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A Warning With A Lot of Notice


In one of my newsletters of the past, I included the following sentence: " Since everyone is saying that real estate is about to take a major plunge downwards..."  then I went on to warn people (like I'm warning myself) to maybe consider hiding in cashflow properties, and less in equity purchases.  Quickly thereafter, I received a chastizing email saying that my comments were terribly irresponsible; there was also a link to a CMHC article about the sellers' markets returning to a balanced state!   (In retrospect, what were they thinking to write an article like that when clearly the writing was on the wall?)   The email went on to say that my comments could become a self-fulfilling prophecy.   And, I do believe in those types of things as well.  I know, like the movie "The Secret" (www.thesecret.tv - if you haven't watched it, you've missed a great message) that our beliefs, ideas, and values become our reality because they drive our daily decisions.  
The only problem is that I don't believe I was prophesizing.   I think I was reflecting on the market changes in the US, which have historically been followed by market changes right here in Canada because of our major trade connection and inter-dependence.   Remember Pierre Elliot Trudeau's famous comment about the mouse and the elephant?   Who has greater power?   I  think it stands to reason that we are about to be impacted by the growing and impending recession in the US.   This is not a prophecy:  Michigan is in a disastrous condition and Florida is becoming known as the "Foreclosure State".  Several other states have seen huge decreases of real estate equity. 
At the same time, I believe that we will not drop dramatically and have as many problems as the US is having and is about to have, because we haven't been as aggressive as the US in the sub-prime mortgage market.  As Canadians, our ideas, beliefs, and values are somewhat less aggressive, and from a business perspective, when times are good, this may not been viewed as avant-guarde, (or old fashioned, as even the new 40 year amortization raises eyebrows here) but during times of recession, the offsetting value is that we will be somewhat insulated from the degree of negative drop. 
Although I'm no economics major, and certainly don't profess to be anybody important in this great debate, I have to wonder why the Bank Of Canada is even considering dropping the rates.   After all, I know a few basic things:  
  1. There is a huge sub-prime mortgage crisis occurring in the US; 
  2. The US will suffer from the 3 trillion + spent on the war effort for decades;
  3. We are succumbing more and more to the manufacturing prowess of the emerging markets;
  4. The trade interdependency between the US and Canada will affect us more than it will them, and lastly;
  5. The downturn in the economy already happening will negatively affect the Canadian economy because of its interdependency.   
So, I guess I agree that while some ideas can become self-fulfilling prophecies, other thoughts and ideas can be reflective of changing trends in the markets, and should be serving as warnings to us all.   Current investors need to be aware, in my opinion, more than ever before, that this is a time for cash flow purchases - not risky equity deals.  If the market continues to drop, your cash flow properties will protect you and provide more or less the same income, regardless of whether the value of the property goes higher or lower. 
This did prove to be a correct summation of the recessionary tendency of the time.  Now, there isn't anyone who wouldn't agree that 'hindsight is 20/20', but it wasn't too hard to see this one coming!


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