Tri-City News

Exploding the myths of a housing market correction

Peter Kinch is the author of The Canadian Real Estate Action Plan and co-author of the Canadian Bestseller - 97 Tips for Canadian Real Estate Investors. - SUBMITTED PHOTO
Peter Kinch is the author of The Canadian Real Estate Action Plan and co-author of the Canadian Bestseller - 97 Tips for Canadian Real Estate Investors.
— image credit: SUBMITTED PHOTO

Pick up any newspaper today and no one could blame you if you got a little worried about the state of the economy or the fear of a pending market correction in Canadian real estate. What if Greece defaults? What about the Fiscal Cliff in the U.S.? Are Canadians taking on too much debt? Have mortgage rules gone too far? Is there a housing bubble about to burst? What if there is a market correction?

The real question is, do Canadian home owners or potential home owners need to be concerned? I personally find that every time there is talk about a market correction in Canadian real estate the tone is quite negative. But let’s take a closer look at that situation:

Rather than argue about whether we may or may not have a market correction, let’s analyze what it really means to Canadians if there is one.

• First Time Homebuyers:

If you’re a first time home buyer, you have likely felt the pinch of the rising cost of housing and the new mortgage rules certainly haven’t helped any either. So a slight market correction would be welcome news for you. For now you can still get into home ownership with only 5% down, but since your maximum amortization is now limited to only 25 years, a drop in pricing is exactly what you’ll need to be able to get into this market.

Conclusion: A market correction is a good thing for you.

• Current Home Owner buying or selling – Moving Up or Downsizing:

It is very rare that someone buys something without selling something first and vice versa. If you are a home owner and you’re looking for the right time to sell your house so you can buy another, you may be concerned that the price of your current home is dropping. But let’s take a closer look at that:

Assume the value of the house you are selling drops by 10%. Let’s also assume that you plan to buy another home (whether upsizing or downsizing). The key to remember in a downturn market is that the person selling their home to you is going through the exact same thing. In other words, if the value of your home dropped 10% so too did the value of the new home you are buying. Focus on what your bottom line ‘net’ is rather than what you thought or had hoped to sell your home for.

Conclusion: In most cases out there, the net effect of a market correction is zero.

• Real Estate Investor or Second home Buyer:

If you are buying real estate as an investment either for cash flow or as a second home, then this is the perfect market condition for you. When there are more sellers than buyers you have more bargaining power. If you are able to negotiate a better deal and pay a little less for the property you are looking for it simply makes the deal that much more affordable.

Conclusion: You should be hoping for a market correction.

• Current Home Owner with no plans to sell:

The majority of Canadians fall into this category and let’s be honest —– the single biggest reason we worry about a housing correction is the fear that it will erode our home equity and as such our net worth. Over the last decade a significant amount of the net worth of Canadians has been tied up in their home equity and this has provided the foundation for a lot of retirement plans — so there is obvious reason for the concern. But should there be? Again, let’s look at the facts. For the majority of Canadians (and I emphasize that I am talking about the majority — not the exceptions who for whatever reason have to sell their home today) the plan is to stay in their current house for at least the next three to five years. So here’s a simple fact: Equity is only gained or lost the day you sell. In other words, if the value of your house were to drop by 10% tomorrow, you may feel anxiety over the drop in your net worth — but it would only be on paper unless you sold your house tomorrow. If you have no intention of selling soon and you can still afford your monthly payments, then all you need to do is sit and wait and go about your normal life until the market bounces back — which it has always done for the past 100 years.

Conclusion: A market correction may very well have zero impact on you.

In the end, the headlines will continue to talk of pending market corrections. The key for you is to decipher one of three things:

• Is this a real concern for you?

• Is this an opportunity? Or,

• Am I just getting worked up about nothing?

Bottom line — a lot of people will fret about this topic over the water cooler tomorrow morning — but the majority of them really don’t need to.

Peter Kinch is the author of The Canadian Real Estate Action Plan and co-author of the Canadian Bestseller - 97 Tips for Canadian Real Estate Investors. Peter Kinch Mortgage Team is located at Unit 201 101 Klahanie Dr. Port Moody, phone 604-939-8326 www.peterkinch.com

 

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