Lessons From Past Recessions

[00:00:00] Welcome to the Canadian Real Estate Investor, where hosts Daniel Foch and Nick Hill navigate

[00:00:06] the market and provide the tools and insights to build your real estate portfolio.

[00:00:13] Welcome to episode 199, I think, of the Canadian Real Estate Investor podcast.

[00:00:20] 199 already.

[00:00:22] Wow.

[00:00:23] Almost 200.

[00:00:24] You know, this time is a funny thing because sometimes it feels like just yesterday that

[00:00:28] we started this thing, Dan.

[00:00:30] Does it though?

[00:00:31] It feels like 10 years ago for me.

[00:00:33] Yeah.

[00:00:34] It's been a hard couple of years.

[00:00:36] Yeah, it has.

[00:00:37] I mean, you know, to be fair, we were both living very different lives then.

[00:00:42] We've both moved a few times, seen a lot of change.

[00:00:44] You quite literally had a full baby from start to finish.

[00:00:48] He's now an extremely cute little kid who was smiling at me earlier, which, you

[00:00:52] know, baby smiles, brightens up your day.

[00:00:54] Yeah, babies really do keep you sane for sure.

[00:00:57] So I mean, in that regard, when we're reminiscing on the past, we felt it was only appropriate

[00:01:02] to revisit an episode that is very near and dear to our hearts.

[00:01:07] That is episode one.

[00:01:09] Now in an uploading error, it's actually episode two if you go all the way back.

[00:01:14] Yeah, I don't know if it was an error.

[00:01:17] Like it just the first one was a preview.

[00:01:19] No, no, literally it is episode two.

[00:01:21] Yeah.

[00:01:22] Yeah, so...

[00:01:23] Canadian real estate performs in a rising rate environment.

[00:01:25] If you're going to go back and listen to this, to the original one, this is different, but

[00:01:30] does take inspiration from that one.

[00:01:32] Yeah, much more highly regarded than Star Wars episode one, The Phantom Menace, which

[00:01:36] received only a 53% score on Rotten Tomatoes.

[00:01:39] Brutal.

[00:01:40] Is that the worst rating for a Star Wars movie?

[00:01:44] I think the Clone Wars got a worse rating, but episode one is good.

[00:01:47] Like it's the one with Liam Neeson and Natalie Portman.

[00:01:49] I feel like it's actually underrated, honestly.

[00:01:51] Yeah.

[00:01:52] I hope my girlfriend isn't listening to this show.

[00:01:53] I used to have a huge crush on Natalie Portman.

[00:01:56] Was that Queen Emma Dahl?

[00:01:58] I don't know.

[00:01:59] She's a girl in V for Vendetta with the shaved head.

[00:02:01] Yeah, so I know who she is.

[00:02:02] Yeah.

[00:02:03] Well listen, our episode one doesn't have Liam Neeson or Natalie Portman unfortunately,

[00:02:10] but it does have myself, Nick Hill and my good friend and 200 episode co-host Daniel

[00:02:17] Foesch.

[00:02:18] Yeah, so I guess it is actually episode two that we're going back to since episode

[00:02:21] one was like a preview, right?

[00:02:23] That's why it was like a five minute kind of summary of what the show is going to be.

[00:02:26] Yeah, exactly.

[00:02:27] And it was kind of comparable to Star Wars since the episodes are out of order and difficult

[00:02:33] to understand that chronology.

[00:02:35] So yeah, I guess.

[00:02:37] Are you into Star Wars?

[00:02:38] Are we into Star Wars?

[00:02:39] I'm not.

[00:02:40] I just found all this info online to put in the script.

[00:02:44] Also information that you can find online is reviews of our show.

[00:02:49] I'm going to read the oldest one that we've got here because we never used to read the

[00:02:53] reviews on the show.

[00:02:54] We'd look at them, we'd read them, you know, we'd call it late at night and be like,

[00:02:58] hey man listen this review and I'd fall asleep and fall into a lovely sleep because

[00:03:02] I knew that people out there were listening and loving what we put out.

[00:03:05] And it was only a few dozen episodes ago or I don't know, I've lost track,

[00:03:09] but we started to read our reviews on the show and I love that new tradition that

[00:03:14] we've started here.

[00:03:16] Here is our oldest review.

[00:03:20] Highly recommend five stars.

[00:03:22] This is a great podcast regardless of your real estate investing knowledge.

[00:03:26] The hosts are competent and seem passionate about the topic, making it very

[00:03:31] enjoyable to listen excited to follow along and learn more from Michael Panza.

[00:03:37] Michael, we hope you are still with us today because that review is coming on to

[00:03:43] almost two years ago, Dan, which is crazy to think about.

[00:03:47] Yeah, it is, isn't it?

[00:03:49] So, so let's should we get back into the episode that prompted this wonderful

[00:03:55] review, I guess.

[00:03:56] Let's do that.

[00:03:57] Yes, what we're going to do is we're going to basically redo that episode with

[00:04:01] context of today, what's happening now.

[00:04:03] Yeah, I guess it's kind of like when you...

[00:04:04] Past cycles.

[00:04:05] Well, when you write a book and, you know, it's a really good book and then

[00:04:08] ten years later that book is still relevant, but certain things have changed.

[00:04:12] That's kind of what we're doing right now, right?

[00:04:14] Yeah, like or like a Ghostbusters film.

[00:04:15] Like you make a Ghostbusters film and then you they remake it like four times.

[00:04:19] But just with the same actors.

[00:04:21] Yeah, you know.

[00:04:22] So this is from Zolo.

[00:04:24] Dan, you had a hand in writing this article for our friends over at Zolo.

[00:04:29] So shout out to them as always and the good people over there.

[00:04:33] Great friends of the show.

[00:04:34] It is titled How Canada's Real Estate Housing Market Looks Based on

[00:04:40] Historical Cycles.

[00:04:41] Dan, get us started here.

[00:04:43] So these days finding a good news story about Canadian real estate takes time and effort.

[00:04:48] Both sales and house prices are down.

[00:04:51] House prices are down by more than one hundred and seventy thousand dollars on average

[00:04:54] since February of 2022 and sales are down by about 30 percent year over year from

[00:05:00] that date, the peak of twenty twenty one to twenty two.

[00:05:03] And they're down. We just had a record low year in 2023 and we're trending very,

[00:05:08] very low except Calgary in the rest of Canada pretty much.

[00:05:14] So among the doom and gloom, there is a silver lining.

[00:05:17] We've been here before and we survived.

[00:05:19] Another Star Wars rest.

[00:05:19] Oh, no, that's Lord of the Rings reference.

[00:05:21] What's that?

[00:05:21] Silver lining?

[00:05:22] You've been here before.

[00:05:23] I said, I don't know.

[00:05:24] I'm like a Lord of the Rings nerd too.

[00:05:26] I don't know if they.

[00:05:27] Yeah, when they're walking around Mount Doom and they're walking in circles.

[00:05:30] Anyways, while I'm really showing my nerdiness.

[00:05:32] That's good. I'm glad you're.

[00:05:33] That's a good thing to be a fan of.

[00:05:35] Except they didn't do a very good job with the new one on Amazon.

[00:05:38] I thought I had a chance to be like the next.

[00:05:40] I guess redoing things is a good idea.

[00:05:43] As we go and redo.

[00:05:44] You know, they kind of killed that franchise when they gave

[00:05:46] The Hobbit more film time than the trilogy.

[00:05:49] Yeah. Anyway, we're going to stop trying with stuff that we're not qualified to talk about now.

[00:05:53] No more Star Wars or Lord of the Rings for the rest of the episode.

[00:05:55] We promise we survived it.

[00:05:57] We survived the last housing downturn and we will survive it again.

[00:06:00] So here's what you can expect while looking at Canada's real estate

[00:06:04] market as we head into 2024.

[00:06:08] So the first question we're going to look at is this the end of a market cycle?

[00:06:14] Now, if you study enough economic history, you'll notice patterns emerging.

[00:06:20] Some assets tend to have a cyclical value pattern,

[00:06:24] and these cycles have been going on for centuries.

[00:06:28] In most cases, the typical fuel for these patterns is debt.

[00:06:33] When buyers use debt to buy things, the economy grows.

[00:06:37] Eventually, buyers must pay back that debt,

[00:06:40] which causes a contraction in the value of that asset.

[00:06:43] And sometimes that effect can be more widespread.

[00:06:47] In this case, the entire economy can contract also known as a recession.

[00:06:54] You can better understand every ongoing trend based on this simple observation.

[00:07:01] Canada's real estate housing market follows the same cycles,

[00:07:04] value patterns and has experienced downturns, many over the last 100 years.

[00:07:09] The last time we saw a significant downturn in Canada was in the 1990s.

[00:07:14] This 90s downturn was marked by a few key conditions

[00:07:18] that make it easy to compare to present day,

[00:07:20] such as speculation in the housing market, a lot to do with the pre-construction side of it.

[00:07:26] Major military conflicts, which at the time we last did,

[00:07:29] that was really just the Ukraine side of things.

[00:07:32] But now we have a lot happening in the Middle East and a lot of oil based economies,

[00:07:37] which leads to the next point, which is an oil price shock.

[00:07:40] And then you have fear of or persistent inflation.

[00:07:46] Or the combination of real inflation and the consumer response to that.

[00:07:51] And then the last piece is in 1989, we saw population growth peak.

[00:07:56] For the last time, like 89 was the last time we saw population growth.

[00:08:01] It hit 1.84%.

[00:08:03] And the first time we broke that was in 2023 ever since then.

[00:08:06] Right. So a lot of setups that are very similar.

[00:08:08] So there's a downturn in the 1990s left lasting fear in that generation's real estate investors.

[00:08:13] And Morgan Housel talks about this in Psychology of Money, great book.

[00:08:15] I would encourage people to read that.

[00:08:17] You know, our generation never really thought about inflation.

[00:08:20] We never really prepared for inflation.

[00:08:22] And so because we never lived through it in our life. Right.

[00:08:26] And so and similarly, we never saw a house price crash.

[00:08:28] And so a lot of people were like, let's jump into the real estate asset. Right.

[00:08:31] And but the 90s as a result, many baby boomers have decided to steer clear

[00:08:36] of that asset class because they've heard horror stories.

[00:08:38] They remember if people, you know, you talk to a lot of like parents

[00:08:41] from our generation, baby boomers, and I guess they're Gen Xers.

[00:08:45] Our parents, I think would technically be Gen Xers.

[00:08:47] They are afraid of the real estate asset.

[00:08:51] They have a healthy respect for the risk.

[00:08:53] Yeah. And I don't think it's just the real estate asset that they're

[00:08:58] fearful or weary of.

[00:09:00] I think it's what's directly tied to traditional real estate investing,

[00:09:04] which is debt.

[00:09:05] Yeah, they don't want large mortgages.

[00:09:08] They don't want to play that leverage game because they

[00:09:11] saw firsthand as we are seeing firsthand right now

[00:09:14] what happens when you don't have a good understanding or a grasp

[00:09:19] on what leverage really is and, you know, the power of it,

[00:09:23] but also the power when it goes the wrong way.

[00:09:25] For sure. So what happened in the 1990s was dramatic,

[00:09:27] but the downturn followed the typical real estate cycles usual pattern.

[00:09:32] Real estate cycle has four phases.

[00:09:34] Each phase has unique challenges for homeowners, buyers and sellers.

[00:09:38] You can tell which stage we're in based on the absorption rate

[00:09:41] or how many homes sell in a period of time.

[00:09:44] So that's how quickly the supply gets absorbed.

[00:09:47] And I'm going to solo for the article of this did an amazing

[00:09:51] visual on this, by the way.

[00:09:52] So I would encourage people to check that out.

[00:09:54] And if you watch, if you're one of the five people who watch

[00:09:56] our videos on YouTube, I'm going to share it as well there.

[00:09:59] Yeah, awesome.

[00:10:02] As Dan shares that, I will go over these four phases.

[00:10:06] So it starts with phase one.

[00:10:09] This is the recovery phase and matches what you see in a seller's market.

[00:10:15] Less construction, rental rate increases,

[00:10:19] lower vacancy and moderate absorption rates.

[00:10:25] Then we go to phase two, that is the expansion phase,

[00:10:29] similar to a seller's market.

[00:10:31] But here you'll see more construction activity,

[00:10:34] mild rental rate increases and lower vacancy.

[00:10:39] The absorption rate in this phase is moderate.

[00:10:42] Then on to phase three, hypersupply.

[00:10:47] Phase three is hypersupply or a buyer's market.

[00:10:52] In this phase, you'll see things like high construction rates,

[00:10:56] low rental increases and higher vacancies.

[00:11:00] And the absorption rate is usually lower.

[00:11:03] Then finally, phase four.

[00:11:08] Also known as recession.

[00:11:11] We'd still be in a buyer's market, but what's changed

[00:11:13] is there will be less construction, low rental rate increases and higher vacancy.

[00:11:20] So to understand what is happening in real estate today,

[00:11:24] we need to look at history.

[00:11:26] Looking back at economic cycles in decades past will help explain

[00:11:31] what's happening in Canada's real estate market right now.

[00:11:34] You can usually predict how a country's group of consumers will behave

[00:11:39] based on the way that they did in the past.

[00:11:42] So this context should comfort the average homebuyer or homeowner

[00:11:47] because we've been down this road before and we recovered.

[00:11:51] The 90s correction, for example, affected many millennials' parents

[00:11:54] who owned real estate through that area.

[00:11:56] Most still own their home today and recovered financially from the downturn.

[00:12:00] So, you know, I mean, for those of you who are already kind of stuck

[00:12:03] in a mistake of a property or a bad investment or something

[00:12:06] that you weren't happy with, you know, you will likely if you keep paying it,

[00:12:10] yeah, it sucks. But, you know, if you keep paying it, you will likely still own it

[00:12:13] and will have financially recovered by then.

[00:12:16] So let's review Canada's last three real estate market boom

[00:12:19] and bust cycles to find lessons for 2024 and beyond.

[00:12:23] Yeah, I would love to.

[00:12:24] And I'm going to get us started going back to the 1980s recession.

[00:12:27] But before we do that, I just wanted to start things off here

[00:12:31] with a quote that I think is powerful for both negative

[00:12:37] and positive things in your life.

[00:12:39] And this is from Bill Gates.

[00:12:41] People always overestimate what they can do in a year

[00:12:45] and underestimate what they can do in a decade.

[00:12:48] And, you know, I tell that to people when they're early on investors

[00:12:53] and like, well, I want to do this, that and the other thing.

[00:12:55] I want to own this many units.

[00:12:56] And hey, that's great. You can get there.

[00:12:58] But understand that the first year is going to be hard

[00:13:01] and year three is going to be better.

[00:13:02] And by year 10, you'll be shocked at what you do.

[00:13:05] But at the same time, going back to these cycles

[00:13:09] and the fear and the hardship that people went through as well.

[00:13:12] Yes, we're going through that stuff right now.

[00:13:14] And guess what? The next year is going to be hard.

[00:13:15] But are you going to be facing the same problems a decade from now?

[00:13:19] I don't think so.

[00:13:20] And if you are, you probably have other problems

[00:13:23] that you need to deal with.

[00:13:24] But I just wanted to start things off with that,

[00:13:26] because that is a major lesson and just something to take away,

[00:13:29] whether you are in a good position now or in a hard or bad position.

[00:13:34] So anyways, back to the 1980s recession,

[00:13:39] otherwise known as the era of nineteen point seven percent

[00:13:44] mortgage rates. If you thought they were high now.

[00:13:47] Wow, they were a lot different in the 80s.

[00:13:48] In 1981, the Canadian Consumer Price Index,

[00:13:53] the CPI was an astounding twelve point four seven percent.

[00:14:00] The rate had been consistently rising since the year 1976.

[00:14:04] And the Bank of Canada

[00:14:05] tripled the prime interest rate during that period to fight inflation.

[00:14:10] The environment of hyperinflation and high interest rates

[00:14:14] made housing extremely unaffordable across the country.

[00:14:18] And the average mortgage rate in the 80s was comparable

[00:14:21] to a credit card today at nineteen point seven percent.

[00:14:27] However, in 1981, marked the peak of rising prices

[00:14:31] before the Bank of Canada policy began to have its intended effect.

[00:14:34] So by the year, second half, Canada was officially in recession.

[00:14:37] Disinflation set in encouraging the Bank of Canada

[00:14:40] cut interest rates accordingly.

[00:14:42] So right now I mentioned in our most recent episode

[00:14:46] about how Canada's inflation rate came in at two point seven percent in May.

[00:14:50] So May 21st, they did a print two point seven percent.

[00:14:52] Core inflation is now at one point six percent.

[00:14:54] So if inflation is slowing, that's a period of disinflation.

[00:14:57] That doesn't mean prices are going down.

[00:14:58] It means they're rising less quickly.

[00:15:00] And central banks want prices continue rising.

[00:15:03] I haven't really necessarily figured out why I think capitalism

[00:15:06] just relies on petrol growth.

[00:15:07] I think it's kind of the idea behind it.

[00:15:09] But deflation is prices going down.

[00:15:12] So that would be a decrease in price levels.

[00:15:14] Disinflation is the speed at which prices are rising, going down.

[00:15:19] Does that make sense? It's the derivative. OK, cool.

[00:15:21] Appreciate that. Finally, you get to use the derivatives

[00:15:23] that you learned in high school calculus.

[00:15:24] Cool. High school. Yeah.

[00:15:26] There was a long time ago. Yeah.

[00:15:27] So house prices had peaked in the third quarter of 1981.

[00:15:32] They drifted 30 to 50 percent lower over the next two years.

[00:15:35] Crazy. OK, so the key lesson from the 1980s recession,

[00:15:41] the era of 19.7 percent mortgage rates are rapid rate hikes

[00:15:46] successfully broke the back of inflation as a result.

[00:15:49] House prices dropped when disinflation set in.

[00:15:52] Now, Dan just did a lovely reminder of disinflation, deflation

[00:15:57] inflation and more. And guess what?

[00:15:59] We've seen rapid rate hikes in the last two years,

[00:16:03] more so than we have seen in the last 22 years.

[00:16:06] And I think they might be doing their job at this point.

[00:16:12] Yeah, I would say so.

[00:16:13] On to the next recession here, Dan.

[00:16:15] Yeah. So the 1990s recession, it was really a lesson in curbing inflation.

[00:16:20] So in 1991, CPI inflation was five point six percent.

[00:16:24] So, you know, comparable to what we were getting into in Covid,

[00:16:27] we're seeing kind of like high, high single digits.

[00:16:29] I think we saw it like in that was eights, nines.

[00:16:32] Maybe we hit eight and nine. Yeah.

[00:16:33] Eights. Maybe that was the U.S.

[00:16:34] The highest rate in seven years anyway, which is like for us,

[00:16:37] this was like the highest we were seeing the highest rates

[00:16:39] basically since the 90s.

[00:16:41] So the Bank of Canada deployed its most potent tool rate hikes.

[00:16:45] It is worth noting that inflation surged from three point nine percent

[00:16:48] in 1986 to five point six percent in 1991, even as the Bank of Canada

[00:16:52] doubled its prime rate over this period.

[00:16:54] Policymakers learned their lesson from previous cycle

[00:16:57] and were more aggressive with rate hikes this time.

[00:17:00] The peak of inflation and interest rates

[00:17:02] marked the peak of real estate prices in this era.

[00:17:04] As a result, house prices across Canada fell from 40 to 50 percent

[00:17:08] from 1989 all the way to 1996.

[00:17:10] So that was a seven year drop in house prices.

[00:17:14] Forty to 50 percent to. Yeah.

[00:17:16] That's tough. You see why there's that, you know,

[00:17:19] there's that jadedness with certain generations.

[00:17:22] Well, yeah. I mean, a lot of people lost everything. Right.

[00:17:24] And so and in most cases, it was the people speculating,

[00:17:29] which was speculation was not uncommon then.

[00:17:30] Like people were doing like they called it.

[00:17:32] What did they call it?

[00:17:33] I think it was just called like the speculation crisis or like the speculators.

[00:17:36] Like a lot of people were buying pre-construction houses

[00:17:39] or brand new build houses.

[00:17:41] And they the property had changed hands

[00:17:44] like seven times before anybody had ever occupied the house.

[00:17:47] So it's the same thing as what we're seeing.

[00:17:49] And so same stuff, different decade, you know, same really.

[00:17:54] I mean, we didn't learn anything.

[00:17:56] Yeah. Just what's the key lesson from from the 90s

[00:17:59] that that you that you took away from this?

[00:18:01] Yeah, it was a don't flip.

[00:18:03] Don't flip paper on assignments.

[00:18:04] I think was that I mean, that's what everybody got pinched

[00:18:07] doing the same thing twice.

[00:18:08] Like, yeah. And condos actually were fascinating case

[00:18:11] study during that period of time because condos really led the price drops.

[00:18:14] My condos were the first portion of the real estate market to really drop.

[00:18:17] And right now we're seeing a huge flood of condo supply.

[00:18:19] New new. We have two years of record new construction and condos

[00:18:22] in the GTA, at least 20 between 20 and 30,000 new builds

[00:18:28] that will be completing in 24, 25.

[00:18:31] Yeah. And plus you're seeing a ton of resale.

[00:18:35] I feel like I've never got so many calls to list condos

[00:18:38] as I have in the last couple of weeks.

[00:18:40] And those calls are you're getting to list condos.

[00:18:43] What's the what's the sentiment behind that?

[00:18:45] Is it is it investors trying to offload?

[00:18:49] I mean, you don't have to just speak to yours.

[00:18:50] But I know that you keep a you keep a close here to the market occupied.

[00:18:54] Yeah. So one owner occupied and is their profit.

[00:18:57] Is there profit? Yeah, they're all in the money.

[00:19:00] But like the ones that are being rented are all cash flow negative,

[00:19:03] which is so I think people are like, yeah, I mean,

[00:19:05] there's no sense holding it down.

[00:19:06] They must have started listening to the podcast,

[00:19:08] realize cash flow negative is not a good thing in real estate.

[00:19:11] Yeah. And then they're like, I better call Dan and list this thing.

[00:19:14] That's how it works. Right.

[00:19:15] That's the lead funnel right there.

[00:19:16] No, no, not actually.

[00:19:17] I typically wasn't even listing condos.

[00:19:19] But, you know, right now we're just like, I mean, like it's not

[00:19:22] the market saturated as long as you set the realistic expectation with people.

[00:19:25] It's like, hey, this is just going to sit on the market

[00:19:27] unless you want to sell it for nothing.

[00:19:29] That's kind of how it is.

[00:19:30] And like not only are getting showings, like, you know, it's it's tough.

[00:19:33] It's a very tough market.

[00:19:34] So the key lesson here was that front loading interest rate

[00:19:38] hikes capped inflation sooner, but it also caused a bigger consequence.

[00:19:43] Like the 90s recession in Canada was like brutal, like by any amount,

[00:19:46] any talk to anybody of their recollection of the 90s, like,

[00:19:49] you know, Abe on on Twitter is always like,

[00:19:52] you could fire a cannon down Bay Street and not hit anybody.

[00:19:54] And, you know, yeah, so apparently, yeah, it is.

[00:19:57] But apparently it was pretty bad.

[00:19:59] Like, so well, by the time this episode's out, we'll have had our episode

[00:20:02] with our dear friend, Vince, out who, who talks a lot about the recession.

[00:20:07] But he was just getting started then.

[00:20:09] Yeah. But I mean, some of the crazy stuff that he saw that

[00:20:12] the consumer sentiment, as well as the bank's attitude

[00:20:15] to words dealing with some of that stuff, you know, it was a

[00:20:18] what a time to be alive back then.

[00:20:20] And, you know, a lot of not repetition,

[00:20:24] but a lot of rhyming in in today's world. Yeah.

[00:20:29] So on to the next recession here. Hit me with 08.

[00:20:32] So the 2008 recession, otherwise known as the GFC,

[00:20:37] the global financial crisis.

[00:20:40] You remember this in 2008, there was an external shock

[00:20:44] from the US inflation rates were not in an upward trends before the crisis.

[00:20:49] But the US Federal Reserve cut interest rates sharply to deal with the crisis,

[00:20:53] which compelled the Bank of Canada to cut rates to unprecedented lows.

[00:20:59] And by 2010, the overnight rate here in Canada was near zero percent.

[00:21:05] Now, before we go on, if I told you I could lend you money at almost zero percent,

[00:21:11] you're likely going to take it because you can go and make money

[00:21:15] with that money, even in the most risk free of investments of, let's say, five percent.

[00:21:21] So why wouldn't everyone be borrowing money now?

[00:21:24] This recession didn't start like those from the 1980s and the 1990s

[00:21:28] instead of rapid inflation and subsequently

[00:21:32] increased interest rates to tame demand and external shock did the opposite.

[00:21:37] As a result, the recession caused deflation and convinced policymakers,

[00:21:42] maybe forced them almost to lower those rates.

[00:21:46] The global financial crisis resulted in a decade of access

[00:21:51] to ultra low interest rates and cheap borrowing.

[00:21:54] These conditions fueled over a decade of, you know,

[00:21:58] probably the greatest Canadian real estate boom we've ever seen and likely will ever see.

[00:22:04] Since 2009, average home prices in Canada have surged from around $300,000

[00:22:10] as the national average to $735,000.

[00:22:13] That's a compounded annual growth rate of 17.5 percent of 14 years.

[00:22:20] And the boom is just ending now.

[00:22:24] I'd say it's ended. I'd say it's over.

[00:22:27] And so then this is kind of where we get to that next question.

[00:22:30] Give me the key lesson there and we'll kind of talk about

[00:22:32] what happens when the boom's over.

[00:22:35] Yeah, the key lesson from this one is Canada's rate cuts created a prolonged

[00:22:40] and unsustainable housing boom, right?

[00:22:43] You can only kick that can down the road so much before you got to go pick it up.

[00:22:48] And that's what we're doing right now.

[00:22:50] Yeah. So, you know, if I had to guess, I would say that we're kind of in a similar setup to the 1990s

[00:22:58] where we've seen – I made the comparisons at the beginning but the way that that happened was

[00:23:03] like after you saw a big drop in prices in like 89, 1990, you saw kind of like a slower

[00:23:09] reduction in prices after that over the next couple of years.

[00:23:12] And then the market was flat for a long time, like, you know, 92, 93, 94, 95, 96, 97.

[00:23:18] Then it's just started increasing.

[00:23:20] And so what I think is to – is that we'll end up kind of with that type of scenario.

[00:23:27] But, you know, as I mentioned in this article, which was again a summary,

[00:23:31] really a derivative of that episode one that we did, Star Wars episode one,

[00:23:35] today's downturn looks strikingly similar to the transitional cycles that we

[00:23:40] experienced in the 1980s and 1990s.

[00:23:43] In addition, we are seeing an energy crisis, maybe not so much but,

[00:23:48] you know, I mean oil prices definitely making some upward movements.

[00:23:52] We did see a huge – some huge volatility in that space.

[00:23:55] I think it's going to continue as a result of conflicts.

[00:23:58] Yeah.

[00:23:58] In those areas.

[00:23:59] Yeah. We saw rising inflation due to COVID-related stimulus and worldwide

[00:24:04] supply chain shortages.

[00:24:06] And as a result, the Bank of Canada is currently – I guess that sounds like they're

[00:24:09] done and maybe they're getting to the cutting phase.

[00:24:10] I don't know. I guess we'll see.

[00:24:11] But the Bank of Canada is deploying rate hikes to curb demand and tame inflation.

[00:24:16] Based on our lessons from the past cycles, home prices will continue to fall until

[00:24:21] inflation decreases which it's kind of doing now enough to end the Bank of Canada's rate

[00:24:26] hiking campaign. This phase could take several years. It has already kind of taken several

[00:24:30] years especially given how elevated valuations were during the recent boom.

[00:24:35] With that said, there is no guarantee that the current downturn will resemble what we've

[00:24:39] seen in the past. So staying informed is essential.

[00:24:42] Moreover, dropping house prices isn't all that bad.

[00:24:45] Housing affordability is one of the biggest issues that Canadians are facing right now.

[00:24:50] And one of the cures for high prices is high prices that fall, right? People can't

[00:24:54] buy them anymore. You see demand destruction and prices start to come down which is what

[00:25:00] we're seeing. Condos flooding the market I just mentioned. It seems like there's a

[00:25:03] little bit of a race to the bottom. Not an urgent race but a slow race to the bottom

[00:25:06] like the tortoise in the hair kind of thing where people are – buyers are kind

[00:25:11] of shopping around. They're not as urgent and we're seeing this slow

[00:25:15] downward price discovery. If this trend follows the recessions we've seen in the past,

[00:25:18] there could be opportunities for new buyers and investors or those looking to kind of move up

[00:25:24] the housing ladder, people looking to start an acquisition strategy. And this is one of the

[00:25:30] things we've talked about a lot on the show. People are always like, Dan, why are you so

[00:25:32] negative? Why are you always talking about recessions and blah, blah, blah? And it's

[00:25:36] like well because before they happen, I want you to manage the risk. And after they happen,

[00:25:40] I want you to identify the opportunity. Dan's negative because he's got your best

[00:25:45] interests in mind. I take on the negativity so Canadians don't have to.

[00:25:49] We appreciate you. Thank you for doing that. I hope you know what quote I'm paraphrasing there.

[00:25:53] Justin Trudeau said we took on the debt so Canadians didn't have to.

[00:25:57] Same guy that said the budget will balance itself, right? Yeah.

[00:26:00] Yeah. Okay, nice. Okay, so if you are a home buyer, a potential home buyer this year or

[00:26:09] in the next year from now, what can you expect and what lessons can you take from

[00:26:17] the past, the past recessions? Well, you can probably expect more monthly payments going to

[00:26:22] mortgage interest. Remember that your mortgage payment is broken up into two pieces, principal

[00:26:28] and interest. You really want to be paying down the principal because that actually equals

[00:26:32] ownership in the house, whereas the interest is just the money that the bank gets for

[00:26:36] giving you that loan. So unfortunately, you're going to be seeing more of your payments going

[00:26:41] to interest. You're probably going to see a decrease in buying power, which I think a lot

[00:26:46] of people have already realized that where your budgets will become very tight and that's

[00:26:51] going to happen or has already happened as we've seen interest rates go up and buying power

[00:26:58] decrease. On that note, you'll also see stricter criteria from lenders. I think that is probably

[00:27:04] just starting now as we've seen a lot of the big banks get fines and slaps on the wrist and

[00:27:10] they're a lot more careful as to who gets those mortgages and who gets those loans now.

[00:27:16] Dan, I looked at files that we were talking to two, three, four years ago and pulling up

[00:27:23] to what we had pre-approval then and now going back now and it's like cut in half

[00:27:27] in some of these cases. It's crazy. So we've seen that one happen too. And finally,

[00:27:32] price stabilizing into a seasonal cycle. It's springtime here in Canada and we all know

[00:27:40] in the real estate market that the spring market means a thing or two. So those are

[00:27:45] some expectations that you should get used to if you plan on buying or investing at home in the

[00:27:50] next year. Yeah, I will summarize Nick from my article, I might add. What can owners expect?

[00:28:00] So we talked sort of on like what it would look like on the demand side. What would it

[00:28:03] look like on the supply side? If you're an owner of real estate, what should you expect?

[00:28:08] I would say if you're renewing in 25, 26, which the majority of mortgages are more than 50% of

[00:28:15] mortgages are or if you've already renewed in the new rate environment, you're going to pay

[00:28:19] a significant increase in your monthly payments and a lot more of that money is going to be

[00:28:25] going towards interest. So a big cost factor, a big line item that just went into your pro

[00:28:31] forma, your model, your business model as an investor is paying a lot of interest.

[00:28:35] You can expect to lose some value or some equity in your property. You can expect to

[00:28:40] potentially be cashflow negative on existing investments, potentially if they were very,

[00:28:44] very tight margins to begin with. You can expect less exit liquidity, less liquidity of

[00:28:50] the equity in your home and it's more complex for you to try and get a HELOC or refinance or

[00:28:57] pull some of that equity out. If anything, it's like almost impossible now in the current

[00:29:02] lending environment, but it's also less liquid as an asset. So not just the equity, if you want

[00:29:08] to try and pull that out from a lending perspective, but the asset itself will be

[00:29:12] harder to sell in an environment where we have low absorption and tons of supply.

[00:29:16] Now speaking of sellers, Dan, let's wrap this piece up here with what sellers can expect.

[00:29:22] Well, unfortunately, probably a noticeable decrease in activity in the sense of there's

[00:29:29] just less people out there buying homes or buying investment properties. You can also expect that

[00:29:34] selling a home will take much longer than it did during the absolute craze that we saw in

[00:29:39] the pandemic where people were quite literally lining up to throw extra money at people

[00:29:45] selling homes, which should have never happened and was truly crazy. And the last piece is

[00:29:51] that offers will likely be conditional on things like financing and inspections,

[00:29:57] which again kind of disappeared during those crazy COVID times and people were just waving

[00:30:03] two of the most foundational things that you should have in an offer, which is a condition

[00:30:07] of financing and inspection of that property. So that's what sellers can expect. Now,

[00:30:13] Dan, let's keep this going and tell me what the Bank of Canada stance on this whole thing is.

[00:30:20] Yeah. So when I wrote this article as a follow-up to the episode, it was at the

[00:30:25] beginning of when they were getting to their pause, right? So the Bank of Canada and the

[00:30:29] Federal Reserve signaled that they had intended to end their rate hiking cycle or start cutting

[00:30:35] or they had intended to start and the rate hiking cycle at that period of time.

[00:30:38] And it took until what summer of last year for them to just pause, I think, right? And

[00:30:42] then they give us another one this year. And so we've basically been on that in that kind

[00:30:47] of pause thing. So now the question is like, are they going to start cutting relatively

[00:30:50] soon? And honestly, the ultimate fate of interest rates does depend on inflation and

[00:30:54] inflation is trending down now. It's at 2.7%. So we're in a disinflationary environment. Core

[00:30:59] is that core inflation, which is kind of what the Bank of Canada pays a lot more attention to

[00:31:03] is at 1.6. So based on statements from Jerome Powell and Tiff Macklem, the central banks will

[00:31:08] likely make an effort to reduce some of the stress on the economy right now. I think even

[00:31:13] the Bank of Canada seems to be a little bit, or sorry, even the Fed, like I think the Bank

[00:31:16] of Canada likely will be pushed to cut before the Fed. I don't know if, I think Simone

[00:31:21] on the Canadian investor podcast, he says like they're probably not going to cut in the States

[00:31:25] too close to the election because it'll become too politicized. So either it's going to be like soon

[00:31:30] or after. I imagine that Jerome Powell and Tiff Macklem probably talk about this pretty

[00:31:35] regularly. And there was a great presser where the two of them are on, I think it was

[00:31:38] Bloomberg just talking. Did you hear that? Where they were talking about like our best

[00:31:42] export is like- Comics. Comics. Yeah. Or like Dad Rock, Nickelback. They weren't talking

[00:31:48] about Nickelback. But anyway, the history would tell us that interest rates can lag up to 18 months

[00:31:53] before we fully feel the impact. And I think, you know, we're kind of there now. We're like,

[00:31:56] we're in that 18 month period where we're feeling the impact. Like I don't know a Canadian

[00:32:02] that I've spoken to that like isn't aware that this is happening and feeling it right now.

[00:32:06] It comes up in conversation. Yeah. Like it's all you hear about. And so the next phase

[00:32:10] of monetary policy aims to see if the interest, the increased interest rates accomplish the

[00:32:15] goal of lowering inflation, which it kind of seems to. And then once inflation starts to decline,

[00:32:19] once we're in this disinflationary environment like what we're in right now, the Bank of Canada

[00:32:23] will reduce interest rates to stimulate the economy, which it sounds like they're probably

[00:32:28] going to start doing. And if even if it's not stimulate the economy, it could just be

[00:32:31] provide relief for the people who need it right now. Because it sounds like everyone

[00:32:37] in Canada needs that. Yeah. I'm sure it would be a welcome relief. Now they also have stated

[00:32:42] that it's their policy and objective to balance the labor market and eliminate job vacancies.

[00:32:49] This move would dampen wage inflation and eliminate the risk of a wage price spiral.

[00:32:57] However, it is worth noting that there is a risk that the Bank of Canada overshot its

[00:33:02] monetary policy objective by being too zealous with its rate hikes and having inadvertently

[00:33:09] triggered a recession. This one that we are currently in now, recessions can be

[00:33:13] economically painful Canadians. However, they also have a 100% success rate for

[00:33:18] eliminating inflation. I like those odds. Yeah. So on that note, like if we're going to see

[00:33:22] a similar cycle or recession, what can you do as a real estate investor to manage real estate

[00:33:29] risk? Buying real estate comes with risk. For those of you who have realized that risk,

[00:33:34] I wish somebody told you earlier, I apologize. This podcast exists for that reason. So there's

[00:33:38] risk that your asset won't increase in value the way that you thought that it would, or that it

[00:33:43] could someday actually be worth less than what you bought it for. And I think a lot of people

[00:33:47] who bought pre-construction condos at inflated values are feeling that reality today.

[00:33:53] This can cause problems if you want to sell it or if you want to finance it, even if

[00:33:57] it's a closing on a pre-construction where it's not worth what you paid on a contract value

[00:34:01] for it. This risk increases when prices were higher and steadily climbing because there's a

[00:34:05] bigger chance of the value of your home decreasing due to market fluctuations.

[00:34:10] Exactly, Dan. Now conversely, a home purchased during a depressed or falling market is actually

[00:34:17] less risky because there's more opportunity for your home to increase in value as the

[00:34:23] real estate market recovers. Timing the market and buying at the bottom, these are very

[00:34:30] difficult things, but a declining market still represents an opportunity for savvy buyers to

[00:34:36] get in there and take advantage of that. Yeah. I mean, although we're going through

[00:34:41] definitely difficult economy, our real estate market has been continually rebounded with

[00:34:47] many historical economic moments or has rebounded through all of those historic

[00:34:52] economic moments that are similar to what we saw today. So if you plan to buy or sell in

[00:34:55] the next two years, don't panic. Keep an eye on the market. Practice patience and remember

[00:35:01] what Nick described. You can find good deals in bad markets. To be honest, the best deals are

[00:35:06] found in bad markets and a lot of people don't have the, I don't know what you call it,

[00:35:11] confidence, I guess, bravery to buy in a bad market. Yeah. But to buy in a bad market or

[00:35:16] buy in a downward market especially. But the reality is, and I've tried to describe this a

[00:35:20] lot of times with easier to see visually, but if you're buying on the way up or if you're buying

[00:35:27] when you think the bottom is in, even if you time it perfectly, the bottom is already in,

[00:35:31] which means that you're buying on the way back up. Yeah. Because it's the bottom. So

[00:35:35] the best way to actually get by closer to the bottom or the less risky way to buy closer to

[00:35:40] the bottom is to buy on the way down because it's those comps, those people lowballing on

[00:35:44] the way down that actually end up setting the bottom. And so by the time the bottom is

[00:35:47] already passed, it should be using a past comp. So it's a historic kind of thing.

[00:35:53] So it's a lot easier to get a deal on the way down than it is on the way up from my perspective,

[00:35:59] but it's a lot scarier. Now, the last piece I'll leave you with is as we come off the top,

[00:36:04] we know what the top is. February 2022, definitely the peak. As we come off of that,

[00:36:09] as you start coming down, there's less risk below you and there's more upside

[00:36:14] above you because you know how high prices can go and we know how low

[00:36:18] prices can go historically. And so the closer you get to the bottom, the less risk there is

[00:36:23] below you and the more upside there's ahead of you, but I'm sorry, above you. But most people

[00:36:28] don't want to buy on the way down. Most people want to buy into that increasing market.

[00:36:34] So I think the main, in very wise words, really great takeaway there. I think if you took

[00:36:39] one thing away from this episode, that would be it. And I think when everyone goes left,

[00:36:46] look right and explore that. Thank you so much for tuning into this episode and tuning into all

[00:36:53] of the episodes. We put a ton of work into them and all the reviews and the five stars and the

[00:37:00] outreach from all of you is greatly appreciated. Check out the show notes for our course in

[00:37:06] communityrealest.ca, our meetups across the country and all the other good stuff.

[00:37:11] Thanks so much. We'll see you soon. The Canadian real estate investor podcast is for

[00:37:16] entertainment purposes only and it is not financial advice. Nick Hill is a mortgage agent

[00:37:23] with Premier Mortgage Centre and a partner in the G&H Mortgage Group. License number 10317,

[00:37:31] agent license M21004037. Daniel Foch is a real estate broker licensed with

[00:37:38] Rare Real Estate, a member of the Canadian Real Estate Association,

[00:37:43] the Toronto Real Estate Board and the Ontario Real Estate Association.