The lurching ups and down of global stock markets over the last few weeks have moved so swiftly and with so much force, that even the heartiest of constitutions felt a little motion sickness.
Any qualified investment advisor will tell you that a good investment portfolio is both diversified and suited to investor’s time horizon, desired return on investment- and perhaps most notably in the current environment, risk tolerance.
Diversification is one way of guarding against risk- or at the very least in minimizing the impact of it. And the good news for those in the property markets, real estate is one investment vehicle that is being given renewed focus, especially in light of recent stock market volatility globally. The markets in the last couple of weeks saw the biggest one day drop since late 2008, when the markets plummeted at dangerous speed, pushed by the force of the implosion of the financial system in the U.S. The events of 2008 are not so distant in our collective rear view mirror that investors will quickly forget the economic turmoil that ensued.
And now, headlines about debt downgrade and bi-partisan showdowns are reflecting the possibility of a looming financial crisis- even a recession. And the yo-yo after effects of these events in the markets demonstrate, among other things, investors, who despite best efforts to show a brave face, are fundamentally nervous. They also display the interconnectedness of world economies, and the general sensitivity causing large swings in both directions.
However, in all of this chaos, the opportunity exists for Realtors to remind investors about the Real Estate component of an investment portfolio.
History to Predict the Future
Without the presence of a high-powered crystal ball, there is no way of predicting what will happen after money is invested.
However, one can look at historical data to see the behaviours and characteristics of various investment types and gauge how they have performed, both in the long and in the short terms, and also to have a visual sense of volatility.
This is not so much predicting the future, but allowing for investors to consider the benefits and risks of various investments within diversified portfolios and to match them to their risk tolerance and desired returns.
There are tools available, like the Andex Chart for example, which is essentially a visual representation of the last several decades, through various political administrations and events, and shows the ups and downs of the stock markets.
This chart shows that, though peaks and valleys in stock markets are significant throughout history, the line does, ultimately over the long term, point in the upward direction. Although, it is important to remember that the overall trajectory of your investment has as much to do with where you step into the market, and where you step out.
Similarly, the Real Estate Market displays a similar trajectory- with some peaks and valleys as well, over the long term.
Karen Filice, Broker of Record/Owner, Cirrius Realty Inc., Brokerage, who has worked extensively with Property Investors doesn’t need visual representation- she has seen it happen over her years in the business: “Values have consistently gone up. From time to time there is a minor blip down, but usually it is a seasonal adjustment. For the rest, there has been upward movement.”
It is not to say that one type of investment is better than another. A Real Estate Investment for an investor who needs access to liquid cash is not necessarily a good idea. A speculative stock investment for an investor who has low risk tolerance may not be a good match either.
It comes down to understanding a client and due diligence- not just returns. And again, as they say- never put your eggs all in one basket.
We are Not an Island
It is important to remember that the Canadian Real Estate market, while perhaps not as hair trigger sensitive to ups and downs globally as the stock market is day to day, is not insulated from global events.
The truth is, that in a world economy that lives under threat of crisis- as seems to be the current situation for many nations around the world, despite Canada’s best efforts to remove itself from the fray, there are still effects and downward pressure on the market.
Luigi Frascati, Sutton Centre Realty , agrees: ”I contend that the looming American Debt Crisis is the single most important event threatening real estate in Canada – in fact threatening our entire economy overall. This is so because the US is Canada's biggest trading partner. Take the recent real estate market crash in the States, for instance. When American contractors stopped building, the effects on exports of the pulp and paper industry in British Columbia were devastating. Related industries here were affected as well and consumer confidence dropped, causing among other things a decline – albeit temporary – in real estate activity.”
“In situations such as this (and I believe there will be more to come in the future) there is nothing much anyone can do. My manager’s advice is to “work with good buyers”, but that’s all theoretical since there are typically no good buyers to be found anywhere under these circumstances. It relates to the fact that market participants tend to handle real estate the same as stocks and bonds, and thus in times of volatility they apply to real estate the same criteria they apply to stocks and bonds, which is a mistake.”
Steven Fudge, Sales Representative, Bosley R.E. Ltd (www.urbaneer.com), says that one need look no further than to our neighbour to the south to understand the material impact of economic downturn: “The sub-prime mortgage crisis has shown us that the stock market and property market can be intrinsically linked, frequently unknowingly.”
This does not necessarily mean that investors should keep their money in the sock drawer. Rather this suggests the necessity for Realtors to know their markets, to be well versed in what outside forces can both adversely affect and boost the value of the investment, and most importantly- to keep these lines of communication open with the client.
There is nothing more valued when travelling bumpy terrain, than having an arm to hold on to. You can’t provide a crystal ball analysis, but you can provide historical information, draw on your own experience, and be a conduit to information that could currently impact the housing market, at home and abroad.
What Goes Up....
There is volatility inherent with any kind of investment, but there is somehow a perception that the real estate market is less subject to this volatility.
One must remember that, while investors may not see the value of their property slide up or down upwards of 3% in a day, as many stockholders did in the recent weeks, the housing market is still sensitive to price movement.
Investors need not even reach too far in the recesses of their memories to hearken back to the most recent event that caused a cascade of value. In 2008, the US, the asset bubble that had gained such momentum and weight that it did not just burst- it exploded -with such force that it became the epicentre of a financial tsunami that took out the US financial system and then the whole economy at its knees, and several other nations around the globe along with it. Though the flood waters have long receded, the rebuilding is slow and at times uncertain- as was evidenced over the last few weeks in the US.
Fudge, who started his real estate career by jumping off a peak into a real estate valley by entering the market during the housing market slide in 1989, says that there is indeed some ups and downs in the housing market: “The magnitude of the housing market collapse was so substantial it took five years for the market to stabilize. Prices plummeted, with downtown properties being discounted by as much as 35 percent below their 1989 sale price in order to attract a buyer. It wasn't until 1996 that the real estate market regained momentum, demand began to outpace supply, and property values began to increase.”
He also says that there is good news and, with the gentleness of time, and the wheels of the economy chugging consistently, that what falls precipitously does cautiously come back up again. Again, he saw values fall dramatically again in 2008- only to rebound with verve and vigour. Fudge looks at the real estate cycle, not with cynicism, but with the experienced eye of a survivor- who knows full well that it is only a matter of time before the peaks dip into valleys: “With our real estate market booming 14 of the past 15 years, it's easy to assume Toronto's housing climate will consistently increase in value. I'm wary. Is this 'too good to be true'?”