The Driving Factors Behind Real Estate

A couple of days ago my Twitter feed was alive with talk of several real estate related subjects that caught my attention:

• Confirmation of Canada’s Housing Bubble
• Record home sales are forecasted for 2010 in Canada
• New Mortgage rules forcing non-owner occupied properties to have 20% down, refinancing your homes to a max of 90% of value and other regulations aimed squarely at cooling a hot condo market
• Affordability of Vancouver homes have hit at an all time low.

Of course these headlines all hit at the same time as the headlines in the US are declaring massive foreclosures are still to come in many states and stats from Q4 2009 were announced that one in five homeowners in the US are underwater.

I don’t know about you but it can be really hard to tell what is going on.And frankly, the national numbers really mean nothing for real estate investors. It’s what is going on in the backyard of your investment areas that matters. But how do you tell if your area is booming, slumping or recovering?

That’s where Kieran Trass, author of The Housing Bubble comes in.

This book is going to go on my “Must Read” books for all real estate investors– no matter what country in the world you’re in – because he has spent 20 years studying real estate cycles around the world.  And while I do understand the fundamentals of what makes a good market to buy in and I have for years, his book made things absolutely crystal clear for me. I could see through the fog before, but now the fog has lifted.

The big difference comes in understanding what is actually DRIVING the market versus what is INFLUENCING it. And the thing I’ve always inherently known but never clearly understood is that the media headlines are almost always based on the things that INFLUENCE the market not the things that drive it.

The influential factors are more sensational. Not too many media outlets are going to be excited to report that the population of an area increased by 8% for the third year in a row. It’s just not interesting or exciting. But they are going to jump all over any suggestions that a new harmonized tax is going to destroy the new home real estate industry, or that banks aren’t going to be lending money to anybody because of the tightening of rules, or that consumer confidence in house prices is at an all time high or an all time low.
The difference? Things like interest rates, cost of borrowing, laws, consumer confidence and the investment alternatives like the stock market are all things that influence the real estate market. These are not actually the factors that drive it.

The driving factors behind real estate, according to Kieran’s extensive research are:

• Factors influencing demand such as population changes, construction, the number of people per household and employment levels;
• Factors influencing the financial elements of house prices like the average rental rates, average income of residents, availability of financing;
• Emotional factors like the number of days it takes the average house to sell, the number of listings on the market and the overall sales volume.

The drivers of the market are what will actually take the real estate market from one phase to another and it takes a combination of factors to move the market not just one strong element. Market influencers, on the other hand, might present short term opportunities or red flags to be aware of but they aren’t driving the market into a new phase or out of an old phase.

So fellow Canadians if you’re getting wrapped up in the media hype about the housing bubble and boom allow me to use this quote from the book to tell you what I am trying to say:

“Many real estate market observers mistakenly believe that a real estate boom has begun when the real estate cycle enters the beginning of the recovery phase.” p. 71

By the way …Keiran Trass also says that  this is also the point when wise investors enter an aggressive buying pattern with an intense focus on cash flowing properties.

One might say that sending 5500 letters out to home owners, placing signs on posts, posting ads online, and in newspapers is aggressively pursuing cashflowing deals. We might be wrong about where the market is at …. but we’re buying properties with $500 – $800/month positive cash flow so we’re ok to be wrong while we take those cheques to the bank. (If you don’t know what I’m talking about then it’s time you checked out our blog – Life As Real Estate Investors).

And for our dear American friends … we welcome you to invest in Canada if you’d like. Things are pretty stable up here these days but we definitely don’t have the same juicy opportunities that you have around you!! But I have some wise words from Kieran Trass for you as well:

“Before the sunrise everything is dark as the previous night comes to a close. They say that the night is always darkest just before dawn, but as the sun moves closer to breaching the horizon the reduction in darkness is subtle. Then slowly it gets lighter and lighter until suddenly the sun rises and floods the landscape with light. While this light is strong, initially it is not accompanied by too much warmth, although before long the warmth increases. So too the recovery phase seems subtle in its arrival, until suddenly real estate values start to rise and everyone recognises the recovery.” p. 71

It’s always darkest just before dawn my friends.

We’ve said it before, but it’s worth saying again:Ignore what the headlines in the paper are saying about the housing market. Focus on what is going on in your backyard.And, pick up a copy of this book –The Housing Bubble– you’ll be glad you did.

Published on February 18th, 2010