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A Canadian Real Estate Market Doesn’t Exist in 2011, So Don’t Be Fooled

by Andrew C. MacDonald on March 31, 2011

The following is a guest post by Don R. Campbell; best selling author, and President of The Real Estate Investment Network (REIN).

What does 2011 hold for Canadian Homeowners and Real Estate Investors?

Almost a quarter of the way into the new year, many people are still looking for ‘predictions’ of what 2011 will hold. That’s why you see so many pundits come out of the woodwork to share their insights. I do find this a bit strange as nothing about the market really changed from December 2010 to January 2011 and through to March 2011, other than a few new pictures on your kitchen calendar. Those who pay close attention to the underlying economic fundamentals aren’t struggling with what is coming next.

But having said that, let’s take a look at what the next 12 to 18 months hold for Canadian real estate.

Quick 2010 Overview – Multiple Levels of Confusion

In order to look forward, we do need a quick review of 2010. The year in real estate turned out to be exactly as predicted in January 2010. It was a year of turmoil and confusion (the big economic ‘W’) and those who were unaware that we were riding this 2010 ‘W’ allowed themselves to be shaken out of the market (right at the wrong time!).

The economic ‘W’ does have a real cleansing effect on the market as it always chases out most of the speculators (those who profit only when market values increase dramatically) and leaves the market to the real professional investors and landlords.

This confusion was especially felt by those using housing market numbers to analyze the market. Investors understand that:

If You Are Making Decisions based on Housing Market Numbers …
You are Driving By, Looking In The Rear-view Mirror, and are Bound To Crash!

Government Meddling Led To Unsustainable Mini-Boom

More confusion was thrown into two very large markets (BC and Ontario) with the announcement of the HST. Despite some limited efforts by both provincial governments, how the HST was going to affect real estate purchases and sales was not clear – into this vacuum sped confusion and an almost breathless panic to get purchases done before July 1st. This caused a higher percentage of purchases to be pushed into the first half of the year than would normally be expected. Due to their sizes, these two markets hold such a high percentage of the Canadian real estate transactions that this activity made the Canadian average price and activity statistics jump despite most other markets under-performing.

This cursory analysis led some housing analysts to predict that a bubble was forming. This, of course, turned out to be false as markets slowed down again later in the year. Those of us who analyze the real estate market by looking at underlying economic conditions knew this boom would be short lived and was a product of desperation rather than true market sentiments.

A ‘Canadian’ Real Estate Market Does Not Exist

Overall, 2010 proved to investors and homeowners alike that a ‘Canadian’ real estate market doesn’t exist in and of itself. The Canadian real estate market is actually a series of very regional markets all which perform relatively exclusive of each other.

In fact, in 2010 and in 2011 the market really will be a ‘Goldilocks’ story. Some markets will be too hot (compared to underlying economics), others will be too cold, and some will perform just right. As our regions continue to detach from each other economically this trend will continue for many years to come and will compel investors and homeowners to ignore national real estate numbers and trends. They must focus on what is happening in their region.

2011 Market Predictions

To make it easier to predict what is going to occur in their local real estate markets, investors can use the formula shown below. Long term increasing prices of real estate stem from economic (GDP) growth. Without economic growth, a real estate market is not sustainable. Sure there can be upward and downward blips not attributed to economic growth (such as when the governments meddle as in 2010), but these are just short-term unsupported blips.

Figure: The Long Term Real Estate Formula

Figure: The Long Term Real Estate Formula

GDP Growth = Job Growth = (12 months later) Population Growth = Increased Rental Demand = Decreased Vacancies = Increased Rents = (18 months later) Property Purchase Demand = Increase in Property Prices

This cycle works both ways, over roughly the same time lines. Sustainable real estate price increases occur approximately 18 months after a region’s economy begins to grow and they drop approximately 18 months after the economy in a region begins to shrink.

We can use Alberta’s markets as the perfect illustration of this formula in action. Alberta’s GDP grew so quickly for years in a row and the real estate markets skyrocketed over that time and even after the economy began to slow down. This set up a number of high expectations and assumptions by people not understanding this formula and scared a lot of people out of the market. Even today, despite the fact that Alberta is going to lead the nation in economic growth in 2011, those who experienced the 20% annual increases in the past are sitting on the sidelines waiting for the market to come back. Smart investors who understand the inevitability of this formula are quietly picking up pieces of Alberta cash-flowing real estate, positioning themselves for the inevitable increase in demand 12 to 18 months from the start of the strong economic growth.

Because Canada’s 2011 market is going to be even more regionally fractured than in 2010, it is imperative that investors and homeowners understand this formula and they make their investment decisions based on it, rather than the fluctuating housing market numbers.

CREA & Competition Bureau Settlement Leads to Unintended Consequences in 2011

As with any structural changes to an industry, the settlement imposed by the Competition Bureau on Canadian Real Estate Association’s MLS website will have many unintended consequences on the health of the Canadian real estate market. We are currently completing a full report and analysis of these consequences (some of which are OK and some of which are not good news). Here are some preliminary conclusions that will affect the overall market:

  1. Housing metrics will indicate incorrect readings of the health of the market, leading to inaccurate analysis by some market commentators during the year
  2. Often used metrics such as ‘sales to listings ratio’, ‘days on market’, and ‘overall number of listings’ will be impossible to use as comparisons to previous year’s performance. This is because under the new rules, there will be many more listings being posted by people just fishing the market at very little cost (many poorly priced, poorly managed listings left in the system too long).
  3. These additional listings will lead to average price increases being softened more than the underlying economics would usually lead to.

The complete Unintended Consequences of the CREA Settlement with the Competition Bureau report will be publically distributed to all who are subscribed to www.myREINspace.com.

Finally, the distinction between real estate “investors” and real estate “speculators” is created by one thing – a sound and unbiased education in real estate fundamentals. Done properly, real estate investing produces results in any market conditions because it incorporates economic fundamentals, proven business practices, and a long-term vision. On the other hand, real estate speculation requires perfect timing, lots of hope, and a strong enough stomach to ride out the cycles in the market!

By far the quickest, least expensive and most engaging way to become a sophisticated real estate investor is to set April 16th and 17th aside to attend the 2011 Toronto ACRE™ Live event. Now in it’s 19th year, the ACRE™ system continues to be where Canadians go to receive an unbiased real estate investing education that works – not because it focuses on the “Canadian” market, but because it teaches investors to drill down into the economic fundamentals that drive regional real estate markets.

Author Bio

Don R. CampbellDon R. Campbell (@DonRCampbell) is a Canadian-based real estate investor, researcher, author and educator. He is the president of the Real Estate Investment Network TM whose members have purchased well in excess of 26,800 properties valued at more than $3.0 billion. Don and his team are leaders in providing Canada’s most current real estate investment education programs and economic research. Don is the author of four of Canada’s best selling real estate books including Real Estate Investing in Canada 2.0 and he donates 100% of his author royalties directly to Habitat for Humanity. So far Don and the members of REIN™ have raised over $600,000 to build homes for those in need of a hand-up.

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{ 4 comments… read them below or add one }

Andrew C. MacDonald March 31, 2011 at 12:27 pm

Hi Don,

Thank you for a fantastic guest post and sharing your model on how economic fundamentals work together to drive real estate demand and ultimately property values.

To My Readers,

I have attended ACRE in the past and would suggest it is a teriffic starting point for any new or aspiring real estate investor, as well as existing landlords who’d like to learn more about how to identify growth areas with strong potential for the future.

Cheers,
Andrew

P.S. If you’re interested in learning more about the economic fundamentals of Canada’s Tech Triangle (Kitchener-Waterloo-Cambridge) which is ranked as Ontario’s #1 Investment Town, subscribe using the sidebar or click here to get access to my free report & updates.

Julie Broad April 2, 2011 at 7:17 pm

Andrew – this is a jam packed post!! Great stuff in here. I am happy to see that image as well – I tried to take a picture of it during Don’s presentation at the Investor Forum but it was a blur on my phone. I love how it shows the general flow of what is driving a market. GDP growth is increasing in several markets in Canada and this graph really shows why that is the start of good things to come for real estate investors.

It was really great to meet you in person!! Take care,
Julie

Andrew C. MacDonald April 5, 2011 at 10:19 am

Hi Julie, it was great to meet you at the Investor Forum as well. After looking at Don’s graph it makes so much sense to invest right here in Canada. The US may have some cheap housing markets, but as you know there is more to investing than just price. I think we’ll do really well here over the next decade, especially if our politicians can put partisan politics aside and focus on what is best for our economy!

Conley Hall April 11, 2011 at 11:14 am

Don,
Hi thought your post was great thanks. Do you think the US is in the same 12-18 month time frame or are we a little earlier or later?

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