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Fwd: TO Property Market Is Going To Tumble Down!

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lynnpabel

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May 30, 2002
FYI … Lynn

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> The economic gurus are predicting a property slum (a real > hard one this time around) will most probably take place as > early as in summer 2002! As a matter of fact, virtually all > insiders in the business do know a sharp turning is imminent > as the property market has simply gone too high and for too > long, except no one could tell for sure when the fall will > actually take place.
>
> If so, why do Torontonians still rushing to bid for properties > of all kind that are priced so outrageously high? While there > are many factors causing the unusual phenomenon (high > demand during a recession), ignorance and desperation are > seen as the main driving force as commented by Dr. Richard > Long of Metropolitan Research Institute. “The logics behind > the rush are not difficult to understand” said Dr. Long, “It all > started upon collapse of the securities market when vast > amount of liquidity is diverted from various financial > institutions including TSE, NYSE and NASDAQ to what was > traditionally perceived as the safe haven – real estates. That > was more than a year ago and what followed was the tight > rental housing directly due to influx of new immigrants who > came into the country in record number, particularly from > such places as China and India. The Asians are known to be > lovers of fixed assets, which are historically a good > investment vehicle to count on for growth and security. > According to unofficial statistics, many of the new immigrants > have capitalized on the tight housing supply by buying up > houses just to slice them into pieces (illegal multiplex) and > lease them out to fellow immigrants. Such practice has been > proven to be viable and have sustained many immigrants > who typically are unable to secure a proper job in a tough > place like Toronto for the past many years. However, things > may soon change so drastically that those who have been > living on rentals from illegal multiplexes may soon wake up in > despair as the rental income they used to enjoy may longer > be there anymore or perhaps at a far lower rate. How is that > so? “It all boils down to basic demand and supply. First, more > and more people will join in to contribute to the supply side > by becoming landlords while the number of new immigrant is > diminishing fast due the recent change in immigration policy. > Second, more and more houses will be up for sales because > more and more people will not be able to afford their > mortgage payment as interest goes up while the job market > is deteriorating (don’t forget, recession is in place at the > moment) and the fact is banks will also tighten the credit as > the business become riskier, meaning you will have to fork > out more deposit and this will effectively barr most people > from buying. Third, panic selling (in line with > Murphy’s > Law) as witnessed during all economic downturn will cause > the price to tumble so fast that under normal circumstances, > the profit you have accumulated for the past many years will > be completely wiped out in a matter of weeks. Fourth, house > prices will become affordable again during the downturn and > this will eat into the already sluggish rental market and fifth, > the equity market is already attractive and will be more so, > why would the smart investors (provided you have the cash) > waste time with the about to tumble hard asset, instead of > the too good to be missed equity market?”.
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> It appears prolong recession is the main reasons (the small > improvement Canada has experienced recently is only a > temporary correction and our economy will eventually reflex > what is happening down south of the border, which remains > gloomy) and the change of our immigration policy, which is > highly damaging as it essentially stops the cash-rich > immigrants from landing here, as the next biggest factor. > Another factor why Dr. Long is predicting the property > market will soon belly up is that no economy can sustain > without fundamental support ie. majority of the people > simply can’t afford to buy a house anymore and worse. Those > who have bet on rentals as a mean of living may soon find > themselves living on their own, if they do not lower the rent > because the prevailing building frenzy will not just leveling > out the basic demand, a glut is more like it! Imagine these > once comfortable landlords were to lower the rent and worse, > the interest rate must go up as a natural cause to combat > inflation which is another immanency down the road … which > means they won’t be able to cover their mortgage > commitment and in the long run … bankruptcy may be the > only word bespoke the situation.
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> The next question is will there be a chance that the property > price will just go on rising for the next few years? > “Absolutely, anything is possible; however, our economy is > going to get into real serious trouble if the property price > keeps on going against the tide. In any case, we would have > to face a slum eventually, just a matter of time. The earlier it > takes place, the milder will be the effect. So it is advisable for > the bureaucrats to let the pain happen now than later. While > a price drop in the form of a slum is disastrous, it is > nevertheless good for the economy (particularly if it is just a > mild correction) as artificial control will only create a time > bomb that will eventually explode. Like everything in this > universe, things must be in equilibrium.”
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> Dr. Long also predict the coming downturn may stay on > much longer than the previous one because there is no > apparent economic stimulants to drive the economy like IT > did in the 90s. Impact of IT as an economic stimulant will be > much milder than before as the segment is relatively > developed, although IT will still be a growth segment.
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> So, what is the solution? “Sell before it is too late, the world > will adjust upon itself and no man can stop that for sure, > certainly not in the long run” said Dr. Long. What about those > thinking of buying one at the moment? “These brave people > are no different from the heroes who have bought Nortel > stocks at $120 a piece. While I am not suggesting the > property price will dive to $4 a share (Nortel’s current price), > it won’t be surprising to see the property price to depreciate > more than 50% during the next few quarter. As a word of > advice, stay put for a while … patience does pay! Need a > yardstick? Just ask the living proof of the financial world - > The legendary Sir Templeton, who is one of the very few > financial guru who is able weather economic ups and downs > for decades and his portfolio has always been the bluest of all > blues. Guess what? His secret is none other than the simplest > rule of the thumb in the world of investment … Buy Low, Sell > High! You can never miss the boat because the property > market is always there and unlike developing countries where > there is a possibility of property price rising for decades and > to a level that is beyond reach by most people. On contrary, > Canada is well developed and therefore, there is no room for > growth like some places in the third world. Remember, > whatever goes up must come down and the higher it goes, > the harder it falls. ”
>
 
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