Posted yesterday at 7:00 a.m.
So do you think our homes will lose almost a quarter of their value in the next year?
This scenario published by the Parliamentary Budget Officer in Ottawa caused quite a stir this fall. TD Bank is talking about an “unprecedented” correction by the end of 2023. Homes in Greater Montreal have already lost 9% of their value since the spring, and real estate agents have the impression that the market has “hit a wall”.
Home values have been going up for so long that we’ve kind of forgotten that the elevator also works in the other direction. It happened in Canada in the 1990s, when prices fell across the country — including a 32% correction in Toronto — and took more than a decade to recover to their pre-crisis values.
I concede that when it comes to real estate, I’m the worst person to play the guessing game. It’s because my brain was “broken” by my years in the United States.
The American Disappointment
As correspondent for The PressI lived for seven years in Los Angeles, from 2006 to 2013. Older readers will notice that these dates coincide with the bursting of the American housing bubble.
When I came to LA, everyone was talking about real estate. Prices had been rising sharply for years, and there was no sign of it stopping: immigration was strong in the state, the chorus went, the economy was doing well, the unemployment rate was so low that he was breaking records and the whole planet wanted to come and live in California.
Then interest rates rose and the floor disappeared. The average home value in the state has plummeted 40% in just a few years.
The most affected places were those located in the distant suburbs of San Francisco and Los Angeles. That said, no neighborhood has been spared. Near my home, dozens of “For Rent” and “For Sale” signs were turning yellow in front of houses that no longer interested anyone. With all the desperation — bankruptcies, stress, divorce — that entailed.
It’s human nature: we are attracted to assets that increase in value. But when their price drops, they immediately cease to fascinate.
When I returned to Quebec, I was annoying my friends with my apocalyptic predictions on house prices. Fortunately, no one listened to me, and time proved me wrong: prices continued to rise.
Till today.
Personally, I stopped caring about rising prices, or looking for a reason that would make them go down. Time will tell.
The essentials of a financial strategy
What I notice is that we tend to see the purchase of a house or a condo as the beginning and the end of a financial strategy.
We justify it by saying that real estate is “solid”, it is “tangible”, we can “touch and see it”.
A convenient reasoning, which veils the true source of our love for our houses: because, year after year, their price increases. It’s easy to love something that increases in value while you sleep.
You could “touch and see” the houses in the 1990s. But no one wanted them.
That’s why I like the formula popularized by Garth Turner, director of Turner Investments at Raymond James.
Mr. Turner recommends starting from the number 90, and deducing our age. The result should be the percentage of our net worth (which is the value of our assets minus the value of our debts) spent on residential real estate.
According to this rule, a 25-year-old should have 65% of their equity in their home, while a 60-year-old should have 30% of their equity in their home.
We accumulate financial assets throughout our lives, often in a retirement plan or an RRSP, so that the value of our home does not matter much in our finances when we reach retirement age. retirement.
I don’t know if many Quebecers have put this formula into practice. But if you’re thinking of buying a house, I invite you to do the math. You would sleep better if the worst scenarios imagined by our big banks were to come true.
We were talking recently about the importance of saving. A reader, who does not want to be named, writes:
“I have saved all my life. Now retired, I still save. It’s simple. I’ve been budgeting and tracking my expenses since I was 15. And the thing is, saving is a budget item. I don’t spare what’s left, but I plan for it. We must also examine our consumption. There are no small savings. I don’t deprive myself. It is not forgoing to discriminate between what we need and what the merchants of illusions want to sell us. The dollars earned, I just want to get the most out of it. »