Real Estate Market Due for a Correction?

There is a lot of speculation and fear about the bubble in the marketplace. While bubble concerns are visible in some marketplaces in the US and perhaps Vancouver, is there a cause for concern for the rest of Canada?

The Normal Market

Similar to the stock market, real estate market also has a cycle. First, there is the annual cycle of certain months being slower months than others – winter is slow time, summer is usually more active time for buyers and sellers. Second, demand & supply, interest rates will cause occasional adjustments in the marketplace.

It is important to note that a “Bubble” is not part of the normal market cycle. It is an artificial rise in demand – which is unjustified by fundamentals usually fueled by speculation, misinformation and greed.

What is a Bubble?

In the dot com era, technology stocks were trading at extremely high price-earning ratios, which were not supported by market fundamentals – that is, the stock valuation had a weak correlation to the profitability of the company; rather it was based on expectation (speculation). People expected dot com companies to be the waive of the future and were willing to finance it, these companies had no real income or collateral to back up the equity loans they were taking out. While some dot com companies made it big, like Amazon and Google, the vast majority failed. The technology bubble burst due to one simple reason, all of these companies came out at the same time causing an excess of supply with no corresponding rise in demand for the products it offered. Buying and trading was being done almost solely on dreams of future cash. That is the basis of almost all, if not all, “bubbles”.

What about Real Estate Bubble?

In contrast, real estate is a basic need – everyone needs a place to stay. It has a finite supply – land is scarce since no one is making anymore of it. In addition, artificial barriers introduced by government (greenbelt, conservation land, farm land) cause land to be even more scarce and push the demand up for other available land for development purposes.

Population is on the rise largely due to immigration, demand is boosted for real estate around business hubs (like Toronto, Vancouver, Edmonton, Montreal). Since land is more expensive in these areas, developers will likely address the higher density issue by building up (high rise condos) in these areas. And since the vast majority of people prefer a single family home and builder’s are expected to build less of it in these areas, these types of homes will also see a rise in price.

To sum up so far, a bubble is fueled by artificial demand unjustified by fundamentals (normal supply and demand) – people begin to buy and sell based purely on speculation with no current market justifications for the higher demand. Real estate has a consistent rising demand and a limited supply which is unexpected to change anytime soon.

It’s all up for Real Estate?

Does this mean that the housing prices will not fall, absolutely not. As part of normal real estate cycle, prices will occasionally adjust to reflect the current supply and demand situation of the market.

Let’s first look at the crash of the 90’s to see if similar fundamentals are visible in today’s market place.

Crash of the 90’s

Over 30% of the people buying in the Toronto area in the 90’s were investors, with consistently rising interest rates, these investors could no longer afford the financing costs which caused them to either sell or be foreclosed on by the banks, which caused an excess supply of properties (especially condos) in the marketplace; the excess supply caused the prices to fall. The falling in prices caused investors who had crystallized their losses recently to stay away from the market place (further lowering demand). And end buyers noticed the falling trend and decided to wait a little longer hoping that the property values would drop further and properties could be picked up for a bargain. This waiting game lasted years.

Last year, only 19% of the condos in Toronto were rental units (according to CMHC’s Housing Market Outlook from the second half of 2005) and vacancy rates are dropping. This is because more people are buying for themselves and not on speculation. So even if the rental markets slowed and vacancy rates started to rise, the real estate market is not likely to be flooded like they were in the early 90’s.


A major factor that caused the adjustment in the early 90’s was the interest rates. In May of 1990 the interest rates were a whopping 14.21% (according it CMHC), making mortgage payments $11.89 for every thousand dollars of your mortgage. This would make a $400,000 mortgage cost $4,755.97 per month. You can currently get a 5-year mortgage at a rate of about 5.25% or $5.96 per thousand dollars on your mortgage. This means that a $400,000 mortgage today will cost you $2,383.67 per month. That means that the effective cost of owning a house is half the amount that you would pay back in 1990 and yet the average price is only 5%-10% higher now than it was in 1989.


The adjustment in the early 1990s was a response to too many speculators and excessively high interest rates. In the late 90s and until now there has been another adjustment to account for the housing markets being under valued in the 90s and consumer attitudes changing to acknowledge that homes were affordable again. Now as prices are starting to reach a level where affordable houses are affordable, we are likely to see prices moderate with slower increases in price and the occasional peaks and valleys that represent a normal market.

Luxury Real Estate Marketing Essentials – Stay Focused and Be Consistent

As branding and marketing consultants for top producing luxury real estate marketing professionals throughout the country we have identified two of the biggest challenges that agents face when trying to build a high volume practice. The first challenge is discovering one’s winning marketing strategies, the best formula for lead generation. The second is staying focused and consistently repeating the winning formula.

One of our clients was earning about $15, 000 a year in another industry. Now, six years later, she is making close to $1 million a year in her real estate practice as the highest grossing individual agent in her marketplace. What is her success secret?

She discovered her winning marketing strategy. She stays focused and consistent. For one thing, she only goes “fishing” for business where the fish are biting. That is, she determined the neighborhoods where the homes were selling fast and started farming just in those areas. This is a simple but often overlooked strategy.

What made her what we call a “breakaway brand” in her marketplace was her consistency of direct mail to homeowners and her consistency in advertising her listings through media channels that proved successful. She became a master of marketing listings in particular areas.

Do you track where each of your leads are coming from? Are leads coming from referrals, phone calls from signs, advertisements, direct mail campaigns, or the internet? When you test a new lead generation method do you analyze what your return is on your investment? Experimentation with marketing strategies is very important. But, without measuring the return on investment, you are missing a very important step on your way to mega productivity. Discover what is working. then, keep working it.

Once you have identified your winning marketing strategies you must have the discipline to repeat them over and over again. This is very difficult for creative people.

After, Neal Simon, the famous Broadway play writer, rehearses his cast and the show opens he attends the first several performances to experience, first hand, how the audience reacts to his story and jokes. He tinkers with the script until he is satisfied that it is his best work-the winning formula. Then the show is considered “frozen”. The cast, the stage crew and lighting crew must repeat this formula over and over again to deliver a consistent experience.

Great brands are built by providing a predictable, reliable user/consumer experience. This holds true in every price range of products and services. There is plenty to be learned and applied to a successful real estate practice by observing the best practices of name brand products and services that have endured over time.

This is part of a series of articles entitled, Luxury Real Estate Marketing Essentials. It is dedicated to luxury real estate marketing professionals worldwide.

First Quarter 2006 Miami Real Estate Analysis

Alex Shay, an experienced real estate broker associate in Miami, analyzes market conditions and a changing real estate climate in Miami Beach, where luxury waterfront properties have been in high demand for years.

What’s happening in Miami? It’s a question that is asked over and over again. Sellers want to know; and buyers want to know. We’re talking real estate, Miami Beach luxury real estate, to be exact. This is an analysis of the first quarter, which should give you a feel of the real estate climate and marketplace in Miami Beach during the first 3 months of 2006.Do you want to know what’s happening? According to Alex Shay, the best way to describe it is, resistance. It’s a word that Realtors don’t like to hear, but that’s what has been happening. Sellers are keeping their asking prices up, and buyers are resisting. Sellers feel that the number of luxury homes in Miami Beach is very limited, and that the demand is high, and buyers are refusing to pay the prices being asked. “We are experiencing a bit of a standstill in the Miami real estate marketplace”, says Alex Shay, and the result is that there far more luxury waterfront properties on the market now, than there were during the first quarter of just one year ago.

For example, in discussing Miami Beach real estate, including Indian Creek Village, and Bal Harbour, changes are taking place. Last year, during the first quarter, there were 29 closings of listed luxury waterfront properties, as compared to 24 closings during the first 3 months of 2006. However, last year during the same time period, there were less than 90 listed luxury waterfront homes as compared to almost 200 luxury homes that are presently listed on the market for sale. That in itself should tell you that the Miami real estate marketplace has shifted, at least temporarily.People want to know will happen in the future, but a crystal ball has not been found. Alex Shay does have opinions, however, as well as a great deal of experience in the luxury real estate market, and although he doesn’t pretend to be able to predict the future, he says that the demand for luxury waterfront real estate on Miami Beach remains high. Miami is an international city, and the only place in the USA, where the weather remains warm all year round. That makes Miami a very desirable place to live and to own real estate, especially luxury real estate. People come to Miami from all parts of the globe, and some of those people see the investment opportunities that this wonderful city offers. They buy property. For that reason, the demand for real estate is high, and will probably remain high in the foreseeable future. Owning Miami real estate is most likely going to mean that you will be “sitting pretty” at the end of the day. Prices have not gone down in many years, and because the amount of international travel has increased dramatically over the past 20 years, people will continue to purchase Miami Beach real estate. What does it all mean? In Alex Shay’s opinion, it means that although there is presently a temporary standstill, in so far as buyers resisting the high asking prices of sellers, things are still looking good.

Closings of luxury Miami real estate are still happening, and will continue to happen. If a buyer is astute, and allows him or herself, to become well educated in the real estate marketplace, that buyer can make a good deal, and within a few years time, may thank his/her lucky stars for having the courage and willingness to take a chance. A few years ago, buyers would sometimes complain about the high prices. That was when you could pick up a luxury waterfront property, for $500,000. Today that same property may be valued at more than 5 times what it was worth then. Therefore, if you can buy a luxury property on Miami Beach, and get a fair deal, do it. Don’t hesitate. “You wont be sorry”, says Alex Shay. He points out that he has yet to find anyone who said that they were sorry for purchasing Miami Beach property.

Miami is not a city located somewhere in the USA where people merely buy and sell property because they are able to afford more, or because they are downsizing. It’s not a place where only people who live here, buy property. It’s a city where people from all over the world buy and sell, so, unless some unknown disaster strikes, almost anyone buying Miami Beach real estate, is going to be very glad they did.One last thing that should be mentioned is that those who are interested in luxury real estate are not hesitating to purchase a home because of negative economic conditions. It appears as if the economy is fine at the moment. They are hesitating because they don’t know what to do. No one wants to make a bad deal, and no one knows what the future will bring.

They approach Realtors in whose opinion they have some faith, and ask the age-old question; will prices go up or down? In the near future, they won’t go up much, or down much. What can be said is that prices of luxury waterfront property on Miami Beach, have stabilized.

For more information go to