By Conrad Zurini | Owner and Broker of Record
I grew up in a family of five, and we three kids had a power we didn’t realize until we were adults. That power was the capacity to outnumber our parents, to divide and conquer our two very different parents. You see, my dad always had a soft spot for the outdoors and animals, and my mom had a soft spot for keeping her indoors so clean that when people came over they would ask, “Does anyone really live here?”
You can imagine that, growing up, my two sisters and I always wanted a pet, but it had to be a pet that could be contained and wouldn’t mess up our house. We did get the proverbial goldfish, but that didn’t really satisfy our desire for pet engagement. We always overfed them to gain their love, and, well, you know how that turned out. Then I remember one Christmas, we all came down to open our gifts from ‘Santa’, and there, in our living room, was a stand with what looked like a box on it covered by a white sheet and sporting a bright red bow. As it turned out my dad surprised all of us, my mom included, with a yellow canary. It checked all of the boxes. It was contained and it was something we could hold in our hands. We were super excited to have a pet that actually did something. It wasn’t a puppy or a kitten, but it was our very first pet that we could love, feed, give baths, clean up after it and it would sing for us. We named it Tweetie - not very original but it was a name we all agreed upon.
Tweetie was a foray into pet ownership at our home. We never did get the puppy, but we did finally get a cat, at which my mom cursed every day because she had to vacuum all of her long white hair. Tweetie was our canary in the coal mine. If my mom could learn to accept a pet in our household, then gradually she would come our way, and she eventually did.
I have always been fascinated with the meaning behind ‘the canary in the coal mine - a mining tradition dating back to 1911, where miners would use canaries in coal mines to detect carbon monoxide and other toxic gases before levels became high enough to hurt humans. Yes, this practice proved to be inhumane, but miners ended up treating these canaries as pets and they were known to whistle to the canaries to get them to sing.
This idiomatic expression is used to identify an early sign of things to come. When we think of our current economic landscape, what could be the canary in the coal mine? In other words, what is that one outlier or event that leads to where our economy and real estate market will be at the end of this year, and the beginning of 2024? More importantly, where is the opportunity, and where should we be re-deploying our resources to find success in this new normal?
First, it is important to explore the possible candidates for being the canary in the coal mine. Is it tech layoffs, work at home and the afternoon fun economy, bank failures, the erratic bond market, or the rise and fall of cheap money? Whichever it may be, it is important for us, as real estate industry experts, to identify the causes of ebbs and flows which fuel the broader real estate market.
Canary Candidate #1 - Tech Firms Trim the Pandemic Fat
It may have come as a surprise to most of us that big technology companies have been on a layoff spree. Companies like Amazon, Meta, Microsoft, Zoom, Shopify, Wealthsimple, and HootSuite, to name just a few, have just gone through some major layoffs. Most of these companies overestimated their future growth post-pandemic. It seems our patterns of consumerism and how we worked, lived and played during Covid-19 vs. now has shifted, and are causing some ripple effects in our economy.
Canary Candidate #2 - A Bank-run by Idiots
In the early days of the failure of Silicon Valley Bank,(SVB) many experts felt it was the result of an overvaluation of technology companies. SVB was primarily a technology sector bank, and with the sector laying off employees, and trimming growth estimates, it was only natural for a niche bank like SVB to go down. SVB was a huge champion of the tech start-ups who inherently have zero revenue and are flush with venture cash. The cash in SVB went from $62 billion in 2019 to $189 billion by the end of 2021. With that huge influx of cash, the financial gurus at the bank decided to act conservatively and place the money into U.S. Treasuries and other long-term bonds. As we all know, SVB was forced to sell off these long-term bonds at a tremendous loss in order to counter the run-on accounts.
Canary Candidate #3 - Bonds and the Seasoned Investor - A Love Story with a Tragic Ending
In order to understand what is occurring in the banking sector, it is important to understand the way bonds and interest rates co-mingle. I recently listened to an excerpt on my favourite podcast called Marketplace, where they told a story about a fictitious love affair between an investor and a bond. An investor gets together with a $1,000 long term bond paying 5%. It payed $50 a year and the investor was happy. Interest rates then began to rise (8-9 increases in one year) and now there were bonds that payed 10%, or $100 for that same $1,000 bond. As a result, the investor wanted to break up with the 5% bond, and replace that bond with a new bond paying 10%. Bonds are like any other asset class. They continue to pay the contracted return. However, when you go to sell s 5% bond, when others are paying 10%, you must take a loss on the price of the 5% bond. As a result, when other bonds are paying 10%, you must sell your 5% bond at a price that returns 10% on the cost of the bond. In this case the bond was sold for $500, which was 50% of the initial price. This is a simplistic example, but you get the gist of what is happening in these banks that are failing.
Canary Candidate #4 - The Rise of the Afternoon Fun Economy
It’s official! Many companies are mandating their employees back to the office, with some new patterns taking shape. According to Strategic Regional Research Alliance’s recent report, occupancy levels are currently at just 43% of pre-pandemic numbers. Most companies have instituted a partial work week at the office, with a Tuesday-to-Thursday in-office trend emerging. This has led to a rise in what some are calling the ‘afternoon fun economy’. As remote employees get their work done, they are engaging in weekday activities, like golf, shopping and spa afternoons. They are interacting with these services where they live, rather than where they work, causing a shift in where these services are located to the suburbs. The question remains, will amenities flood into the suburbs to take advantage of this current consumer habit, and how will we advise our clients of the impact of this trend?
Canary Candidate #5 - Cheap Money The Cause of all of Our Woes
It is important for us to ask the question, did you think that low interest levels were going to last forever? Be honest, did you plan your investments and your life around cheap money? Real estate has always been a long game, and the price increases that we witnessed in 2021 and early 2022 were the first signs of headwinds to come. With cheap and plentiful money, demand for just about everything goes through the roof, leading to inflation. With inflation remaining high, central banks called for more rate hikes in January, February and March of 2023, and as a result, bond yields edged higher. Then came instability in the banking world, which will require lower rates to start happening as early as summer of 2023, to combat this economic vulnerability.
Canary Candidate #6 - Now For The Good News
As bond yields drop, so does the cost of borrowing, where we have seen rate specials at 4.62% for 4 years. Finally, there is a light at the end of the tunnel for buyers, and we could be moving towards more traditional long-term rates around the 10-year average. The bottom of the market across Canada has occurred, and now Canadians can look forward to steady medium and long-term growth. But the fact still remains that consumers deserve and demand great information going forward.
The shift away from DIY brokerage models such as Comfree/Purple Bricks/Fairsquare, further emphasizes that the full-service real estate model is alive and well, but do not take this trend for granted. It is beholden upon us to look at our clients’ needs with a more holistic approach, including a discussion around best and worst-case scenarios. If we have learnt anything from the past 3 years in real estate, it is that the market shifts on a dime, and it is important to gather and process all of the economic information at hand.
The super real estate agent will emerge in this new era of real estate, by going that one step further to identify these proverbial canaries in the coal mine. These realtors will identify scenarios and/or opportunities which may be time sensitive, but valuable in our client’s decision-making journey. More importantly, they will make a difference in how they help their clients make strategic moves, which will net the best results, for themselves and their families.