The Bright Side of Real Estate Price Corrections
With the headlines blasting out how much equity we have all lost in our homes and property investments in most major markets (they call them "Price Corrections"), I thought I would analyze where a price correction comes from and why it's a "good" thing. As well apply it to where I focus our real estate investing efforts, in the Barrie, Orillia, Innisfil and Midland real estate housing markets.
I can't help but view a price correction as a necessary component of a healthy real estate market. That it is a necessary correction that keeps the real estate market stable. It is not to be viewed as a negative component in the real estate business. Price Corrections occur when real estate values escalate too rapidly. It is just like when Ben Johnson won the Gold at the Seoul Olympics. It was a great "short lived moment" of glory for Canada. But we (Ben) won on a false pretense. It's the same when real estate market values rise past that of what the economic fundamentals can handle. We will eventually loose those gains because they were won on false pretenses.
For clarity, an over exaggerated example of a price correction is a real estate "bubble". It's caused by an extreme rapid rise in home/property values that escalates way beyond that of what the ECONOMIC FUNDAMENTALS can bear. That is, the real estate values increase PAST what the LOCAL economy can handle very rapidly. It is caused by over excited home buyers and investors( called "speculators"....I like that word ...it makes people who buy homes without considering real estate fundamentals, sound just like the Gold Speculators of the 1890's)
The idea that you can get rich quickly by buying real estate is exactly the same concept of the Gold Speculators of the Yukon gold rush. Yes some ( very few) got wealthy quickly by striking it rich. It is a concept and dream that only late night television empires are built on. Not reality and Real Estate Economic Fundamentals. But let me clear...very clear. Real Estate is not a get rich quick scheme. It's a get rich slowly scheme. With that mindset, all these flashy news headlines that can sound scary mean very little for our long range goals. Or better put, it's a get rich slowly scheme.
What are the economic fundamentals that the increasing or decreasing values in the housing industry is built on in Barrie and Orillia that I am referring too?
I think the number one fundamental to consider (and there are many) is the HOUSING AFFORDABILITY INDEX. It clearly shows what the LOCAL average person has left over to spend on a mortgage. The magic number is about 35-40%. That means above this number we will see housing prices decreasing (price corrections). Below that number, we will see housing prices increasing. This number means that 35-40% of our LOCAL (Barrie and Orillia) persons income is spent on housing. This what he can afford based on his income....35-40% of his income will be spent on housing.
For comparison purposes lets look at Vancouver. Right now the housing affordability index sits around 65%. That means that 65% of your AVERAGE LOCAL person in Vancouver spends 65% of his income on housing. Vancouver is in a classic housing Bubble.
Price corrections occur when the housing affordability index gets too high, or above the 35-40% range. The Housing Affordability Index in Barrie, Innisfil, Orillia, Midland, and Collingwood areas right now sits around 38%. That is right smack in the middle....so what do we see? A little of everything. Some areas are increasing, some slowing down or flattening out and even some decreases or PRICE CORRECTIONS. All this is GOOD and NORMAL. It keeps the house prices in line with the affordability index.
The reciprocal of this of course is that if INCOME INCREASES then the index will drop - we will have more money to spend on buying a house. So only one of two things can happen to keep prices stable when discussing the housing affordability index, either we have a price correction when we get above 35-40% or we see a wage increase in the average income.
So although we see a slowing down of price gains in Simcoe County recently, consider it a good thing, a NORMAL thing...it will allow us to grow slowly...remember in real estate slow and steady wins the race!!
Mark Vosylius
(705)-812-1033
Email: mark(at) manainvestments com
Mana Investments -www.manainvestments.com - Defining real estate values and economic fundamentals for investors and home owners the Orillia, Barrie, Innisfil, Collingwood, Midland areas. We specialize in using RRSP as for real estate investing as well as joint venture agreements and assignment real estate contracts in Ontario
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