One day we will know the truth!

 

I used to tell a story years ago about where to get advice. It was a simple story about a guy in a bar sitting on a stool and talking to the person next to him about persistent headaches and nose bleeds he had been getting. The less than wise counsel from the bar companion was to take a couple of Advil and carry on partying. My point was the bar is the wrong place to get advice about serious head problems, a doctor would be better. Likewise with real estate, the best place to get advice is a REALTOR® - someone who is working in the field day after day, has been educated in the many complicated facets of real estate and related issues and commits to a continuous process of learning.

 

Today, I am not so sure. 

 

Perhaps we should take an Advil and keep on partying!

 

I very rarely watch TV, however, last week I had a spare hour and caught a 60 Minutes show out of the US which was profiling over-development in the real estate industry in China. It was a fascinating show portraying how Chinese developers had pushed poor workers out of a region to build a new city. Complete with high rises, Manhatten-esque commercial towers and blocks of apartments and even replicas of English mews style homes. The most amazing amount of borrowed money had been put into building an urban environment that nobody could afford. There were no residents in the city. The point the producers were making was there were more than one of these cities which had been built but nobody could afford! I have to admit that I had no knowledge that China had been fuelling a more than fake economy along with us as we pump billions of dollars into “stimulus spending” that is clearly not making a difference where it needs to. The impacts of such a fast growing Chinese economy have been vast price increases in commodities as traders bid up the future value of items and necessities that they know we cannot live without such as fuel and groceries, yet they were taking advantage of artificial news to line their own pockets.

 

China learned a lesson from us, perhaps they are even more capitalist than most western economies. The build it and they will come mentality however has never worked. An economy is driven by the very basic principle of demand. For any economy to be successful, there needs to be consumption. For the sake of greed, many people made the mistake of believing there was an insatiable appetite for real estate.

 

When one person walked into my office several years ago with five contracts in one building of apartments and explained they would never have to close on any of the contracts because they would assign them to other people it was clear something was wrong. Greed or "red mist" as we call it in car racing, creates such a fog that we cannot see the truth.

 

In another report I was reading recently it was talking about the evolution of “traders” in the real estate industry. “The buy it now or it will be gone” mentality that treats real estate as a commodity. Thankfully, we have seen those types of people travel through the Okanagan, but I don’t believe there are many if any “traders” left. The truth is real estate offers very flexible investment opportunities. Whether you are a first time home buyer looking to add some sweat equity into a run down home in need of some TLC or a mature investor looking to hold a property with a tenant that creates an annuity, or simply a home owner looking for a roof over your head, a local REALTOR® will be able to guide you through the process. The one thing they will not be able to do is predict the future. 

 

This week I received a spam email from a “marketer/trader” in another part of the country. I was told that if I wrote a contract for an as yet unbuilt condo in that market place, I would make as much as a 40% rate of return in the first year (a forecast return in their language). It was one of the “traders” in my mind that I just wrote about. A few things struck me, a few numbers that had been left out of the calculations that appeared on their cartoon, a lack of a financial prospectus since they were selling a security, a REALTOR® that was selling a security (who I hope had a securities trading license) and finally the thought in my head about returns. 

 

So here is what struck me. If I went to my bank and said I have a guaranteed deal. I am putting some money in, I want you to partner with me and together, we are going to make a 40% return. What would the bank say? Yes, would be my guess. Now if I said to the bank six months later I am selling our investment, I am bored of it, I think they would ask why and how stupid could I be?

 

The final thought I would summise then, is why the heck would any developer and their respective bankers sell a deal that generates a 40% return. The banks only get 27% on credit cards?

 

When do we get to know the truth? Like the above deal, it looks to good to be true, so it may well be but getting to the truth is the most difficult challenge for us. That is the biggest question in my head today because until we know the truth, until we know what has happened and the magnitude of rampant greed that has driven capital markets, then we will never be able to predict the future. A future that we are leaving to our children.

 

With all of the confusion and lack of ability to forecast the future, I for one, am very thankful to be living in such a beautiful part of the world while I contemplate which way the world is being spun.