Last night, was one of our Rock Star Inner Circle VIP dinners.
It's so cool to be able to hang out with so many like-minded people.
We have conversations about real estate of course, but also about family, kids, life, purpose, continuing education, vacations & vacation properties, Bitcoin...and so many other random topics.
The network of people in that room has become very powerful.
It's been amazing to watch it grow and evolve.
The VIP group started as an idea from one long time member who suggested that there was a group of investors who wanted to get together more often.
So we started a few dinners throughout the year and added in four extra 4-hour classes, with dinner, throughout the year.
Our first VIP dinner was myself, Nick, and 6 other people.
We made a regular reservation at an Oakville restaurant for it.
Today, we shut down entire sections of a restaurant or close the restaurant entirely for the group.
And we have one more VIP Class coming up soon to close out the year!
To learn more about the Rock Star Inner Circle VIP program, click here.
This week, we wanted to address a topic that comes up a lot...
Why hasn't the real estate market collapsed with all these past rate hikes, and when will it collapse?
We'll address this with a series of charts.
And for context, if you're not aware, we lived through the epic real estate downturn of 1990 to 1996. It was horrible.
Here we go...
Here's a chart of Toronto area real estate prices from the Toronto Regional Real Estate Board and average Canadian incomes (from Stats Canada) from 1969 to 2008.
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Notice how real estate prices outpace income growth?
This is because of the debasement of our Canadian dollars. We'll save debasement talk for another day.
For now let's focus on the top line.
Now let's look at this next chart, real estate prices from 1969 to 2024.
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On that chart you can see the dip in the 1990s, the 2017 dip, and the current dip.
The red arrow on the chart marks the year 2008.
Now let's look at this next chart, where we extrapolate out real estate prices to 2034 using the average growth rate from 1969.
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The first red arrow is 2008, the second is 2024, and then look at the last one.
Crazy, right?
And we don't have a crystal ball of course, but this is using average real estate growth rates going all the way back to 1969.
Now let's look at this next chart where we take real estate prices and compound them forward another ten years.
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Seems absolutely bonkers, right?
Look at the income growth line at the bottom and the real estate price line on the chart on top.
How can this be?
It doesn't seem possible at all, does it?
Real estate prices just can't keep going like that, right?
But what if we told you that it's not the real estate prices that keep going up?
The base of our current financial system is the U.S. dollar. Whatever they do down in the U.S. directly impacts the entire global financial system, including Canada's.
So check out this post on X from Sven...
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That is the size of the monetary base. The foundation of the entire global financial system.
In 2008, they discovered they could manipulate it quite wildly.
Any time there is any sort of financial crisis, the central banks now open the money cannons and spray new money into the economy.
This didn't exist back in the 1990s.
They discovered that they could do this in 2008 in the depths of one of the biggest real estate debacles of all time.
And somehow they turned it all around in a few short years with massive amounts of new money creation.
Debasing your income's purchasing power, but supporting asset prices like real estate and stocks.
We want to be very, very clear about something...
We absolutely DO NOT agree with this. We're fine with the market discovering the real and true price of real estate. We believe in true free market real estate price discovery, but we don't live in that world.
We're not saying every property, in every area, goes up forever. But in general, the market is supported, very largely, by the central banks.
And today, some segments of real estate are going to suffer in this current environment more than others for sure.
Case in point, there is a heck of a lot of condos coming on the market over the next few years here in the Greater Toronto Area.
So we're NOT saying that every property type in every area goes up in dollar terms perfectly and forever. No.
But what we are trying to call attention to is this...
If there is ever a major financial crisis, like in 2020 when the entire global economy shuts down...what did the central bankers do?
They sprayed so much new money into the economy it wasn't even funny.
And we all know what happened to property prices from 2020 to 2022.
So what will they do if there's another major financial crisis here in Canada, the U.S., or globally again?
Likely, open the money printers and spray newly printed money everywhere, wildly.
It's wrong and it shouldn't happen. But what it does do is prevent a nominal dollar collapse of real estate.
This shouldn't give anyone the idea that they can buy anything in real estate and always win. No. Cash flow is still how you survive this game because in the short term prices can drop, rates can rise, and things can get tight.
What we are talking about is over the medium and longer terms the central banks have shown their hand...they print new money to prevent any substantial collapse.
It's happening again right now, just as things are getting super tight in Canada, magically the Bank of Canada has begun dropping rates.
Did anyone expect this many rate cuts this year? And possibly another 0.5% cut to come in December? Not many.
It's wrong, but it's what's going on. The central banks control the markets and they use rates and large amounts of QE when necessary.
We'll talk more about the many nuances to this over the next few weeks.
Happy Halloween, everyone! 🎃
Tom & Nick
p.s. To repeat for clarity, we are NOT saying real estate prices cannot go down in the short term, they clearly can. What we're talking about today is that over the medium and long term there seems to be a very clear central banking "floor" to the market.
