Real Estate Cycle-Ontario

[KGuthro]

Hello REIN Members,



I have just finished Don's The Canadian Real Estate Cycle book (which was fantastic!) and I wanted to get some opinions on where we currently are in the real estate cycle (Boom, Slump, recovery) in Ontario? Are we in the beginning, middle, end of a specific point in the cycle? And if some could provide insight on where Hamilton is in the cycle or where they are heading towards in the cycle would be greatly appreciated.



Kyle Guthro

 

[housingrental]

You'll know in a few years

 

[DonCampbell]

Hey Kyle,



Great question. The Cycle in Ontario is not provincial specific, it is really quite regional. Ottawa's cycle differs from Toronto's which differs from Hamilton's.



Hamilton is in it's recovery phase and has gained momentum up the S-Curve over the last 12 months. The key in this city is to ensure that you are watching the job and population growth numbers to ensure that they continue in the positive direction.

For that city, this will be the key determinants.


The revitalization zones are earlier in the cycle than up on the mountain.



Other key pieces to watch for are the potential influencers coming into play:



1. Rental Licensing has been spoken of: that would not be great

2. Transportation change: current gov't has put it on back burner but the city really needs it to keep its momentum (light rail)

3. Basement suite/secondary suite tighening. Good if you only own rental pats/condos as demand goes up. Bad if your whole cash flow is based on non-conforming suites.




Using the NEW version of the Property Goldmine Scorecard (given out at the last month's ACRE event) will assist you in this analysis.



The Hamilton Economic Development office is one of the best in the country, so spend time with them as well to listen for future opportunities/incentives/job growth announcements etc.

 

[nubiwan]

Surely a big factor in any Canadian economy is what is happening across the border in the US - NO?



The stock market is floating on borrowed cheap money - floating at all time high it should be added. DOW over 15K.



When they stop the money printing, inflation kicks in, and the repercussions of their massive debt hits the fan, then how will Canada cope? What will the next US recession/depression do the Canadian economy. While the resource sectors will cope, it is somehow inevitable that Canadian employment and export will take a hit. Surely, inflated housing prices (if they are inflated) will need to re-align, and the equity borrowing will be squeezed. Interest rates will be hiked! Or will they?



Weidermer in his Aftershock book indicates that house price can be directly related to income rise. That without the latter, you cannot have the former. In my market, I'd suggest that average incomes have risen very little in recent years, compared to house prices, which have rocketed due to an increase in local oil production and other resoruces. Old centre city houses that sold for $65K 20 years ago are selling for $300-500K today. The underlying feeling is that it is preposterous pricing.



Owning several income properties, I am leery of how the US economy affects housing and interest rates in Canada, and find myself paying little heed to historical housing trends. Are we in for a period of buckling down, securing long term interest rates on properties and weathering the coming storm?



Mr Doom N Gloom

 

[Thomas Beyer]

[quote user=nubiwan]Are we in for a period of buckling down, securing long term interest rates on properties and weathering the coming storm?
no



longer answer:



Quantitative easing will gradually end, perhaps starting later this year or 2014 over 3-5 years.



If you change the rudder of an oil tanker by one degree, it will turn around.



For example, interest rates will nudge up slowly, ever so slooooowly, perhaps 1/2 to 1 % higher 3-4 years from now.



US will allow immigration in larger numbers and will make many illegal immigrants legal. Imagine that .. over 400,000,000 Americans or 500,000,000. US has a healthy birth rate too, over 2 per female, the highest in the industrialized world !



Imagine, too, they do what every industrialized nation does: introduce a GST or VAT tax of 3 or 4 on good sold. Boom. Deficit gone.



US rebound is prolonged and healthy, unlike Europe with its older dying population, inflated bureaucracies, huge debt, maxed out taxes on all levels, and low in-migration.



Canada will come along for the ride, especially raw material or resource based economies like BC, AB, SK and MB .. but perhaps also ON once they elect a more right-of-centre, job creating, union busting, cheap energy focused government. The new Bank of canada governor might lower prime rate even, to lower the Canadian $ to help car exporting Ontario, so I expect real estate prices to continue to go higher in Canada in most healthy economic areas.



So, borrow heavily (money is on sale right now !) but ensure that the real estate you buy can cover the debt load by a wide margin.

 

[Rickson9]

[quote user=nubiwan]When they stop the money printing, inflation kicks in...





There is zero correlation between the Fed printing and the money supply. If you don`t believe this, you owe it to yourself to study up on monetary policy until you do...



It was a crisis of credit or credit crisis. Inflation was never the issue. This assumes that the individual understands the fractional reserve banking system governed by a central bank and how money is created.

 

[nubiwan]

If the answer to the US deficit is something as simple as introducing a GST or increase in sales tax, then why haven't they done it already? Why all this chit chat about fiscal cliffs etc.? Is this simply economic fear mongering?



Is GST simply a very unpopular decision for their government to make? Hell, the US can't even pass a gun law, imagine the uproar introducing a GST would create.



Canada has GST, and reasonably aggressive income tax, yet our national debt is still increasing. Is it not?

 

[Thomas Beyer]

[quote user=Rickson9]

There is zero correlation between the Fed printing and the money supply
Debt is the new currency.



Kinda like you using cash or your LOC. The same thing to the recipient (say a car dealer) but not the same to you.



As long as there are enough assets and income your LOC will be fine, expand even.



With less LOC you'd buy a smaller or no car. Similar to Federal Bank buying up T-Bills which allow US government to continue running government services.

 

[Rickson9]

To paraphrase the important parts of the article:


Those who think that we're going to return to hyperinflation are from the 1980s Paul Volcker set. These individuals believe that "printing" (an increase in bank reserves
deposited at the Fed) eventually leads to credit growth
and then, inflation. The problem is that from 1981 to 2006 total credit assets held by US financial
institutions grew by $32.3 trillion (744%). Bank
reserves at the Federal Reserve fell by $6.5 billion.




Collateral lending is now king. Today, length of collateral chains define the
upper bounds of the money supply, not base "high powered" money and reserve
requirements. So, even though credit increases, the total amount
of banking reserves on deposit at the Fed remains unchanged.




So if the banks can increase credit through collateral chains and there is no link
between base money and credit creation, why is the Fed doing QE in the
first place?




By keeping rates low and sending out the message that the Fed will be there to fight the risk of recession and
deflation, they are creating an environment to encourage risk taking in the real economy. The hope is that society starts taking their
money out of their mattresses and putting it back to work.




Risk taking always starts in Wall Street, but eventually bleeds
its way into Main Street. And, if you listen carefully, you can
hear over the pitched squeals of fixed income investors, who are
suffering from sticker shock and low yields, that this is exactly what`s is happening.

 

[Darr]

Inflation and Hyperinflation are totally different.



Inflation

When: near the top end of the business cycle.

The economy is hot with big demands for goods and services made possible by the abundance of credit.



Hyperinflation

When: at the bottom of a depression.

The economy is so bad, governments borrow excessively to stimulate the economy and the central bank monetize this debt issuance thus diluting the currency. The vicious cycle accelerates until confidence in the purchasing power of the currency is lost. The paper is then quickly unloaded for hard assets pushing costs & prices up.