October 2008 newsletter

You win some. You lose some.

Ottawa Parliament Building. Original image at
http://www.chessdom.com/images/store/canada-open-parliament-hill-1761.jpg

Interesting times?

Well, although he didn't get the majority he wanted, Stephen Harper did increase the Conservative presence and, although the Liberal opposition was reduced in size, this was perhaps less his doing and more a rejection of Stephane Dion's idea of a carbon tax.

What remains to be seen is whether things will be better than they were or whether the lack of a clear mandate will still prevent Stephen Harper from having all his own way.

In hindsight, both Conservatives and Liberals may rue the day that a not-altogether-necessary election was called, not to mention being frustrated by the between-times emergence of concerns about where the world's economy is headed.

The odds seem to be that uneasy times are going to be faced by politicans of all stripes, not only in our own country but certainly to the south of us, as well as in Europe and Asia. To no less a degree, the public-at-large is going to be at the mercy of global events and trends far more than usual for some time to come.

Nevertheless, my personal hopes rest on the British habit of "muddling through" and the North American tendency of "doing what has to be done." In turn, despite what some people fear is a repeat of the Great Depression, I believe that the lessons that came out of it aren't lost on today's governments. Political decisions may often be bewildering, but I like to think that the overriding commitment is now in favour of taking care of the common good.

In fact, although we may be into difficult times, I cannot for the life of me envisage them as the end of us.

It's the economy, stupid

Never a truer word spoken in jest seems to be the underlying affect on our own housing market.

The political makeup will be different, but I don't think it will lead to significant changes in the availability of mortgages. True, the 40 year amortization period is no longer available , but that was already decided upon as part of a continuing federal wish to limit the risk and extent of sub-prime lending. Moreover, the $25 billion bank underwriting proposal, as well as hints that, in consequence, interest rates are likely to decrease rather increase, met with no protests from any of the candidates. In fact, a belief in a healthy housing market was part of every party platform -- and anything that Harper favours in order to strengthen it isn't going to meet with very much opposition. Indeed, his claim that we have little chance of suffering from -- let alone being seriously affected by -- the spate of US foreclosures (Powers of Sale in our own language) is, according to most authorities, beyond question. When it comes to banking, we do NOT go the Great American Way, have never really done so, and show no signs of starting to move in that direction.
Even so, our economy and its relation to those south of us and beyond our shores has to be a major preoccupation of the new parliament. On reflection, it was largely his thought of experimentation that was Stephane Dione's undoing, whereas Harper's emphasis on Canada's fiscal prudence played well to the crowds. Whatever the case, returning and newly arriving members aren't likely to stray from the overwhelming need for steady hands on the financial tiller.

To do otherwise will be to ignore what the voters, regardless of their varying political beliefs, have said about what they want: to keep their jobs as much and as long as possible; to avoid and have the means to overcome financial pressures, let alone being free from unsustainable increases in taxes and living costs; and to have confidence in their own and a better future and never mind that of their children.

And, unless I'm very badly mistaken (as opposed to simply being personally involved in the real estate business), I'm quite satisfied that somewhere in the midst of it all there's an abiding wish on the part of most people to buy and hang on to homes of their own.

Just like in America

Last month, I implied that the root of today's widespread economic worries lay in the US predilection for unfettered free enterprise. However, the current focus by both candidates for the Presidency runs parallel with our own more tempered preference for not living (at least unduly) beyond our means. Both Barack Obama and John McCain are obviously keen to revive the US economy by one means or another. Yet, despite differences in approach, neither has much hesitation about the need to pull in the financial reins and to turn back to reliance on old fashioned principles: spending only what you can afford; making sure that you always get good value for it; and holding people accountable for results and/or the lack of them.

In turn, they both stress the urgency of bringing the housing market out of its serious downturn. If people cannot afford to keep their homes -- let alone not having access to soundly conceived and managed mortgages for buying them in the first case -- the economy is indeed headed to the likes of the Great Depression.

If the $700billion bailout (or whatever else various people choose to call it) isn't well handled and made effective in rapid, quick order, shame on whoever becomes the next President -- and neither of the candidates shows much doubt about the importance of making this one of their first steps and getting it absolutely right into the bargain.

In the US, too, it's the economy, stupid.

Underlying hopes

Within the decisions by various governments to ensure liquidity in the lending market, there's what I see as an interesting prediction: that the depressed values of foreclosed properties is expected, over time, to either rise to their original figures or to even exceed them. The basis is a belief that housing prices don't drop in the long term but, however slowly or steadily, increase. It may take five, ten, or even more years, but the purchase of problem mortgage-backed securities isn't expected to end up as a charge on the taxpayers. Rather, the rationale is that removing them from the books of the banking system and transferring them, for a while at least, to the likes of the Mortgage and Housing Corporation in Canada, will give the property market time to return to the healthy pattern that most financial experts perceive to be normal and, for that matter, essential.

Those of us who bought homes many years ago -- including when interest rates were in double digits and despite the periodical ups and downs of the marketplace -- know that our places are worth more than what we paid for them at the time. Perhaps the banks are the real winners, given the interest they make on mortgages, but we certainly don't end up as losers when we make the final monthly payment.

Thus, in contrast to the Great Depression, when governments simply left the market alone to sort itself out, there's now what to my mind is a more enlightened willingness to interfere and use a country's borrowing power to soften, if not minimize, the hardships of its citizens.

Republicans and Conservatives alike support the idea no less than Democrats and Liberals. Political persuasions have advanced beyond the erstwhile conviction that the voting public should be left to entirely fend for itself. Government, big or small, has some obligation to help the undeserving.

So is this the time to buy?

On balance, I see no reason to hold back from a purchase when and as it makes sense, particularly if the need and timing are right.

Real estate isn't -- and really shouldn't ever be -- a short term decision. It's a long term investment that may not always pay off quickly, but it will inevitably do so. In fact, even if the objective is investment itself, an expectation of a sudden turnaround and profit is invariably rather shortsighted. You need to be in it for the long haul to really stand the chance of an acceptable return.

On this point the commercial sector isn't, in fact, as badly affected by the sub-prime problem. Most buying decisions depend on sufficient due diligence, and loans against commercial, industrial, and investment properties are seldom given with a thought of turning them into mortgage-backed securities. In effect, the lenders are usually well and strongly financed and sometimes involve a joint venture in the ownership and management of a subject property. The risk may be spread in one way or another, but it's unlikely to call for the kind of government intervention that is being applied to the residential sector.

Regardless, I don't see a mistake in buying something today as opposed to waiting for the market to get turned around. Especially here in Canada -- and not the least in the Niagara Region -- any significant drop in values -- or indeed in asking prices -- seems quite unlikely. Harper IS right is stating that our economy is in better shape than in the U.S. Maybe a look at properties threatened with foreclosure in some parts of America is worthwhile, but my advice would be to proceed with well-thought-through caution and concentrate on what the Canadian market is offering (which, of course, includes a decided shortage of pending mortgage defaults). The doom and gloom doesn't have its roots in our neighbourhoods and, as I implied last month, has no real justification for what many real estate agents are seeing as a slower and softer level of selling and buying activity hereabouts.

But did our election make a difference?

Well, if it did, I have to think that the voters told the candidates that their pre-eminent concern underscored the saying that I've used more than once in this my latest Shot across the bow. It IS the economy, stupid!

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 addressed 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.