Real Estate Engine Running Out Of Steam - For Good Reason

Feb. 05, 2019 2:27 AM ETVNQ, IYR, RQI, SCHH, RNP, RFI, KBWY, DRN, NRO, URE, ICF, XLRE, JRS, RWR, SRS, FREL, DRV, SEVN, LRET, REK, FRI, PSR, USRT, WREI, IARAX, RORE, BBRE, PPTY9 Comments8 Likes
Danielle Park, CFA profile picture
Danielle Park, CFA
4.54K Followers

Summary

  • While slacker conditions may enable a few more people to hyperextend themselves a little further in debt servitude and realty speculation, it will not help what ails Canadian households and our overly-concentrated-on-realty economy.
  • As in past periods of 'easy money,' it is typical for individuals and institutions to ramp up their expenditures, leverage and risk exposure during the boom times and then be caught short when money flows recede.
  • On the other hand, those who well managed the last decade of ultra-low-rates and rising prices will have taken the opportunity to pay down debt, reduce financial leverage, and strengthen their balance sheets with liquid savings.

Sales trends lead price trends, and according to a new report by Altus Group on behalf of the Canadian Real Estate Association, Canadian home sales fell 11% nationally in 2018 on poor affordability, higher rates and tougher loan qualification rules. The report also estimates that each home sale not made is a loss of some $60,000 in knock-off revenues not flowing through the economy to related services like lawyers, realtors, movers, home furnishings etc. See: Sales decline causes significant economic spin-off losses.

Naturally, these are the same 'feeder fish' sectors that grew above trend over the last decade and are now feverishly lobbying the government to step in with more 'help for homebuyers' in the form of 30-year mortgage amortizations and laxer lending standards (help for whom?).

While slacker conditions may enable a few more people to hyperextend themselves a little further in debt servitude and realty speculation, it will not help what ails Canadian households and our overly-concentrated-on-realty economy.

The real estate gravy train had a hell of a run over the past 15 years on lower and lower rates, higher and higher debt, and inflows of foreign capital looking for land banks; but all credit booms must come to an end, and this one is long overdue.

As in past periods of 'easy money,' it is typical for individuals and institutions to ramp up their expenditures, leverage and risk exposure during the boom times and then be caught short when money flows recede. On the other hand, those who well managed the last decade of ultra-low-rates and rising prices will have taken the opportunity to pay down debt, reduce financial leverage, and strengthen their balance sheets with liquid savings. They will have reduced costs, not increased them. They will not have their income and assets all dependent on a never-ending expansion. They will have a plan that defines their life and financial goals including a target list with the amount they wish to allocate to different asset classes once price and yield come back to attractive levels. They will, in short, be some of the few positioned to benefit as this historic financial cycle completes.

Disclosure: No positions.

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

This article was written by

Danielle Park, CFA profile picture
4.54K Followers
Portfolio Manager, financial analyst, attorney, finance author, a regular guest on North American media. Danielle Park is the author of the best selling myth-busting book “Juggling Dynamite: An insider’s wisdom on money management, markets and wealth that lasts,” as well as a popular daily financial blog:www.jugglingdynamite.com Danielle worked as an attorney until 1997 when she was recruited to work for an international securities firm. A Chartered Financial Analyst (CFA), she now helps to manage millions for some of Canada's wealthiest families as a Portfolio Manager and analyst at the independent investment counsel firm she co-founded Venable Park Investment Counsel Inc. www.venablepark.com. For two decades, Danielle has been writing, speaking and educating industry professionals and investors on the risks and realities of investment behaviors. A member of the internationally recognized CFA Institute, Toronto Society of Financial Analysts, and the Law Society of Upper Canada. Danielle is also an avid health and fitness buff.
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