Fear and Greed

There is really only 2 things that drive markets – any type of market, and that is fear and greed. The great Warren Buffett also has a saying about these 2 items – be fearful when others are greedy, and be greedy when others are fearful.

Real estate has certainly seen its fair dose of greed in Canada in the last decade – especially in the last few years. Remember people buying shoe box sized condos in downtown Toronto for $750,000.00? The condos that weren’t even built yet? That my friends was called greed. We could go on and on and on with countless examples of the greed that took place in the Canadian real estate sector, particularly from mid 2020 until early 2022, but we all know – or at least should know what it was like. During this time, anyone who remotely resembled the voice of reason was quickly shut down. They were told they didn’t understand the ‘new’ way things worked, they were told ‘that real estate only went up’, and on and on. Seminars were held to ‘teach’ people how to leverage up and use OPM ( other people’s money) to build their fortunes. Making money was as easy as buy, sit on it, sell, repeat, or as I liked to refer to it: rinse, lather, repeat.

Of course, those of us that were quietly exiting the real estate game were called a multitude of names. I was called many of them. People thought I had lost my mind. I mean, seriously, who sells real estate during a bull market? Well, this guy for one. Was I brighter than everyone else? No! Did I have inside knowledge? Also No! All I knew was that I should be fearful when others were greedy, and greedy when others were fearful.

Now, let’s get in my time machine and go back to 2009, and 2010. Remember those times? The global financial system was in full meltdown mode like Homer Simpson had been left in charge of the nuclear power plant. Banks were sitting on millions of homes in the United States, and couldn’t give them away it seemed. You could literally buy a house in Michigan for the cost of the back taxes and water bill arrears! Everyone was so afraid to touch housing. Fearful you might say. Homes from Phoenix to Miami to Chicago were almost looked at as a liability instead of an asset.

So I decided it was the perfect time to make my first foray into international real estate. Working with a trusted realtor, I was able to purchase many homes in the US at deeply discounted prices. I don’t mean 10% or 15% off. No, no, I mean 90% off the previous selling price of the boom in 2007. I was buying homes in Michigan for under $20,000.00 ( with a CDN dollar above par at the time ). A Canadian dollar got me around $1.07 USD. At the time, people thought I was off my rocker, had gone insane. After all – who in their right mind would buy property in Michigan of all places during the worst downturn in real estate we had ever seen? This guy, that’s who. Ironically enough, the same people that said I was beyond crazy to be buying in 2010, were the same people that told me I was insane to be selling in 2021. Good thing I didn’t listen to them either of the times!

I was able to buy houses for under $16,000.00 Canadian, put around $5,000.00 Canadian into fixing them up, and rented them out for around $800.00 US a month. I held those properties until mid 2021, and sold them all. The selling prices ranged from $115,000.00 all the way to over $210,000.00 USD. Anyone who has shopped, or travelled knows that the same US dollar I paid 93 cents for in 2009 and 2010, got me around $1.25 Canadian upon sale of the properties. My rate of return was in the hundreds of percent when you factored in capital gains, currency exchange, and the rents I took in monthly for over 10 years.

This theory applies to investments of many forms, whether it be stocks, bonds, currencies, or real estate. Timing can go a long way to deciding your ultimate fate. Making smart decisions, based on actual fact – not emotions, can have long term lasting impacts on the financial future that you and your family will enjoy. Luck always plays a part – for better or for worse, but when you can pick up an asset at the prices they were being offered at – it was a no brainer.

The reason I tell you this, is so that you look at today’s real estate market through a little bit of a different lens. Now, I do not believe we will see prices come down to what they did in the US in the aftermath of the Great Financial Crisis – not even close, however, they still need to drop from where we are. Sure, we have witnessed a nice correction in Canadian housing – but it is still beyond expensive. Yes, people need a home to live in, but buying real estate from an investment ‘ quick hit ‘ is not here – at least not yet. That day may come, but right now too many people still remain greedy. Sellers are still trying to attract top dollar from a bygone day of 2021. There are still speculators in the housing market that think they have the secret formula to turn a quick million dollar profit on a portfolio. There are too many people sitting on wads of cash they refinanced out during the heyday, and think they can make a rental property work. Until we completely beat the will of these people – we are not at the fearful stage. Until we see everyone give up hope – we are not at the fearful stage.

Everything goes in cycles, and the time to hit the big BUY button will appear. It will take a little more pain unfortunately, but better days will come. Rest assured, that while I have been fairly negative on the prospects for Canadian housing – and the Canadian economy in general, as soon as I start to see the worst, I will start to change my tune, and let you know that it may be time to turn over a new leaf. Canadian real estate is like a Canadian home renovation – it has to get worse before it gets better. I don’t want to wish bad times on people – especially people I have never even met, but unfortunately for the market to heal, we need some people to be washed out, bankrupted, and losses to occur to set up the next set of opportunities in the real estate sector. Some people call that vulture investing. Some people will say it isn’t right to take advantage of people’s bad fortune to make a profit. Of course, those are the same people that will tell you it is a dumb idea to buy low and sell high.

Whether housing is in a bull market, or a bear market, the best time to get invested is when things start to change. When people seem to be the most downtrodden – that is a buy signal. When we see society acting like they were in late 2021 with the flipping, the fancy cars, the expensive Rolex’s, the fancy trips – that is a signal to me at least that you should start worrying what could go wrong. As it turned out, that worrying in 2021 helped me lock in and crystalize my gains. Ironically enough, even though my profits on US real estate were double what I made on my Canadian rental properties, the tax bill to the IRS was less than 25% of what I paid to the CRA. Tell me the tax system needs fixing without telling me the tax system needs fixing!

Overcome the fear, and temper the greed, and you – and your mortgage business will make it through any real estate cycle.