It seems that every week there’s another mainstream-media-hyped story about Vancouver’s rising house prices, and that’s certainly been the case this week. Most of you will have seen the latest story about Vancouver’s “dangerously” unaffordable housing, as determined by RBC’s highly flawed average-income-to-average-price ratio. And then, just today, a new index has identified Vancouver’s real estate price growth as by far the world’s highest.
Add to that the news this week that Vancouver’s home prices in February reached another new record, and home sales were the highest ever recorded for that month, and it all gets pretty intimidating for a would-be buyer of local real estate. Anecdotally, especially in my role as host of the Real Estate Therapist show on Roundhouse Radio, I often hear people tell me they believe home ownership is just not possible for them.
Or, more to the point, that buying real estate is even a wise move to make. Because surely, SURELY, all this is unsustainable, and prices just have to come down. Right? Or at the very least, price growth of this magnitude can’t possibly continue.
That’s certainly what many believe, ranging from the man on the street to such well-known industry figures as architect and planner Michael Geller, who told me on last week’s Real Estate Therapist show that he believes there is a bubble that will burst.
However, many other industry watchers believe that prices will continue to climb, perhaps a little more steadily, and that if buyers don’t get into the market now, they could be left behind forever.
Others say that the market will continue its growth unless there is a major economic collapse or a rapid rise in interest rates, either of which could happen.
So who is to be believed? How can anyone who is looking for a home possibly assess the right course of action?
The truth is that nobody – from the man on the street, to me, to Michael Geller, to world-leading economists – nobody has any real idea which way it will go. If we did, we’d all be a lot richer than we are.
The only thing any of us can possibly do is assess the information available and, most crucially, mitigate against the risks of being wrong.
If you believe there is a bubble that will burst, and you’re waiting for house prices to come down before you buy into Vancouver real estate, that’s your right. However, in this scenario, there is no way to mitigate against the risks of being wrong. If prices continue to rise, you’ll have missed the boat.
On the other hand, if you take the plunge and buy now, even if you’re worried that prices may go down, there are very straightforward ways to mitigate against that risk.
1. Make sure you are not overstretching yourself when it comes to budget. That may seem easier said than done with Vancouver real estate prices as they are, but it is possible, and important. It just needs an adjustment of expectations in terms of home size and/or location. But there are still great-value homes to be had out there (just check out the listings in your price range on REW.ca). Give yourself room to breathe financially, so that if interest rates do go up, you’ll still be OK to pay the mortgage.
2. Put down a substantial down payment, even if it means getting help from family. As above, a reality check on your desired home may be required. But it’s worth it. If you start out with a decent amount of equity in your home, even if there is a price correction of as much as 20 per cent (which we believe is unlikely), your home will still be worth more than your mortgage, and you won’t default.
3. Above all, truly understand that when you buy real estate, it’s a long-term investment. Now, that doesn’t necessarily mean you’re stuck living there forever – as long as you can rent it out, you have the freedom to live wherever you like. But the investment is there for the long haul. So if you buy a home at $500,000 now, let’s say in a worst-possible-case scenario that its value plummets to $400,000 over the next year – even then, you’ll still be fine, just as long as you’ve followed rules 1 and 2. You’ll still have a home to live in (or rent out), you’ll still be able to make your monthly payments, you’ll still be able to refinance when your mortgage needs renewing, and our cyclical housing market will continue do what it may. What matters is not what the home is worth, either now, or next year, or in 25 years. What matters is that after those 25 years, you’ll have a paid-off home to live in for free, or provide you with rental income, in your retirement. And you can’t say that about any other investment.
So, would-be Vancouver home buyers – be not afraid. The market may seem intimidating, but what’s much more terrifying is being stuck as a renter your whole life, paying off someone else’s mortgage and having no home of your own in retirement. Now that’s a scary thought.