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What Happens to Rents During a Real Estate Correction?

So what exactly happens to rents during a real estate correction? In this week's Rock Star Minute we check it out...

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I'm Tom Karadza with another Rock Star Minute. One of the number one questions we get around real estate is what happens to rental prices during a property correction. And the reason this is really important is we don't actually look at the important piece of real estate as being the price of real estate, although that's very interesting because it determines what we can get if we sell our properties, it determines we have what we have to pay to buy a new property, and it is really important.

The key thing for us to survive long term in real estate is, what is the income versus the expenses. And so, we want to know what happens to rents during a property correction so let's go on my laptop right now and take a peek...

Property prices in the U.S. versus rent prices in the U.S.. And the reason that we're looking at the U.S. data is they have the most recent large real estate correction. They also have a lot of data available to us so that we can analyze it and this is really just telling us a really interesting story on what happens between the property prices during a real estate correction and the rent. So, the chart starts off that 1983 and you can see all the way from 1983 till about the year 1999-2000, rents and house prices kind of just grow in line together. And then around the year 2000 something happens here and property prices begin to separate themselves from rent.

And the reason that the property prices start to separate themselves from rent… I can flip over and come back to this, I'm going to flip over to another tab here on my on my laptop...

This is now over the St. Louis Federal Reserve's website. And this is a chart of the Fed funds rate. So just effectively interest rates in the U.S. and if we go to the year 2000 here, if we look at this chart right around the year 2000, we can see that interest rates plunged. And what that was, that was a response to the Nasdaq tech bubble of the year 2000 bursting. The Fed chairman at the time Alan Greenspan decided they were going to lower rates and you can see from this period in 2000 rather aggressively through 2001 and then even if it goes lower 2002-2003, they dropped rates in a big way and that began to drive the real estate market…

So, if I flip back to this chart we can see during these years the reason the separation began to occur is that interest rates dropped and it made the cost of money cheaper so that people who couldn't afford buying a house before now could suddenly buy a house, which increase demand, increased housing activity, and that caused prices to go up, amongst other things, subprime lending then began and that kind of stuff. And you can see what happened to the housing market. It grew rather aggressively prices grew rather aggressively during this time. But rents interestingly didn't really move much at all. They just continued to plod along their historic path here. And then as the real estate correction hit in 2006-2007 property prices come back down but rents don't change.

And as an investor this is this is probably from here, this part of this chart, but here's the most interesting thing to me because it's showing during a real estate correction in prices rents don't really seem to move at all. Rents stay rather stable. And this goes to some information that we've gathered from different friends in different cities in the U.S., many of them tell us during the property correction in prices they had more demand from tenants, not less demand. So, as an investor, this is just really interesting data to analyze and be aware of.

And then you can see as property prices begin to correct and go up in the U.S., rents really didn't correct in a big way. They have just kept moving along their historic path. So, even as Canadians here in Canada, this U.S. data tells us a lot. It is rather interesting. It's not a crystal ball by any means into what would happen to rents during a realistic correction here in Canada. But it does give us a little bit of a case study that we can use to make our own decisions.

So, the reason that we think that's so important is to survive during any correction… To make money in real estate, it's not timing the market, it's time in the market. So, to survive any correction, and one's going to come eventually, we need to know about rents because that's the income component of any investment real estate. So now with some history behind us, we kind of have a sense that perhaps rents are going to stay stable during any correction.

So, today if we can get comfortable in our expenses, and we know what our rents are going to be during any ups in the market and downs in the market, that might help us survive any real estate corrections, and really, we want to survive. That's where you make the big money. It's not timing the market, it's time in the market. So, until next time, hopefully you find that useful, your life. your terms.

 

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