Home buyers are often fearful of a market crash just after their purchase. But fear not!
When I speak to recent or would-be home buyers, one particular fear seems to be prevalent among many of them, especially first-timers.
The fear is that the market will crash right after they buy their home. That it will turn out they bought at the “peak” of the market, and their home will immediately lose value. What’s more, that they could have saved tens of thousands, if only they’d waited.
Even those people who are happy with their decision to go ahead and buy a place can’t seem to shake that nervousness. Take the two Vancouverites interviewed here – a classic example of two smart cookies who made a solid investment choice, but in whom doubts remain.
I’m here to tell them, and you if you share that concern, that there is very little to fear – and much more to fear by not going for it.
Here’s a worst-case scenario for home buyers, which I would stress is unlikely to occur. But even this is totally manageable if you make the right choices.
So, you scrape together all the money you can for a $50K down payment, including borrowing from family and the BC Home Loan program. You qualify for a $350K five-year fixed-rate mortgage that you can afford fairly comfortably, and buy a $400K starter condo in Metro Vancouver. Congratulations!
But, a few months after you close on your purchase, the market crashes in an unexpected economic recession, and the value of entry-level condos plummets by 20% (BTW, that is considerably more than was seen in the 2008/9 recession). Your new home is now worth only $320K.
Time to panic? No.
You keep paying your mortgage each month, live your life, and after five years you owe $300,000 on your unit. The real estate market has maybe stayed in the recession doldrums for a couple of years, but recovered a little, let’s say by only 10%, over the following three years.
So after five years your unit is now worth $352K, and you owe $300,000. You are able to renew a new five-year mortgage at the end of your first term because you have $52K in equity. You continue to pay off and live in your home, and the market cycles continue. Before long, the value of your property is higher than you originally paid.
If you’ve been even smarter, you realized during those five years that you need to pay down your mortgage as fast as possible, and accelerated your payments in order to avoid payment shock when your BC HOME loan payments start. So maybe now you only owe $280K on your home, and you have considerably more equity than you started with, despite the price drop. And so life goes on.
But hold up: what if it was an even worse scenario, and you lost your job in that recession, and weren’t able to pay the mortgage?
No doubt, it’s imperative for all home buyers to have a plan in place for this scenario. After all, it doesn’t take a recession for a person to lose their job.
Emergency plans vary considerably, depending on your situation. Do you live with a partner who can carry the mortgage costs while you get back on your feet? If not, do you have six months’ worth of money saved, in case you have nothing but employment insurance as income for a while? Could you rent out your unit and go live with friends or family, if things got really tight?
As someone living alone who has no family in the city, I have compromised spending some of my inheritance on renovations, saving it instead for that kind of rainy day. I have also put my unit down on the building’s rental wait list, just in case the day comes that I need to save money by moving into a friend’s basement.
The point is, as long as you make the right choices and have a strategy in place, there is nothing to fear. I’ve never feared buying a home, no matter what the market conditions. I’ve bought four condos in my life so far, and all in markets that I was warned were “at their peak” (they were not – and indeed, there’s no such thing as a market peak).
The reason for my unwavering confidence? I can see that even the unlikely, worst-case home-buying scenario ultimately leaves me much better off than even the best-case scenario of not buying, and renting forever.
And just think: we’re talking about the worst-case scenario. Just imagine how great it will be if you buy, and end up with the best-case scenario of prices continuing to soar – or even just the most likely scenario of prices wavering up and down over the years, as they do, but rising overall.
So don’t worry – and allow yourself to be happy.