Show notes
I just got back from IMN’s 5th Annual Single Family Rental Investment Forum in Miami, Florida. I was on a panel there speaking. What I enjoy about these events is that I get to network with people from all around the country and even out of the country and talk about the future of real estate investing, what is happening in the markets, the tightening of inventory, the growing rental pool, the effects of policy, monetary and fiscal, as well as geopolitical events. There’s just a mixed bag of topics. It’s all fascinating. This is a good segue into today’s show. Sometimes I talk to you about tactical items, whether it be asset protection or evaluating a neighborhood or finding a good deal. But you need to counter that with understanding some strategic related topics. It’s good to understand the tactical side of things, but it’s also good to understand the bigger picture, the strategic items, things that can or will affect your real estate investing, the strategy you have, where you invest, when you invest, that kind of stuff.
Today’s show is more about macroeconomic stuff. We’re bouncing all over the place talking about different subjects but they all tie in. It’s good to have that big picture, 50,000 foot level view, of your real estate investing. It doesn’t matter whether you don’t have property yet or you only have one property or maybe you have a large portfolio of a hundred units. It doesn’t matter. You just need to understand this even if it’s at a high level.
Thomas Friedman, he is a US journalist but he’s really an author and three-time Pulitzer Prize winner. He’s a very smart guy. He’s written many books on the subject of world events, economics, geopolitics, and how that all plays into the US economy. I like one of his quotes. He said, “In Globalization 1.0, which began in 1492, the world went from the size large to size medium. In Globalization 2.0, the era that introduced us to multinational companies, it went from size medium to size small. Then somewhere around the year 2000 came Globalization 3.0. At that point, the world went from being small to tiny.” You can see that the smaller the world gets, the more we are affected and impacted by events that happen outside of our borders.
All real estate may be local but that doesn’t necessarily shield one market from major events occurring thousands of miles away. In today’s global economy, important geopolitical events have consequences that can easily ripple across the planet. It can and will affect you. Election results, economic policies and international relations all have spillover effects on global real estate, whether directly or indirectly. These create incentives for buyers to be drawn toward or even repelled from various geographic markets. You’ve got to watch these bigger picture items because it can give you clues as to when or why to move into a market or when or why to move out of particular markets.
Some factors are purely financial in nature, like changes in currency values or tax treatments. For example, the provincial government of British Columbia in Canada imposed a 15% tax on foreign investment last August. That’s a law that would have added $300,000 to the price of a $2 million home in the Vancouver market. We all know that Vancouver is very, very expensive. It’s much like the San Francisco market here in the US. There are many parallels to that. There’s a lot of investment capital coming in from other countries, foreign capital. As a result of this tax, house prices in the area fell 5.3% in November and that’s the largest monthly decline since 2012. From January 2016 to January 2017, house prices in Vancouver fell a whopping 18.9%, that’s almost 19% in one year. It reduced the foreign investment rate from 13% prior to August of last year to a low of about 4% right now. The foreign investment capital has dried up considerably and that lack of demand, that lack of capital has let prices slide in the Vancouver market. They’re really seeing a correction right now.
Other policies that may make destinations less or more appealing by easing or restricting immigration, that’s one thing. Cross-border trade is another thing. In worst case scenarios, geopolitical events can escalate into full-fledged military conflicts and that could displace entire communities and endanger lives. By nearly any standard, 2016 was extraordinary. There were a lot of events going on politically, starting with Great Britain’s Brexit vote and then that rippled through major elections across Europe and the United States. Populism has been turning the status quo upside down. While it may be tempting to view populism as a rigid and inflexible movement extending across borders, this would be an oversimplification of the various forces that play in each election. It would encourage faulty assumptions about how developments may unfold in 2017 and beyond. Donald Trump may have earned his fortune in real estate, but his broader policy positions and their implications on US real estate will only begin to take focus after about his first year as President. It just takes that long for changes to be implemented and start taking effect.
Over the first half of this year, 2017, there’s little doubt the US economy will enjoy stimulus largely from a combination of tax cuts and government spending on infrastructure and national defense. This in turn should boost consumer confidence and drive the economy higher along with inflation and interest rates. As long as our GDP growth is sustained and comes from more jobs and higher productivity, inflation will be and should be manageable. One hallmark of US real estate, this is something to consider, regardless of who holds the Presidency, is the fact that personal property rights here in the US are held sacred. Those property rights are extended equally to foreign nationals. It doesn’t matter if you’re a company or a person or whether you’re a US resident or a foreign national, these property rights are very important because it’s the rule of law that makes the US so appealing to foreign nationals.
This appealing fact, especially to Chinese investors, is a huge draw for foreign capital. I just spoke with an investor in Sydney, Australia right before recording this here today. He’s in the process right now of getting pre-approved for financing so he can start buying a portfolio of properties here in the United States. He’s working with one of our investment counselors right now and putting those pieces in place. People get it and they will continue to invest in the US but in different places and to different degree.
Often, geopolitical events in other parts of the world can tip the scales in such a way that a safe haven in US real estate will still attract inbound investment in spite of other disincentives such as the exchange rate of their currency into ours, which can be dramatic. You may want to consider yourself as a global real estate practitioner. It’s important to stay dialed into these and other stories. Doing so puts you in a much better position to spot opportunities and understand where future business may originate from and why. Today, I have an interesting guest who happened to be in Israel when I interviewed him.
If you missed our last episode, be sure to listen to One Financial Advisor’s View on Real Estate Investing.
Enjoy the show!
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