There have been a lot of attentions on the slippery slope our house prices are taking. Few recent news releases added fuel to the fire. A research Firm, Capital Economics, recently suggested that in coming year the housing market will shed about past three years gains.
The signs are showing:
CERA and TREB both presented negative numbers in their recent publications.
Robert Shiller, told CBC news that in Canada, a slow-motion version of US housing crash is already in action. He also expressed serious concerns about ballooned Canadian debt in only past few years.
Don Drummond, former chief economist of the TD Bank – in another news said that he expects in next two years a number of Canadian markets will experience a price cut of ten to fifteen percent.
Fitch Ratings pointed out that heavy household debt and raising house price will exponentially increase the pressure on home owners. Unable to sustain the pressure, many will eventually give in and trigger a housing correction. It expects that the tighter mortgage regulation will soften the blow.
The positive Impact of the Negative News:
It is your home, not an investment:
We agree that a raising housing price gives us some kind of self-satisfaction. But that is all, if you are going to live in that home for years to come then you should not look into house prices. Your home is a worthwhile investment if it satisfies your requirements and the yield of that investment comes from the smiling faces of your family.
It will happen to everyone:
If this news is of any comfort to you – then you should take comfort from the fact that if your home has lost its worth then the same will happen to you neighbours too. A market correction will hit everyone’s ass ets not only your bottom line.
Look at your home as a long term investment:
In short term housing markets are supposed to volatile in nature. If you still insist that your home is also an investment then think about it as a long term investment. We always can wait out the bubble burst season and return when the market stabilizes again. A report said that a number of homeowners are taking their sale signs off.
Good long term investment opportunity:
If you have money to buy and always wanted to invest in housing then this may be your chance to get into the market.
Don’t panic and rush to sell:
If you can afford your house then just continue life as usual. Your home may be just fine. All the numbers are average or something similar. Till you sell your home, you would never know if you have lost or not. If you really have to sell then do your market research vigorously and take steps with caution. You can also rent some part to earn some extra money, if you need. Your primary objective should be to wait it out; it is not going to last for ever.
If you made 5% down:
If you made only 5% down payment and purchased the house on a 95% loan to value – you should be okay at the next renewal time if you do not default. Your loan amount and amortization must stay the same and CMHC will protect the bank in case you are unable to pay – later it will come after you for the loss.
If you have a HELOC:
One reason the government lowered the secured HELOC limit is this sheer chance of house price correction. The new limit is 65% and so far no one has predicted that the price may undergo a 35% correction. If you have a higher LTV HELOC and at the time of next mortgage renewal the lender requests an appraisal and if it comes out to be lower than original then you have no other option but to pay off the extra HELOC amount.
It would be a good idea to pay off the HELOC to the level where you will be able to manage the risk. If because of some reason you cannot pay it down then you have to look for an alternative lender. We anticipate that the B-Lending will boom if there is a crash and getting a Sub Prime loan would not be easy.
Think twice before doing a renovation:
This does not need an explanation. Renovation your home will not add to the value if the prices are falling. It may cushion the fall but prices will not appreciate.
Home Buyers Precautions:
So you are not in the game yet and still thinking if to jump in or not. Here are few tips for you;
You wait and risk missing the train:
No one can time the market. So, don’t think that you would wait till the time is right. What if there is a two stage fall, what will happen if the house prices started to rise before even you realise? So, doing nothing is just another excuse to yourself. Rather you should look into homes which will not be effected by a crash.
Normally under average priced homes in high density areas feels the least pain. They do not appreciate as much but if you need to buy a house then that is a good option.
Compare Renting and Buying:
From a pure financial aspect, compare the options of renting vs buying. If you will be paying less as a home owner then buying is a viable option regardless of a price correction.
Keep your eyes open:
Even if you have planned to wait till thins settles but it does not hurt to keep looking. You ever know, you may just as well find your right match for you at your price range.
Buy from the owner:
When the market is bad a lot of homeowners will try to avoid paying the extra commission to an agent. If you shop correctly and properly then you can save yourself a lot of money by contacting the seller directly.
These are just our thoughts. They do not constitute any advice or direction. Always talk to a professional if you need help.