LET’S TALK ABOUT SLUMP!
Yup, let’s do it! “Let’s talk about all the good things and the bad things that may be, let’s talk about” … slump. Anyone else remember that song from 1990 by Salt N Pepa? (Google it for more context). Let’s take that dirty word and bring it out into the open!
Slump may seem like an obvious statement during COVID, but as real estate investors there’s a little more to it.
Kieran Trass studied the real estate cycle for decades and found hard evidence that the cycle exists in all countries where there is a “free market” for housing. In his book, The Housing Bubble, he defines the Real Estate Cycle as an “irregular but recurrent and predictable succession … that the real estate market experiences.”
What do you really need to know about this? Real estate has seasons, 3 of them: Boom, Slump and Recovery. In that order. How long the slump will last is anyone’s guess right now. In all fairness, COVID has been confusing for even the most brilliant economists!
And what does this mean to you in the real world? Well, you wouldn’t wear flip-flops in a snowstorm, nor would you wear winter boots in summer, would you? Similarly, the actions you will take as a strategic real estate investor will depend directly on which “season” of the real estate cycle you are in.
To be even more clear, the Slump itself has 3 distinct phases: beginning, middle and end. In the beginning, there is tighter credit from lenders, but property prices are still rising. There is some fear, and definitely some denial (maybe not in Alberta, but in other parts of Canada). Vacancies are rising. In the middle of a slump, people are struggling financially, fear is rampant, and some investors are attempting to sell. This sure sounds like Calgary and many parts of Alberta this December. Near the end of the slump, population growth and employment growth are at very low levels, but rents are stabilizing, and property values are falling a little more. Fear is still everywhere.
Seems like there are a lot of negatives to the slump, doesn’t it? However, “the slump’s purpose is to restore (the) fundamental value of real estate prices and set the stage for a new cycle of growth.” (From Secrets of the Canadian Real Estate Cycle by Don R Campbell, Kieran Trass and Greg Head, together with Christine Ruptash).
Still wondering what this means to you as a real estate investor? When you understand the real estate cycle, it takes the guesswork and speculation out of your investment. Decisions can be rational and strategic, rather than emotional or risky.
For example, flipping in a slump is a little like wearing flip flops in a snowstorm; risky is putting it politely. For those who are prepared, and investing for long term wealth creation, the Slump is the optimum time to acquire your Buy and Hold properties.
Now, we don’t analyze all day every day. We rely on some experts to do the heavy economic detective work for us. If you’re looking for more details, Jennifer Hunt, and the Real Estate Investment Network (REIN Canada), have released a Real Estate Cycle Update (November 2020). This report also has a specific list of all the real estate investing strategies that are good and possible—yes even now! Plus the report suggests which strategies should be avoided.
Slump may feel like a dirty word in December 2020, but no one truly knows when things will shift into the next season: Recovery. For those real estate investors who are patient, and financially prepared, this is an amazing time to set yourself up for financial success. Some opportunities are already here, more are coming in 2021.
