I wish I had a dollar

“I wish I had a dollar for every time I have been asked of late what I think about the condominium boom occurring in the Greater Toronto Area.  Will the rising prices and fast rate of sales continue?  Will it end and, if so, how?  Will it be a so-called “soft-landing” or a total bust?  The assumptions underlying these inquiries are that, as someone who is actively engaged in real estate finance, I somehow have access to information that is not generally available to the public, and that I am thus able to predict where things are going better than might others be able to do so.

Let me state clearly and unequivocally that the assumptions are wrong.  I have no special information.  And any prediction that I might make has no more validity than the opinions of the many others who show no reticence is expressing opinions on this topic, particularly when the media are hanging on their every word.

There are two things, however, that I can state with confidence.  The first is that the current boom market, and the irrational optimism that seems to drive it, will end.  We cannot know exactly when, and we cannot know exactly what the end will look like.  But we do know that it will end.  And the reason we can predict this with certainty is simply that it always ends.  Real estate, since time immemorial, has always been a cyclical business.  Boom then bust.  The length and extremeness of the booms may vary, just as may the length and extremeness of the busts.  But the cycle nonetheless continues.  This is largely a product of human nature – i.e., the way we tend to behave as human beings, however irrationally at times – and there is nothing to suggest that that is going to change anytime soon.

The second thing that I can say for sure is that, whatever direction the market takes, the mass media will have the effect of causing it to be more extreme than it might otherwise be.  How do I know that?  I know it because that is what the mass media does, and what it has always done.  “Sound bites”, and one or two line quotes from those identified as pundits, are reported as if they are news.  It is a constant competition to be the first one to identify the latest economic trend. Members of the public, who love getting on bandwagons even when they are not playing in a band, respond accordingly, and the whole thing quickly gets out of whack.  But here is the rub:  The pundits in fact know nothing more than you or I. And very often their opinions, as a result of being reported in the mass media, are the actual cause of what happens, and not a prediction of what is going to happen.

There can of course be opportunities to make money in all of this, particularly for short-term players who are not risk averse.  As for myself, I buy only real estate that I need for my personal use, and do not regard real estate as appropriate subject-matter for short-term investment unless one is a developer or builder who knows how to unlock unrealized value, which again is risky and can be difficult. Long-term investment is a different matter.

At Morrison Laurier we sidestep the issue altogether primarily by doing two things. The first is that we pay close attention to how much we loan against the properties which comprise our security, being careful never go too high against the value.

Secondly, but for some very limited exceptions deemed appropriate in light of the specific facts, we lend to new projects only where there has been a sufficient number of pre-sales accompanied by good deposits.  Thus, our role is, in effect, reduced to financing a purchase-order.   With apologies to W. P. Kinsella and his Field of Dreams, we do not assume that “if we build it, they will come”.  We build it only because they have already come.  And that makes the market largely irrelevant”.

David Morrison, President Morrison Financial Corporation