September 2008
At Ariston we believe information is power.  Without accurate information you can not properly assess market conditions, nor make prudent or intelligent decisions in business.  Ariston’s blog will attempt to keep you as informed as possible with hard facts, figures and editorials to help you navigate the dynamic nature of the real estate market.

Hard Facts.

The economic developments and fallout both for the North American and global markets for the last six months have arguably been the most unnerving it has been in over a decade. A multitude of negative factors has undermined many forecasts to delay limited upbeat indicators towards the Q4 predictions, and forced further recessionary concerns to influence Q1 of 2009. The host of issues surrounding the American real estate market, including the subprime fallout, mortgage-backed security meltdown, and corporate and financial insolvency that has ensued, has really begun to hollow out the core confidences of the business community and financial establishment. Combined with the underlying recessionary fears within the general public due to the oil uncertainties, sub-prime, high prices, and soaring unemployment, consumer confidence has taken its proverbial lumps.

Who knows how the U.S. would have handled these situations if it did not have the presidential election campaign to follow and become enthralled in. The natural state of optimism that precludes just such an event, especially considering the unique candidates, has combined with national self assessment and sobering realism that shows Americans are really banking on a magical change from this election. Change may materialize similar to that of an economic a band-aid being peeled off slowly with all the hairs, painful but definitely necessary. Realism must come back into their markets again.

The U.S. federal bailouts of Fannie Mae and Freddie Mac are being followed by further corporate failures of the likes of Bear Stearns, Merrill Lynch, AIG and Lehman Bros. which underscores the depth of the losses and its broad based spread throughout the financial fabric of the American economy. What is being revealed in the U.S. is that no corporation, no matter how big or established, is safe from collapse. We must thank our conservative Canadian regulatory strategies and, of course, our Bank Act for sparing us the carnage that is ensuing down south. Unfortunately, our economy is tied at the hip in some respects to our neighbours down south, so how are we being affected by the American doom and gloom? Unlike them, our financial lending markets and banks are built on solid fiscal conservatism that provides Canadians with a strong foundation on equity and value ratios. Although the greed factor was indulged by virtually all our banks, by getting exposed to the U.S. subprime and CMBS markets, it was only fractionally. Now we must accept tighter lending practices for our banks foolish participation in those American investments.

Thankfully our oil and commodity based economy has buffered global tremors and proved to be most resilient to the recessionary downslide that is facing all of the G8 nations. Oil has, however, become a double edged sword for us. While we rely on it for economic buoyancy, its speculative nature victimizes many aspects of our economy. Although Canada gains with higher oil prices, it destroys exports, the airline industry and automotive industry, corroding the manufacturing sector in southern Ontario and service sectors across Canada. Our provincial and more importantly, our federal government must invest deeply in training and technology, to combat the pressing issues facing the new economic dynamics. Also, our high dollar really puts pressure on our exports.

The large federal surpluses have insulated us to some degree, but with continued hapless spending these surpluses will easily slip to deficits. Hopefully, with our own election on the horizon, we can send a clear message to secure government commitments towards diversifying other important elements of our economy including manufacturing and job creation. We must emphasize the markets, sectors and growth of the Golden Horseshoe must be protected at all costs until the 2009 recovery begins down south.

Real estate is now the safe haven of the business world, at least in Canada anyways. As Will Rogers said, “they are not making any more of it”. With billions upon billions being wiped away in losses in the financial markets, and volatility being the main instrument for investment gains or losses, what better place to put your money than plain, old real estate? It never disappears, is easy to understand, has tremendous upside, and provides capital protection that only government bonds have afforded. Over the long haul good real estate investments always will appreciate if handled properly.

Unlike our American cousins, our lending principals are conservative to the point of being ridiculous. These days, our banks have made it extremely difficult to borrow due to their own mistakes, not ours. Now we must put more equity than ever into deals and jump through administrative hoops in the qualification process.  Slowly, through shareholder influence, this will change into next year, once their balance sheets show stagnation. Hopefully, deal abortions will be kept to a minimum until then. Remember, cash is king in these markets. Those with it or significant equity get financed, those without, do not.

Talk to your trusted realtor to assess if it is advantageous to sell key properties now or leverage holdings for future opportunity purchases. In the coming two quarters, great opportunities will become available in real estate. Don’t be afraid to source them, finance them (even through private or non-bank financing), and work them into good solid investments.

Perhaps this might be a good year to send your banker a nice card for the holidays.