opportunities of a potential market downturn with their clients, while recommending they speak to their lending institutions about the ramifications of a market downturn as it pertains to their personal finances. They should also take special care counselling their 'cash poor, income rich' clients, as they are most vulnerable to a market downturn.”

“Through no fault of their own and only by circumstance, the homeowners may end up being penniless and homeless. While addressing this with your clients is daunting at best, better to bring these concerns to your clients in advance of their making a purchase, so it provides them the opportunity to weigh out the risks and explore potential solutions before they find themselves in trouble.”

“On the flip side, a downturn in the market can also create an opportunity for clients. For homeowners with sufficient equity in their property, the best time to move up the property ladder is when prices are declining. ... For the financially prudent, upgrading your dwelling in a declining market can save you money. And for the shrewd minded, there's also the potential to realize a bigger discount when it comes to expensive property. The higher the price, the smaller the pool of buyers, which means it, can take substantially longer for a high-end property to sell. Compound that with a market downturn and you may be able to negotiate a substantial discount on a luxury residence distress sale.”

It comes down, really, to the crux of customer service, and due diligence, knowing your client, and helping them to be clear on what their expectations are from their investments, which will ultimately decide whether real estate investment has a place in their portfolio.

 

 

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