A mortgage broker friend of mine and I were recently observing how often folks ask us about “where the market is heading.” In his case, they mean interest rates, in mine, real estate prices. However, the questions are really one and the same. So are the answers- “We don’t know,” “If we were that smart, we would be retired!” While I am extremely bullish on Guelph, and our prospects for continued prosperity, I am also a realist. We do not live in a vacuum, and our market is greatly reliant on forces beyond our control. Low interest rates have fueled a great run in our industry, helped many people become rich, and many more to act like they’re rich. It might serve us well to remember that the interest rate pendulum can swing both ways, and wealth left exposed to interest rate fluctuations can be short lived.
About fifteen years ago I was involved in the sale of a small local apartment building. The sale price, was just a little under $1M. Through the wonders of City of Guelph tax increases, higher gas and hydro expenses, the net income of the property is roughly the same some fifteen years later. Yes, the rents have increased, but only to keep pace with the the corresponding rise in expenses. Yet, the market value of the property based on prevailing cap rates has almost doubled. It would be very tempting for the purchaser to extract the equity built up (inflated) in the property, boost the amortization back to 25 years, and STILL have more cash flow. Indeed, it may very well be wise to do so, and a great many folks have. The problem however, is that by doing so, they are exposing themselves to the pendulum swinging back and wiping them out. (I am still young enough to recognize how dreadfully conservative I am sounding.)
Thanks for reading,