What Goes Up Must Eventually Come Back Down?

Wherever you are in North America you’ve probably seen housing prices go through the roof in the last year. Real estate markets “normally” appreciate 2-3% per year… we’ve seen 10-20 “years worth” of that appreciation happen in 12 months in many markets.

On the heels of the 08’ market crash interest rates were pushed to 0% (an unprecedented move at the time) and have mostly stayed there ever since. In 2021 we find ourselves contending with yet another set of “unprecedented” decisions by our respective governments to stimulate the economy by providing (in many cases) generous incentives to see people through this pandemic.

Right or wrong on “who” deserves support the fact is that the only way governments are able to fund this “support” (cash payments & programs alike) is through openly “running the printing presses” to expand the money supply to pay for all of it.

Aside from record low rates and government intervention there are many other factors that are playing into why housing prices have gone parabolic. Supply and demand issues, the mass exodus from downtown's to suburbs and the shift to work from home life have also contributed to how people look at housing.

One thing that underpins all of this "appreciation" is affordability and most people have not seen their incomes increase much (if at all) in the last year… yet prices continue to test new highs even as many people lose their jobs, businesses or both… so “who” is funding all this?

The value of an asset is based on what someone else can afford to pay for it and thanks to 0% interest rates and generous government programs people can “afford” to buy more.

As you know by now – I am a disciplined cash flow real estate investor and perhaps I’m not the right person to comment on some of this because I thought that many major markets across North America like Toronto, New York and California were already over priced before the pandemic hit yet here we are as they continue to “appreciate”…

How someone could justify spending $1,000,000 on a condo/house only to generate $2500 a month in rent is math that I can’t reconcile … If you invest in a $1,000,000 home and have to feed that property $1000 - $2000+ a month to cover the expenses you NEED that property to appreciate just to get your money back.

This doesn’t even factor in slight interest rate increases… I wonder how long people can afford to keep subsidizing a property by $2000 a month before they can’t do it anymore... What about people who refinanced multiple properties to buy more negative cash flow properties...how long??

Whatever your opinion on whether there is a financial storm brewing if you remain focused on markets where you can invest for strong cash flow first and look for appreciation as a bonus you will be prepared.

When you have great cash flow and a long term outlook the “price” of the property doesn’t really matter in the near term. With the massive run up in prices these markets are increasingly harder to find but they do exist when you know what you’re looking for.

Where are you investing for cash flow?

Marcin Drozdz

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