If you are a homeowner, you have likely been riding a bit of an emotional roller-coaster these last few years.
On the one hand, there are near constant articles in the media about the precarious nature of the Canadian housing market. Every day seems to bring another expert declaring a housing bubble, a forecast of 10 to 25% drop in value in overheated markets like Toronto or Vancouver or dire warnings about debt levels.
On the other hand, the sales statistics published by the real estate industry trumpet steady – and in some cases astounding – growth in sale prices and home sales. In many neighbourhoods across the GTA, postcards and brochures in the mailbox show dramatic local sale price increases and urge you to call now to get a free valuation.
With apparently conflicting information being presented, it is difficult to decide who to believe. Should we sell our houses next week before everything falls apart? Should we hold steady and enjoy living in our homes and watching its value rise and rise?
I will give you my opinion shortly, but it is important to start by having a closer look at the news stories so that we can take what either side says with a grain of salt.
If we take a closer look at the news stories and reports out there, we see that the confusion stems from a disconnect between what has been happening in the real estate market and predictions about what will happen in the real estate market.
One group of stories tells us that in most parts of Canada, the real estate market has done very well in the last few years. Below are links to a couple of articles that fit this mold.
Currently, the pro-real estate stories are, generally speaking, relying on statistics. Behind every newspaper headline about housing prices or sales are statistics where organizations like Canada Mortgage and Housing Corporation, Canadian Real Estate Association or the Toronto Real Estate Board look at the most recent data and compare it against a previous period, be it month or quarter or year.
Such statistics tend to be of a general nature and broad trends are extrapolated for the media to report. If you want to know the average sale price of a resale condo in Brampton last month compared to 12 months ago, you need to look at the actual source data, as the media will more likely be reporting on average resale prices in the GTA. This doesn’t mean the data is wrong or the headline inaccurate, but it is a generalization and based on averages. Individual cases can and do differ from the average.
That said, such stories use historical data and for the last few years, the historical data shows a very positive trend in most of the country, with sale prices rising. Indeed, in Toronto, prices are up 8.5% over the past year.
There is a second group of stories that focuses more on what is coming than what has taken place to date. Indeed, an easy way to recognize these stories is to note when the only reference to the past is used to bolster the argument that such growth and appreciation is unsustainable and is a sign of a real estate bubble. Here are links to two stories that focus on that possibility.
These articles are predictive rather than historical. Without delving too deeply into the esoteric aspects of critical thinking, we can identify two different types of predictions.
The first is a conditional prediction, where X will happen as a result of Y. This is an area that economists (and experts in other fields) do quite well at when it comes to predictions. An example of this would be “All else being equal, unemployment will go up if the minimum wage is increased.” In essence, the presence of or change in one factor will influence another factor.
The second is just a generic old prediction, where the prediction is not based on a condition. This is the type of prediction that often shows up in headlines in newspapers and on the nightly news. An example of this would be “Canadian housing markets to drop in 2012.” On the face of it, the prediction seems quite clear as there are no conditions attached to it. In many cases, reading the article reveals that there are indeed a number of conditions attached to the prediction and that things are likely not as gloomy as you would have initially thought.
See the Headline but Read the Article
How then, do we form an opinion with any confidence? With our busy lives, we all have limited time to spend on areas outside of our interests, job, family and friends. Snippets of news on our homepage, Facebook and nightly newscasts give us an indication of what is going on but we often don’t have the time to look into it further. We often form general opinions on a topic such as the real estate market based on these headlines. While such shortcuts are useful in giving us a perspective, it is important to look beyond the headline and read the article itself. In many cases, the headline presents one scenario but the article itself seems to tell quite a different story.
A fantastic example of this can be found in an article from the Economist.
With a subtitle of “After years of lecturing America about loose lending, Canada now must confront a bubble of its own” you would think the forecast is indeed very gloomy.
If you don’t feel like wading through the piece, I will let you know that in its conclusion, it states that there’s actually no bubble, just a “balloon” that might deflate slowly. It follows up this statement with a warning that low interest rates mean “the balloon could get bigger – perhaps big enough to become a fully fledged bubble after all.” It is a shame that the editors at the Economist misrepresented the article with the title they used and it embarrassing to see such a respected publication end an article with such a vague and unsubstantiated comment.
If I knocked on your door to sell you flood insurance and told you when you opened the door that this entire area will be flooded tomorrow, you would likely be alarmed. If I supported that statement by telling you that it is forecast to rain tomorrow and the rain system could get bigger – perhaps big enough to become a monsoon, I imagine you would firmly close the door in my face. You certainly would not state a flood is coming when the topic of weather came up at work the next day.
By seeing the headline but reading and analyzing the article, we make certain that our understanding of the topic is both deeper and more accurate.
The big question – sell or stay?
I promised to give you my opinion on whether selling or staying is the best thing to do in this market. As with many complicated questions, a simple answer is likely to not work in all situations. Nonetheless, a promise is a promise, so I will keep it as brief as I can. Answer these questions:
- Are you relying on the appreciation in your property to allow you to pay off other debts when you eventually sell?
- Do you find it difficult to meet your monthly payments (car, credit cards, and utilities) because of your mortgage payment amount?
- Are you not able to afford vacations, luxury items, house repairs or renovations or replacing appliances when needed?
If you answered yes to any of these questions, I would urge you to seriously consider selling your house now. Being in a situation where you need your house to have appreciated considerably in order to cover off other debt, or where you have difficulty paying for the things you need and no ability to pay for the things you want, is incredibly stressful. Relying on continued appreciation of your house in such a situation is very risky and a slow-down or slight dip in the real estate market could remove your ability to use your house sale as an escape from that debt and lack of finances.
If you answered no to all of these questions, then staying in your home is reasonable. From all I have read and seen, the real estate market in the GTA is not likely to drop by any large amount over the next couple of years. Interest rates are projected to stay at these historic lows (or close enough) so you can refinance your mortgage at lower rates and pay down considerable principal on your house. As long as you can afford the house you are in and you can tolerate a slowing down or slight dip in the real estate market, then you are in a good position.
If you are interested in selling your house or refinancing it to take advantage of the low interest rates available for mortgages, please contact me to discuss it further.