What every homeowner should know

Real estate strategies for 2015

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(Getty Images/ mstay)

(Getty Images/ mstay)

You have to have a pretty thick skin to talk about Canada’s real estate market these days. That’s because all the Chicken Little’s are out in force. Remember the Disney character who ran around telling everyone the world was coming to an end? Only this time, the world is the Canadian real estate market and the end equates to an enormous crash propagated by greedy politicians, analysts with agendas, and even naive (or perhaps just plain stupid) journalists like me.

Fact is: the real estate market is cyclical. It goes up. It comes down. And along the way you can either make smart decisions or not-so-smart decisions.

I’ve written a few pieces lately that prompted quite a lot of interest and, at times, criticism. The general gist is that the predictions are faulty, always end up being wrong, or I’m just schilling for “the man”—the guy who’s going to make a bundle on your loss. I wonder if these critics also ignore stock market predictions, ETF valuations, market analysis, and general economic information? For all we know, these could also be made up numbers published so that someone else can get rich.

I’m not trying to say: Throw caution to the wind and buy, buy, buy! What I am trying to say is that if—and I stress the if—you are in the market to buy or sell a home, there’s some good, practical information you can use to minimize the downside risk and, hopefully, increase the upside return. For some, that might mean walking away from real estate as an investment. That’s good, particularly if these investments decisions are part of a larger overall plan.

But for others it’s not so easy.

For instance, what should current home owners do? The purely practical, mathematical decision would be to sell and rent thereby cashing in on the equity in your current when the market is high and waiting it out until the real estate market settles. At that point, I could buy low and really put into practise sound financial planning strategies. It’s great advice, unless, of course, you see your home as more than just an investment. And, quite frankly, I do.

So, let’s get down to practicalities: What’s a current home owner to do in this frothy real estate market?

If you plan to sell do it soon

Well, if you’re selling your home this year and you want the best price then try and list it by March or April. Not only will you capitalize on the historically strong spring housing market, but you’ll probably also gain due to people scrambling to get into the housing market before rates go up.

If you’re close or currently in retirement and the equity in your home plays a significant role in your retirement earnings, then you’ll really want to consider downsizing this year.

“If mortgage rates do go up, there’s a chance your house will be worth less, so seriously consider cashing in and selling in 2015,” advises Ted Rechtshaffen, president and CEO at TriDelta Financial. “Your nest egg really will feel the sting between selling your home now for a $1 million versus selling three years from now for $700,000.”

Think long term if you renew or refinance

Whether you’re renewing or refinancing, you’ll need to decide between a variable- or fixed-rate mortgage. In the past, those who opted for variable ended up paying less, but these days the difference between fixed and variable is so small it’s not worth the uncertainty, says Rechtshaffen. “Don’t get greedy. Just take a fixed-rate mortgage that’s under 3% and be thrilled.”

Also, you may want to try and complete the paperwork before the end of the second quarter—or June 30—when the first interest rate rise is expected to occur. Just don’t time the market, says Rechtshaffen.

Mortgage pre-payments earn you guaranteed returns

Home owners looking to get ahead of these predicted changes may want to consider making mortgage prepayments. When you put extra money towards your mortgage, it’s like getting a risk-free, after-tax return of 2% to 3%—more than you’d get with any other risk-free investment out there, such as a GIC or savings account. Plus, the less you owe when rates go up, the better off you’ll be.

Of course, your home is more then bricks and mortar and more than just dollars and cents on a spreadsheet. It’s your castle and, as Rechtshaffen wisely points out, “life and lifestyle” factors are just as important in home buying decisions (note: this assumes the house is not purely an investment property). As Rechtshaffen points out: as long as you can afford your payments and you’re in it for the long term then “don’t be too concerned about the correction.”


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4 comments on “What every homeowner should know

  1. You have a lot of interesting an valid points. I find it interesting your advice to sell your home in 2015. First off nobody has the crystal ball on to what is going to happen next in the real estate market. The GTA has 200,000 immigrants a year putting upward pressure on demand. East of Toronto, we have the 407 expansion attracting business and jobs. The university in Oshawa is expanding at record speed. Infrastructure is being improved .The government has just announced that interest rates will remain same for 2015. Lower gas prices will boost the economy. (Except in Alberta). Some GTA real estate prices will go up by 8% this year. That’s a lot of tax free profit one would be giving up by selling this year. Read “Garth Turners” books or blogs. He has been saying that the real estate market was going to crash for the past 15 years. If I listened to him, I would not have made hundreds of thousands of dollars in real estate like I did.
    Here’s my take on it. The baby boomers encompass the majority of the population. The older generation won’t want the large homes with big property taxes and high maintenance . Two thirds of the population will be selling big homes and down sizing. This is not happening yet. If it has started, the immmagrants are buying these houses and filling the gaps. People near retirement are putting it off.
    Real estate is very prosporous right now. Investing in the right home is key. For insurance, lock in you interest rate for 5 years to be prepared for the worst. I will be making more real estate investments this year and I garentee you I will make money on them. Putting 20% down and locking in for 5 years is key. Worst case scenario , (if the market crashes), I have options. I can refinance for a longer term when my mortgage is due if interest rates are higher. I’m prepared to weather the storm. Mean time, I will still enjoy a positive cash flow on my properties, my tenants are paying off my mortgages, value of my homes are going more than I ever imagined, my rental income goes up every year, and I have expenses that I write off on my taxes every year.
    Your advice to sell your home and rent baffles me. Right now in the GTA, rental occupancy almost ZERO. Try find a property. And if you do the rent may be higher than a mortgage. I have long line ups of potential tenants with cash in their hands ready to rent from me which include a vast majority of professional people. People are living longer so I see people who sell their homes to get the cash out and rent, may go broke .
    Everybody’s situation is different. I hope I was able to put a different perspective on the real estate market. I have been into it for a while and I know what works for me. Cheers!

    Reply

    • “The Baby Boomers encompass the majority of the population”- This is a widely believed, but false notion. In fact, the Milllenials (read: first time home buyers with ridiculous amounts of student debt and almost no way to save for a down payment) are actually a much larger group than the Baby Boomers. Not only is it harder for them to buy a first time home than it was for their parents and grandparents, many of them also don’t want to settle down yet. This is going to have a huge effect on the market.
      “Two thirds of the population will be selling big homes and down sizing. This is not happening yet. If it has started, the immigrants are buying these houses and filling the gaps”- The immigrants are buying these big houses? Maybe some second or third generation, yes. But most first-generation immigrants are in no position to buy a large home. Many have a hard time finding anything more than a minimum wage job, which is no where near enough to finance a home like it used to be 20-30 years ago.

      In short, I think that we will see a correction in our housing market. Obviously more prominent in some places than others. Like you said, there is still a lot of growth in Toronto and surrounding area, and it will probably not be as noticeable there as in other places across the country. But our biggest problem is going to be first time home buyers. As the Millenials ARE the largest generation, they will have the biggest impact on the market. And unfortunately, it looks like that will be negative.

      Reply

      • Yep! The only time I see new immigrants buying large homes is when the Grandparents/adult siblings and their partners buy in together. So you have three generations living under one roof amounting to three couples and the school age children of two couples. Otherwise, the vast majority of first generation immigrants can’t afford big houses. Gen Xer’s might be able to afford large homes but studies suggest they prefer to spend their money on experiences than on large homes. Most Millenials (I’m one of the older ones) are still paying down student debt in many cases, based on friends my age.

        Actually, now that I think about it, who are going to buy those all of those big houses when the baby boomers downsize? Although, many people say the babyboomers are going to downsize, I know plenty of babyboomers and they don’t have any plans to downsize. I don’t think there is going to be an increase of buying or selling these houses any time soon.

        There are always commenters on real estate articles deriding real estate purchases. They go on about how they have money put away and they can’t wait for a market correction so they can buy up houses from the stupid people who overpaid. I’ve been reading these types of comments for ten years now. I took my savings in my early 20’s and used it as a down payment on a little detached fixer upper. I had an ARM that everyone advised against. I chose rapid payments. If I had waited for the correction derider’s said was coming, I’d still be waiting getting minimal return on investment. As it is, I’ll have paid off my mortgage before I reach my 40’s as I continue with ARM’s. I was warned mortgage rates could go as high as double digits, but people who paid those rates in the 80’s seem so terrified of them, I just didn’t see it happening any time soon. Governments would do anything to avoid that situation again if they want any hope of being elected.

        My conclusion is people who wait and wait and wait for market corrections miss out on opportunities right in front of them for all their waiting. They sound angry and bitter, about what? I don’t know. I ignored them and bought the fixer upper, fixed it up with professional help and I’m happy with the outcomes. I have no intention of locking in on mortgage rates. Even if rates hit the double digits now, I’ve done the math and it wouldn’t be a significant hardship for me.

        Reply

  2. LOL…..Govt of Canada BOC just announced rate reduction. Goodluck with your wishful thinking of a 2015 increase…..more so a correction on GTA housing
    that you guys have been hoopla – ing since forever…..

    Sounds like a Desperate Real estate broker trying to get homeowners to list their homes……LOL

    Reply

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