This article was published today in Vancouver’s go-to business publication Business in Vancouver (BIV). These kind of articles are always written in such a way as to make it seem that prices will never fall again and that those who cannot buy now are in a position of potential loss or at least the fear of getting left in the Jones’ real estate dust.
In times of bubbles – and some will even try to say this is not a bubble but some kind of ‘steady increase with a solid basis’ – this effect is amplified. We see people do exactly the same things when a certain stock is taking a crazy run up the charts. I have been the victim of this one at least twice and I can still feel the regret of rushing in with the mobs today.
What? Are you saying as a real estate agent that someone might *regret* buying a home today in Vancouver? YES! I am saying that! That is, unless, you have the ability to withstand the following potential challenges:
- a potential and eventually inevitable increase in interest rates
- a very, very, long mortgage payment which stretches past the point of death (‘mort’ as the French say)
- possible continuation of a poor economy
- possible loss of employment resulting from the aforementioned poor economy (or otherwise)
- another potential ‘life event’ which could cripple a mortage payment (hint: think marriage)
Although I have many wise friends around me who discourage people from owning real estate at all, I’m not going to go that far. I think there is something neat about being able to secure a piece of land and not move if your landlord gives you notice. One of the same wise men above was forced to move just months after moving in which is absolutely disruptive. And sometimes, the increase in asset value works in your favour (such as my mom who currently has a 70’s home in Richmond valued at a quite humourous 1.0 million) and you can sell at the top of a hot market. Also, on the topic of real estate as an investment, I figure that if you have no other plan to invest your money, that it’s possible that you might do better in real estate than burying it under your mattress. Other’s have even argued me on that point, though.
But for those of you out there like me who can’t afford to take a hit that will cripple their family’s financial future, I recommend a more conservative approach. I’m not advising not to buy real estate, but I am advising to think things through.
Do the math.
What would happen to your payment if interest rates go up just 1%? What about 2 or 4%? And what would happen if the value of your home plummets 30% and you suddenly needed to sell and move to Winnipeg because that’s what the cool kids are doing? Then what? What if the rental market craps out because there is a glut of un-tenanted condos on the cheap? Just take some time with someone around you (ie. an unbiased financial planner if you can find one) and run these scenarios. Make sure that you are not putting your family at risk for a badge of home ownership because take it from me that the stresses of making a mortgage payment when the family income stream is disturbed is not fun. Renting, even if temporarily, offers a lot of advantages, such as these:
- ability to write an offer to purchase without ‘subject to sale of own home’ clause which makes your offer very strong, should you choose to buy real estate in the somewhat near future
- ability to change neighbourhoods much more easily if you don’t like where you are – you can give a neighbourhood a ‘test run’ without paying property transfer taxes and realtor fees
- no maintenance and repair fees
- ability to invest your money elsewhere (do not do this without a strong plan, though!)
Don’t forget. Every market is a roller coaster and unless you have a crystal ball, expect some downs with the ups. This video will help put it all into perspective.