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Remember Chicken Little? The poor little guy who mistook an acorn falling on his head for a falling sky and went on to lead his friends to their deaths?
We can’t help but think of this story as we read the headlines about the impending crash in the Canadian real estate market. Are we all following Chicken Little’s lead to our own downfall? Or does Chicken Little actually have a point? And is there a way to listen to Chicken Little’s concerns but avoid the fox?
Everybody wants to know where the real estate market is going. But if the ‘experts’ had all the answers, the US economy wouldn’t be in the shape it’s in, they’d have all sold their RIM stock ages ago and Nickelback’s success wouldn’t continue to be such a surprise.
So what do we say when people ask us what we think will happen? We say: We don’t know. We say there are always risks, and ways to reduce them. And we tell people to follow basic investment principles: Pick smart; Diversify; Be ready; Hold; Don’t try to time the market.
Good investors don’t just randomly fall in love with the name of a stock and sink all their money into it. They look for good fundamentals, they do their research and they look to the past for ideas of what they future may hold. In real estate, this means strategically choosing a location and knowing how it compares to other neighbourhoods. If you’re thinking of buying a condo, the past tells us that in the event of a housing downturn, smaller buildings and unique condos still sell; it tells us that the fewer investor units in the building, the less prices drop. Nervous about the future? Don’t buy a condo box that’s identical to the other 600 in a building where 50% of the units aren’t owner occupied. Think hot location, unique floorplan or features in a building where most of the owners live in their suites.
It’s never a good idea to put all your eggs in one basket. If 100% of your savings are in your house, then it’s time to consider a different strategy. Cash + RRSP’s + stocks and bonds + yes, real estate = a balanced portfolio. That way, if one part of the market gets hit especially hard, you won’t lose it all.
Never, ever, spend all the money the bank is prepared to give you – figure out what’s comfortable for you on a monthly basis and stick to that. Determine what your payments would be at higher interest rates (say 5% vs the 2-3% you’ve probably been offered) and make sure you’d be comfortable with those payments if rates go up when it’s time to renew your mortgage 5 years from now.
Be Prepared to Hold
Plan for the long-term – the only people who lose in a market correction or downturn, are the people who have to sell. People trying to flip houses and make a profit or move in 2 years after buying could be at risk. If you buy a place that will work for you in a longer-term horizon, you’ve got time to wait out any correction that might happen.
Don’t Try to Time the Market
We have clients who’ve been waiting for the crash for years now, and unfortunately, many of them have now been priced out of the market. They’ll likely continue to be renters. Trying to time the market is a dangerous game – you don’t know when the ‘right time’ to buy (or sell) has been reached, until it’s too late.
We read all the expert opinions too – for every article about the impending crash there’s an article that says it’s a good time to buy real estate. As a potential Buyer or Seller, you need to read ALL the opinions, know all the potential risks and rewards, then make a balanced decision for yourself.
So there you have it. The BREL opinion. Which of course, does not necessarily reflect the opinion of our brokerage. We’d love to hear your opinion too!