Real Estate Engine Running Out Of Steam - For Good Reason

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Includes: BBRE, DRN, DRV, FREL, FRI, FTY, IARAX, ICF, IYR, JRS, KBWY, LRET, NRO, PPTY, PSR, REK, RFI, RIF, RNP, RORE, RQI, RWR, SCHH, SRS, URE, USRT, VNQ, WREI, XLRE
by: Danielle Park, CFA
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.