March 15th 2024
Speculators are gamblers. Plain and simple! Oh, they might disagree. They have a system they will tell you. They follow trends. They watch the market. And ten thousand gamblers at Vegas will say the same thing. They have a system. But in my mind, it’s a lot like the game of musical chairs. A dozen chairs. Set in a row of six back-to-back. And a dozen people sitting on them. The music starts and everyone gets up and begins to march around those chairs. But then one is removed. When the music stops everyone scrambles for a seat. But one is inevitably left standing. That’s the way it is with speculators. Only as the music heats up, more and more people add to the group circling those chairs. By the time the music stops there are thousands left standing.
That’s what we saw in the spring of 2022. Thousands and thousands of people were circling those chairs. And why not. In January alone $100,000 was added to the average sale price in Niagara. People were racing to get in on it.
But then the music stopped!
I saw the same thing happen in the U.S. back in 2008. In fact, I had a friend living in a large Florida town who decided to build $1,000,000 speck houses in 2007. Ten or so. All under construction. But then the music stopped.
Of course, it wasn’t just speculators in the marketplace back in 2008 in the U.S. or in 2022 in Canada. There were home buyers and investors as well. But generally speaking, they are insulated from a downturn. Consider the U.S. meltdown. If you had just purchased a home to live in, the fact that its value on paper dropped had no effect. You still had your mortgage in place and your family in the home. Life was good. The same applied to investors. You owned the property. You rented it out to tenants and the tenants paid the mortgage. For you, nothing changed. It was the thousands of speculators who were counting on spinning the property off before closing who got caught.
That in fact is one of the beauties of investing rather than speculating. You enjoy the numeric lift if the market continues to rise, but are insulated from exposure if and when the market drops. You have a guaranteed seat as it were when the music stops.
That’s not to say investors and end users don’t benefit from a market heating up. They enjoy an increased net worth. Have more borrowing power if they elect to do an equity takeout. But they don’t have the same exposure.
Now I’m going to go out on a limb here and pass along some advice from my perspective. I think the market is absolutely right for end users, investors and yes, even speculators. Why do I say that? Well, prices have been sliding for almost two years now. The average home is priced a lot lower than it was say in February 2022. At the bottom? Likely.
At the same time, interest rates have been rising for most of that same period. At the top? Likely.
Financial people are forecasting interest rate drops throughout 2024. And of course, based on returns, as rates fall, so do cap rates, resulting in price increases on investment property. If I was a speculator, which I’m not, I would get back into the market now while selection is good and prices are relatively low. And as an investor, while I maintain there is no bad time to buy, some opportunities are better than others. Chairs are being added. People are not. And the music is about to start.