Prognosticators love to sound alarm bells. They have forecast the demise of the market multiple times over the past two decades, but we haven’t really seen the kind of pain that we may have expected. In Canada, we certainly didn’t suffer severe financial losses the way our southern neighbours did in 2008, at least not where house values are concerned.
Still, we know that historically, markets move in cycles. A down market eventually happens, and some homeowners always weather the storm better than others.
We have been hearing some people express that they are quite sure a recession is coming. The 2020 pandemic has shaken up the economy and affected many businesses negatively. This is especially true of service oriented ones. The real estate market is holding steady, even thriving – but people wonder if it will last.
Some analysts foresee sustained growth in house prices, particularly in areas outside major cities. Others aren’t so sure about that.
What if the bearish predictions turn out to be right? How do you make sure you are one of the resilient ones? How can you protect your real estate investments – your family home or other property?
Define Your Needs – and Your Worries
Your situation is unique to you, so it’s important to define where any personal financial danger might lie:
- Do you anticipate being laid off or losing your job permanently?
- Have you been planning to sell a property in the near future to free up cash for other projects or pursuits?
- Are you worried about losing your accumulated equity?
- Do you fear that an increase in interest rates will make your monthly payments unaffordable?
Setting up Finances
As with other financial investments outside of real estate, your own risk tolerance is a factor in your decision making process. Over the long term, real estate has proven itself to be a solid and profitable investment. For the staunch buy-and-hold investor, a dip in the market is nothing to be overly concerned with. The House Price Index shows a steady upward trend for at least the past 20 years. However, if you have plans to cash out of an investment property or a need to move from your own home, this may affect the way you handle the threat of a softer market.
Since property values are climbing at the moment, there are some things you can do to take advantage of your own built-in equity. If you have savings and a good amount of disposable income, you could choose to pay down your mortgage at an accelerated rate while interest rates are low. This will help smooth the transition to a market with potentially higher interest rates, since it will reduce your mortgage balance. Check with your lender to see about pre-payment privileges. Most banks and other lenders allow up to a 20% pre-payment per year toward the principal amount of the mortgage (without penalty).
If you find yourself with little to no savings and you find it difficult to put money away on your current earnings, you might try a different strategy. To prepare for a possible job loss – whether temporary or permanent – financial experts are almost unanimous on the need for an emergency fund. Your home equity could be a source of cash to create an emergency fund. By refinancing at a time when you qualify for a new mortgage, you can pull out some cash to pay down high-interest debt and put some money into an accessible account for necessary things. Consider taking advantage of record-low interest rates while you are working.
One more word about mortgages: If you are getting to the end of your mortgage term, especially if you have a variable rate mortgage, consider locking in at a very attractive rate. Predictable and stable expenses can be a godsend when you’re feeling a little nervous about things.
Need to Downsize – or Move Up?
Life carries on regardless of whether the economy is booming or not, and you may find yourself needing to make changes to your living arrangements. Most home owners don’t move unless there is a need – a new baby, a new work-from-home arrangement that requires more space, or a newly empty nest. Even new physical or health challenges in the family can dictate a move.
In uncertain times, downsizing is the easier decision. Since the market is very active right now, you can expect to sell your larger home for a good price. You might find it challenging to find a smaller one, though – since demand is very high for all types of houses, including the one you will want. You’ll have to strategize to ensure that you plan your purchase and sale just right. Your realtor and your mortgage broker can help with that part.
What if the family is growing, though? Or you need more space and were considering moving up to a larger home … what then? You may feel afraid to take on a bigger mortgage, only to have prices drop shortly after you buy.
Depending on your current living arrangements, you might consider trying to re-work your space. Could you add a bedroom or office in an unfinished space? A basement or attic, if you have one, may offer a solution. Or is there a way to reconfigure furniture to carve out a nook for a work space?
If you are worried about the cost of renovating, take time to do the math. Figure out what your actual cost would be for the reno, whether DIY or hired out, and new furniture that you’ll likely need. Then compare that to the costs involved in moving, some of which you can find here. Once you have solid numbers to work with, you will be in a better position to decide whether you can afford to hold off on buying a bigger home. When the market feels more stable to you later on, you can revisit your decision.
What About Investment Properties
Investors and landlords have decisions to make when faced with a shifting economy, too.
There is often stability in rental properties since, even during a downturn, everyone needs a place to live. Rentals will always be needed.
Having said that, a change in mortgage rates will affect owners of rental properties who are heavily leveraged. It is wise to examine your portfolio and see where you can reduce some expenses, and perhaps increase the appeal of your investment home.
Are you the type of landlord who forgoes rent increases for good tenants? While we applaud the kindness and we understand the reasoning behind wanting to keep excellent people, we must point out the danger in this: You could be devaluing your property in the long run.
To sell a rental with tenants in place, you must be able to show an appealing rate of return on investment in the form of rental income. Increases are only allowed once a year and are capped to a small percentage. A landlord who skips increases for a few years could end up with rents that are way under market value. Buyers for properties collecting low rents often ask for vacant possession- leaving you to find a way to evict your cherished tenants.
During good economic periods, consider rewarding good tenants with improvements to the building or property that improve their living space instead: gardens, patios, fresh paint, new doors and windows, etc. This benefits tenants while it improves your property value. Then, if we do have a rough year and tenants are struggling, you can offer to skip the rent increase that one time as the anniversary rolls around. Imagine how much they will appreciate you!
If You Know You Will Need to Sell
There are always buyers and there are always sellers, despite the fact that the balance of power can shift between the two groups.
Not everyone can repurpose a small house to fit growing needs. Adult children of senior parents may have to sell the family home to help them find more appropriate living arrangements as their health deteriorates. Families sometimes have to uproot because of a job transfer.
If your circumstances are such that you inevitably have to sell in the near future, plan early. Get the information you need now so that you will be armed with that knowledge if you have to move quickly.
We are always happy to provide you with whatever guidance, information, or options that could be helpful if you are considering selling a property. There is never any pressure, and we can connect you with other professionals who may also be useful to you.
Give us a call and tell us what you’re planning! We would love to hear from you.