fbpx

October 28th, 2022 | Market Watch

Market Crashes Are Opportunities In Disguise!

Share This Post:

As I’m sure you’re well aware, things have been quite dicey this year. 

The global economy is in a state of panic.  As a result of factors both within and outside of our control, we’ve seen major fluctuations in the market over the last 12 months – and rightfully so as what was happening at the onset of this year was, simply put, unsustainable. 

The point of this note, however, is not to go over the market, but rather explore ways in which we can seize opportunities that might have otherwise been practically impossible to consider had the market continued like a runaway train back in January/February.

If you’d like to read some of the thoughts/updates/summaries we’ve shared in the past few months on the Real Estate Market – you can find them on our BLOG here:

The biggest mistakes we’ve made by far, are mistakes of omission and not commission.  Meaning, it’s the things I knew enough to do, within my circle of competence, and I was sucking my thumb.  Those are the ones that hurt!

Warren Buffett

The above quote REALLY RESONATES with me (Amir), because I can distinctly remember my “missed opportunities”.  I particularly love that he specifically says … “mistakes of omission and not commission” – because it couldn’t be truer.

Think about it – forget about markets and housing. 

Just basic stuff – like procrastinating, skipping that workout you knew would lift your mood, purchasing that bag of All Dressed Ruffles Chips that you knew you’d ultimately eat, going to bed too late and feeling shitty the next day, putting off all the household chores until they’ve piled up a mile high, and so on.  In each case here, you knew what to do or what not to do … didn’t you?  So why did you do the opposite?

Now, those items are just day-to-day stuff, and behaviours that you can change over a relatively short period of time, like a few days or a few weeks or maybe even a few months … no biggie, no big lost opportunities or time here.  But, what about events like a “HOUSING MARKET CRASH” or “MAJOR CORRECTION”? 

Well, let’s defer to our wise friend Mr. Buffett once more …

The BIG OPPORTUNITIES in life HAVE TO BE SEIZED.” 

Warren Buffett

Let’s look back at the “BIG OPPORTUNITIES” over the last 10-15 years pertaining to the Toronto Real Estate Market – 3 major ones come to mind:

  1. 2008:  The Global Financial (Sub-Prime) Crisis – US Trash Mortgages
  2. 2017:  Liberal Government Policy Induced Crisis – Ontario’s 16-Point Plan to Cool Toronto & GTA Markets
  3. 2020:  Global Health Pandemic Crisis – COVID

In each of the above 3 examples – here’s what happened:  first there was uncertainty and a reduction in sales/activity … followed by a period (often shorter than expected) of stagnation … after a while the market adjusted and quickly shot back up … overtaking its previous mark and then some!

Now, it’s important to mention that we are not (intentionally) trying to suggest that this market event will behave exactly the same as the 3 mentioned above.  In fact, we strongly believe that this market is likely to get worse before it gets better.  You can read our most recent thoughts and conclusions on this here:  Toronto Real Estate Market 0-3 Year Outlook

But, we 100% believe that this market presents (and will present) FAR MORE OPPORTUNITIES than the last 3 crises combined.

And here’s why:

  • Sales are down – both price and volume
  • Buyers are naturally weary – suffering from FOOP (“Fear Of Over Paying”)
  • Inflation is still too high and prices are still on the rise
  • The BoC consumer expectations survey showed a majority of Canadians believe inflation will be last both near and long term (~3.5-7% 1-5 yrs out)
  • And so, the BoC has to stay the course and raise rates again – likely up to 4.5%, at which point the prime rate will sit at 6.7%
  • So, it’s likely that we’ll see rate hikes into the next 2-3 months and these rates will have to remain high(er) well into 2023

Why?  Because we believe that so long as credit is cheaper vs inflation… inflation will prevail… think about it …

  • In 1991, Canada’s inflation rate was at ~5.6% while the lowest prime rate in 1991 was between 8-12%
  • Borrowing cost more vs inflation
  • In 2022, Canada’s inflation rate is at ~6.9% while our prime rate sits at 5.45%
  • Borrowing costs less vs inflation
  • Conclusion – The BoC still has lots of room to raise rates

So, it is our firm opinion, that until our prime/lending rates are closer to if not equal or above our current inflation rate, the above narrative … “Sales are down … Buyers are naturally weary” … will continue

This will put more downward pressure on prices as Sellers who have not yet come to terms with reality, will be forced to do so

This present opportunities for BUYERS … and SELLERS alike … seriously, even for SELLERS

Move-Up Buyers – Buying Your “Dream/Forever Home” and Selling Your Current Home

  • Your future home is likely more $$$ than your present home
  • A 20-30% adjustment in pricing would therefore favour you – as your savings on your purchase would outweigh your loss on your sale

Example: 

  • Your current home – 1.8M valuation / adjusted 20% = 1.440M (loss of 360K in equity)
  • Your future home – 2.5M valuation / adjusted 20% = 2M (loss of 500K in equity)
  • You’re up 140K (the spread reduces from 700K to 560K)

Further, if you hold a mortgage on your property that you renewed before the rate hikes – you can PORT the mortgage and get a blended rate (i.e. lower than what the market currently offers)

Investors – Thinking of Buying Your First, Second or Nth “Multi-Unit/Investment” Property

  • It was near impossible to make cap rates work in Jan and Feb 2022 and even prior
  • Today, while rates are high, prices have come down favourably
  • More importantly, rental rates are at an all-time-high since 2017

Why?  People are back to work, students are back to school + high interest rates and the post-COVID era have created a bottleneck of demand for housing

We’re talking a 30% jump since the 2020/2021 lease market

Example:

  • An average downtown 500 sf 1 bed suite rented for approximately $1600-$1800 back in 2020 and into early 2021
  • Today, that same unit will fetch $2100-$2500 depending on where and what

And while rates are higher, rates won’t be high forever as the BoC must and will do what it takes to get us back down to in/around 2% inflation (at which point they’ll start dropping the rates)

So, now is a great time to take advantage of units that are sitting, price reducing and not able to move – as you can pick them up, rent them out at extremely high rents and wait for the monthly (mortgage) payments to drop … and they will … thereby increasing your cap rate/cash flow and overall investment value

Sellers – Not Buying, But Cashing Out

  • Your most important task is to be reasonable and not clench onto yesterday’s prices
  • Your go-to-market strategy is crucial – your pricing and marketing have to be bang on … and you WILL SELL
  • If you price too high – you will sit … and only help your competitors
  • If you don’t put in the work (prep/market your home the best you can) – you will sit … and only help your competitors
  • And if you’re thinking, well, I could have gotten ~15-30% more back in January – sure, perhaps!
  • However, who’s to say you can’t lose more if you sit?
  • And, if you sell, nobody is keeping you from re-investing – remember, it’s a deflated market
  • So, take your gains, and re-invest … if not all, then some … even into non-Real Estate related markets … markets in general are down … but those with sound fundamentals are bound to rebound 100% – i.e. your blue chip stocks or hard assets will naturally climb to pre-crisis levels as the market levels off and inflation numbers come back down to earth
  • Profits are made on the PURCHASE – not the SALE … a saying my Mother taught me
  • Meaning – while other factors may deter you … ultimately, if the ‘price is right’ today, you’re bound to make $$$ tomorrow

This period of time is unique as there are so many factors at play.  But one thing we believe is certain, is that while this down and uncertain period will more than likely last into 2023, it’s unlikely to last forever, right?

Once the BoC makes a gesture or hints at inflation finally coming under control – what do you think might happen?

We think it’ll result in a FLOOD of Buyers/Investors who have been sidelined – either waiting with cash/assets in hand OR priced out and hoping for a drop in rates.  And from there, well … we’ve seen what happens with past crisis. 

While inflation coupled with global affairs are what’s driving our current market downturn, there’s no denying the fact that Toronto and the GTA have and continue to experience a housing shortage … a supply shortage … that will 100% last as we simply cannot produce at the required pace.

So, like we said, this period is unique … but it won’t last forever! 

So, if one of the BUYER / SELLER / INVESTOR profiles resonate with you … please, book us for a call!  We love having open dialogue and Q&A sessions … and will listen to your specific circumstances to see what may make sense in YOUR CASE.

Thank you for your time and attention – we truly appreciate it.  We hope this article has been helpful for you!  -Amir and Aleks

ASIDE:  Naturally, it’s not good to live in the past, but it’s also human nature to reflect.  In the best of times, we hope to learn from past mistakes or “missed opportunities” and ideally improve as we move forward.

Hear It From Them

Find out why Torontonians continue to partner with Amir + Aleks to exceed their real estate expectations.