Wisdom from Kevin O’Leary, interst rates increases and housing demand

Kevin O’Leary – AKA Mr. Wonderful and self-proclaimed star of Dragon’s Den and Shark Tank – was speaking at our real estate conference yesterday. Surprisingly, he also used to be a professor at Ryerson’s School of Business so he does know more about what he is talking about then you would expect he does.

The short version of his talk – which was way better than expected.

The good news is hiding

• Corporate earnings for the last ¼ of 2014 are being reported this week and they are all good or great, coming off of one of their best years ever! Companies have increased sales and have lots of cash; unless you are an oil company.
• Overall the S&P should be up 7% for 2015 – with lots of volatility – so hold on tight.

Housing

• Even if demand reduces due to less people buying because of the drop in oil prices OR from an increase in interest rates, pricing should stay stable. Alberta will still have in-bound migration and those people still need places to live.
• Demand should stay stable as long as any interest rate increases are less than 1.2% from today’s rates. That is not expected to happen for another 2 – 3 years.
• Big banks are buying solid real estate and less bonds now. An example is a billion dollar building in New York selling at a cap rate of about 1%. That means that the return on the investment is expected to about 1% on a billion dollars. This is much lower than almost any bond and shows the reasoning that real estate is a great investment in today’s changing markets.

 Interest Rates

• Today the US 30-year bond fell to a record low, surpassing the previous record low of set in July, 2012.
• The US 10-year bond is almost at record lows as well.
• The problems in the market are not real estate but for long term bonds – like the 30-year bond above – lost about 30% of its expected return.
• 6 of the big banks expectations are for interest rates to begin to rise in October by about 1/4% – the same as what the Bank of Canada said 2 months ago. See previous Blog post from October 22 here: http://blog.markherman.ca/2014/10/22/1138/
  • The interest rate increase prediction was before oil fell so interest rates may not increase and stay the same for longer than expected above.

BONUS – 3 Keys to Business Success on the Dragon’s Den

He also shared a few studies on the companies in the Dragon’s Den. They all showed all the companies that boomed all had this in common:

1. Their business model could be fully explained in 90 seconds or less
2. The owners were able to explain why they were the ones to be able to execute the business model better than anyone else and
3. They knew the numbers to their business cold – pricing, costs, revenue, economics, IRR, etc.

All this from the top Calgary, Alberta mortgage broker, Mark Herman at Mortgage Alliance.