Five reasons why falling house prices aren’t so bad
The Globe and Mail
Published Wednesday, Jul. 11 2012, 7:35 PM EDT
Last updated Thursday, Jul. 12 2012, 12:35 PM EDT
Before we start getting all torqued about a falling housing market, let’s remember a few things.
Early indications in June of a slowing market in some cities do not necessarily presage a U.S.-style plunge in housing prices. Forecasters have talked about declines of 10 to 15 per cent being possible, or just a period of drifting sideways. Without a surge in unemployment, it’s hard to see a real crash.
Also, there are some good reasons why a decline in houses prices won’t be so bad. Let’s take a look at five of them:
1. First-time buyers get a break
First-time buyers have it rough. As of this week, the maximum amortization for people with less than a 20-per-cent down payment has fallen to 25 years from 35. Net result: Mortgages are harder to carry for new buyers.
And then there are high prices. Even with historically low interest rates, homes are expensive enough in many places that young adults are either priced out of the market or buying houses they can’t really afford to carry with all their other financial obligations (such as retirement saving and putting money away for their kids’ education). Some young buyers are also heading to the distant suburbs, where homes are cheaper but the commute leaves them juggling two car payments.
Lower prices put more young people in houses they can afford. This gives us a stock of homeowners who can move up years from now to buy houses being sold by downsizing baby boomers. Remember, first-time buyers account for up to half the housing market.
2. Established home owners can still book good gains
Don’t torture yourself by measuring your house price gains from purchase to the high-water-mark price, which in some cities may have been already been reached. This happens with stocks all the time – people buy for $10 and the stock goes to $15 before settling back to $12. Result: The investor agonizes over an imagined loss of $3.
The national average resale house price 10 years ago was $205,333 and the most recent tally was $375,605. That’s an annualized increase of 6.2 per cent. If house prices fall 10 per cent to $338,044, then that drags the 10-year gain down to 5.1 per cent. You’re still doing well here when you consider that the average inflation rate for the past 10 years has been 2.1 per cent.
If you only bought your home in the past few years, why do you care what housing prices do? Sensible buyers plan to stay in a home at least seven to 10 years before moving – otherwise, they blow too much equity on moving costs.
3. Maybe the foreign buyers will go away
Let’s not overstate the impact of condo and home buying by wealthy investors outside Canada, because definitive statistics are lacking. But there’s no doubt that in cities such as Vancouver and Toronto, money from offshore has helped bid up prices. A classic example is the drab three-bedroom bungalow in Toronto’s Willowdale neighbourhood that in March went for $1.2-million – $421,800 over the asking price. CBC reported that the buyer was a university student whose parents live in China. We welcome foreign investment here in Canada, but in the case of the housing market that money has fed a pre-existing over-exuberance. It’s healthy for the market if that $1.2-million bungalow falls in price and makes other investors pause.
4. The return of rationality
Too many people are in the housing market today because they fear that if they don’t buy now, rising prices will keep them out of the market forever. And so they push themselves to do things that aren’t sensible or comfortable, like upping their offer to win a bidding war or borrowing close to the limit of what the bank will offer.
An overheated housing market produces an auction mentality, where people almost think they’re in a competition to buy homes. Falling house prices take the adrenalin out of housing decisions. Buyers have a chance to reflect, and that means more rational buying.
5. Show time for patient real estate investors
Anyone remember what could easily be the No. 1 tip in successful investing? It’s buy low. The smart money doesn’t follow the herd into an asset class that is soaring in price – it waits however long is necessary to buy at cut-rate prices.
If you’re looking to buy an income property, show time begins when people are worried about the real estate market.