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Rising prices and rising real estate today. Why? A quick explanation.

There is a lot of investment capital out there that has been building up waiting to be spent, and...

There is a lot of investment capital out there that has been building up waiting to be spent, and a significant amount of that money is now flowing into real estate.

Is that a good thing or a bad thing?

If you’re scratching your head and asking, “Why are home prices going up?” part of the answer is: because you’ve been sitting at home for 18 months not spending anything.

There was also a lack of housing built in the past five years, especially in the U.S., so now the market is trying to catch up.

The result is that prices are shooting up, driven by lower interest rates (though rates are projected to rise somewhat), not enough supply, and lots of demand.

Housing a good or bad investment?

Does that make housing a good investment? Well, today it does.

If you own your own house and somebody is knocking on your door trying to buy it, it’s probably worth substantially more now than what you bought it for.

But what happens from here? If you have inflation, which we believe is here now, then your house should also be worth more money in five years.

That’s a good thing for property owners.

The same phenomenon is affecting the apartment building market. Again, there is a lot of money chasing apartment blocks right now.

As a potential investor, how do you determine what this means?

Well, a cap rate is generally what investors look at when they consider buying a property – it’s how you measure whether or not you should be buying a property. Many apartment blocks have been traded at cap rates around five per cent, while in bigger communities cap rates have been in the three per cent range. 

The hunt for good product

If I own a property which was acquired at five per cent and cap rates have compressed to three per cent, I have made money if I want to sell that property.

With lots of money chasing real estate deals, that means you’re going to make money if you have the product.

But it’s very hard right now to find good product. When investors do find good product, there can be a feeling that they should grab it, whatever the cost may be.

On the other hand if you’re a value investor like I also am, I’ve been sitting very, very quietly on the sidelines. Somebody described me as a “lonely” investor because there’s no such thing as a value investment today.

That’s not a phenomenon that’s exclusive to real estate. There are many, many other examples.

Similar issue with consumer goods

For many higher-end consumer goods, if you go into a store today and find something you want, you have to buy it at full price or someone else will.

Take Rolex watches, for example. Everybody wants a Rolex. When you look at a Rolex Daytona, prices have increased from approximately $17,000 to $50,000 from a reseller. There is not enough supply and demand is huge. 

Another example is the vehicle market, where it can take 12 months to take delivery of a new vehicle. You’ll pay more, too. If you used to pay $110,000 for a Cadillac Escalade, now it will cost $160,000.

Carmakers are dealing with chip shortages and labour shortages and can’t produce enough vehicles to meet demand. 

If fashion is your passion, and you want an Yves Saint Laurent or Balenciaga bag, not only are they limited in supply, but because of the demand, companies like The RealReal are buying used products and selling them at high markups.

Again, high demand and low supply is driving inflation.

Circling back to real estate

I was introduced to RealReal by my daughter. I walked around the store and was looking at a pair of old sneakers. I’d never put my feet in a pair of old sneakers somebody else had worn.

She asks, “Dad, how much do you think this is worth?” I reply, “I don’t know, I probably wouldn’t pay five cents for it.”

She says, “Yeah, this pair is worth $10,000.” And I respond, “What? A pair of sneakers?”

The demand for old-style nostalgia is crazy.

As we relate this all back to real estate, the point is there’s a lot of money out there chasing very few products which makes it difficult trying to be a value investor.

I wonder if there truly is a “value investor” any more.

If you want an apartment building, a retail building or even land, and there’s no availability and the vendor tells you he wants $1, he’ll likely get $1.10.

So, if you’re a value investor, you’re left sitting on the sidelines. Good luck, because you are probably sitting in a chair somewhere, lonely all by yourself.

If you want to be an active investor it’s time for you to write the cheque. As awful as it sounds, that’s how it is.

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