A lot of people seem to think house prices in Canada are in for a big tumble. Garth Turner has long hammered on this theme, but the mainstream media seems to be picking up on it these days too — for example, Joe Castaldo’s article.
But nobody can really say for certain what lies ahead when it comes to predicting real world events, in my opinion. In the stock market, the top stock pickers get it right only 60% of the time. And many studies show that people who try to time the stock market cannot do it consistently.
What works in the stock market is investing for the long term, diversifying and rebalancing. This would likely be a better approach to adopt in the housing market rather than trying to dodge an expected plunge in house prices by selling one’s house and renting.
Buying and holding for the long term makes even more sense in the housing market because the transaction costs of buying and selling a house are greater – in absolute and percentage terms – than the stock market. And of course, the first few years of paying off a mortgage go mostly toward interest.
The long-term perspective works in stocks because they recover from the downturns and go on to higher levels. That’s also been the pattern in the housing market over the decades and there is little reason to think it will come to an end — or that if house prices drop, they will stay down forever.
One could also consider coping with house-price fluctuations by diversifying and rebalancing. If all of your net worth is in your house, you could consider trimming back on home-improvement projects and build up other assets such as stocks, bonds or GICs. Similarly, you could pull back on aggressively paying down the mortgage and redirect funds into non-real estate assets.
If you are a first-time buyer, the risk of falling house prices lends even more credence to the first rule of personal finance, which is to live below your means. Avoid buying the house at the outer limit of your budget, and direct the income saved on each paycheque toward accumulating a reserve that hedges risk in the housing market.