February 2009 newsletter

The time has come ...

Long overdue

No, I'm not referring to what the Walrus said. Rather, I'm recalling Barack Obama's reminder of the advice in 1 Corinthians 11:13 to "put away childish things." And to give credit where I consider it's due, I think that we can all be thankful for the change in attitude that our MPs in Ottawa and their counterparts in Washington have started adopting towards each other.

Perhaps the new president's undoubted gift for oratory has helped, but Michael Ignatieff's ability to not mince words has also, in my view, had its effect.

In any case, the severe downturn that both our countries are faced with -- and being increasingly made aware of -- calls for an end to political infighting.

One fundamental aspect of democracy is the right for people to disagree, but a time of crisis requires a common effort to fight the enemy. It happens easily and quickly enough in wartime, of course, but the present economic downward spiral threatens our wellbeing just as much, if not more so. We need to set aside our differences and come together for a jointly agreed upon purpose.

Most of us recognize that recovery is going to be a painful and drawn out affair -- and one factor that's unlikely to get put right all that quickly is the fall off in real estate transactions.

Nevertheless, I have great confidence that the market will progressively return to normal.

My reasoning takes the following points into account.

Where have the buyers gone?

There's a pressing need in the US to tackle its foreclosure problem, even though an equivalent in Canada (Power of Sale properties) is largely non-existent. However, earlier predictions (including mine!) that the American downturn wouldn't spill over into our country have proved to be overly optimistic. True, we're not seeing a growing number of mortgages going into default hereabouts, but the likelihood of a quick, easy sale has become increasingly uncertain. Sellers can no longer expect to see their homes attract a series of showings and, like as not, an acceptable offer within sixty days or so. In fact, it isn't too unfair to say that they may be lucky to have their houses shown at all, never mind getting any offers close to their asking prices.

Moreover, buyers have become decidedly hesitant about making a purchase. Many of them are convinced that they'll pay more than a property is going to end up being worth. Short of a compelling need to buy, they're prepared to wait for the market to bottom out -- and who knows when that will be or whether the low point has already been reached. Indeed, my own focus on getting a client the "most house for the money" (versus the seller and listing agent hopes for obtaining the "most money for the house") has become a challenge to which, quite frankly, I don't yet have an answer.

Perhaps blame can be attached to the media's emphasis on doom and gloom, but most real estate people know that they now have to work hard to earn their commissions. Veterans -- and I have the temerity to include myself among their number -- realize that house selling has its cycles and that this is just another one. At the same time, though, they admit that its roots lie much deeper than usual. There's not only a need to wait things out. There's a growing understanding that some governmental prime pumping is an essential requirement before things will begin to turn around.

They're still out there

Real estate activity isn't determined by price alone. People change jobs and have to move to a new location. They get married -- or break up. They start a family -- or become empty nesters. They can afford a larger home -- or can no longer pay for the one they own. Personal circumstances are constantly changing and altered housing requirements accompany them.

Thus, there's always a market, be it up or down.

To put it another way: selling houses is no different than any other selling job. It's a game of numbers. The percentage of naes will invariably exceed the yaes. All you have to do is make calls and, if the naes are more evident than before, the answer lies in increasing either the quantity or quality of the calls.

Nonetheless, the present difficulty in originating a transaction goes beyond the impact of the doomsayers. It's compounded by the U.S. uncertainty of obtaining financing. Mortgage rates are still well below what they were in the past, but getting approval for one is hindered by the banking system's reluctance to incur any more risks than they have (wittingly or not) already undertaken.

A financial gridlock

Although the American movement to sub-prime mortgages and the subsequent sale of mortgage backed securities is seen as a pre-eminent cause of the economic situation -- a downturn that has spread well beyond its borders -- it has resulted in a credit freeze. Bankers throughout the U.S. (and again elsewhere) are worried about the toxic loans that are sitting on their books, albeit they exist because of their own doing. In other words, they're not sure what they owe and have no clear idea of how to stay solvent in consequence.

Ergo the new US. administration's interest in removing the impediment, be it via the suggestion of a combined public and private takeover of foreclosures or some other way to revive the banking system's basic business idea of lending money (which was their original -- and still necessary -- purpose). Indeed, until would-be property buyers and businesses of all kinds can get financing, the economy will remain stalled, not only at home but also abroad.

This conundrum isn't especially a Canadian concern, of course. The reasons for confidence first expressed by the Harper government aren't unjustified. However, the slowness of our own economy lies in what has transpired to the south of us. Maybe mortgages have yet to become hard to obtain, but the prospect of job layoffs and losses (not to mention the report of a sudden turn for the worse in our trade deficit) cannot be ignored. Our employment earnings may not be as solidly based as we assume -- and our banks could begin to hold back on the loans they'll approve.

Government intervention

All protests from Republicans aside, it's interesting to note that our Conservative party (an equivalent, at least, of sorts) has accepted the need to not rely on the private sector to bring us back to economic health. The idea of an American stimulus package has been copied in the revised budget proposals that Prime Minister Harper tabled when the House returned from its prorogued absence. As I suggested in my opening paragraphs, Michael Ignatieff's urgings probably influenced this decision, but the longtime economic student in me sees the sense of it.

Government cannot -- and shouldn't -- do everything, but neither can free enterprise. There are occasions when politicians alone are able to provide solutions -- and the current ailments in the business world are, I'm quite convinced, in need of a cure that's available only in the the form of outside help.

The medicine unquestionably upsets those who quarrel with the thought of a deficit -- and they have some reason to worry about the side effects. Yet, just as there's no gain without pain, the hurt isn't going to go away if we simply do nothing. Some force feeding is required, whether we like what we have to swallow or not.

In fact, every economic bone in my body says so.

Better still, the emergence of co-operation between opposing parties instead of their traditionally ingrained habit of scoring points whenever they can, tells me that recovery is not only a matter of time but also a presumable certainty.
All in all, I see no reason why, despite the moans and groans along the way, the real estate industry won't be among the first patients to make a full recovery.

So, as I'm wont to say, the key lies in simply going onwards and upwards.

Duncan Pollock, Real Estate Broker,
427 Gate Street, Niagara-on-the-Lake,
Ontario, Canada L0S 1J0
Tel: 905-468-3154 Fax: 905-468-3812
Cellular: 905-704-9037
email: duncanpollock@sympatico.ca
Note: E-mail address changed as above on Nov 3 2007

website: http://www.duncanpollock.com

PS. One of my web pages provides a list of the other newsletters I've sent out. If you choose to go to it, you can click on any title to bring up its full text.
PPS. I've recently been invited and encouraged to create a second website, one that deals with my approach to the industrial, commercial, and investment real estate market. You can reach it, if you're so inclined, at http://www.iciniagara.com.