The Canadian residential real estate market has defied many speculations and made a fool out of many industry experts. The continuous price increase had made it difficult for many first-time buyers to enter the market. However, some lucky ones like Emma and John consider themselves fortunate since they purchased their home much earlier. In a few years, they have sizable equity on their home.
The nagging question on Emma and John's minds is; should they sell their home and rent for a while? John explains, "We believe the residential market will cool off within a few years. We will sell our home in the current hot market and pull out our equity, and we will buy our next home once market softened." However, Emma is skeptical. She explains, "most likely; we are not the only one with such an idea. In fact, friends of ours sold their house a few years ago meanwhile watching in horror as the prices keep going up". Emma and John agree on one thing that they need to talk to industry experts and understand the downsides.
Here is the summary of what Emma and John learn in their information-seeking adventure. I hope it will be beneficial for you as well.
Predicting the market: It is almost impossible to predict the long-term behaviour of the market. Even the industry experts admitted all their predictions had been off by a large margin. Charlie Munger, a billionaire and investor and one of my favourite row models, put it cleverly; one of the reasons we had better predictions is because we made fewer of them. So, Emma and John's forecast that the market will soften in future may happen, but no one knows when and to what extend.
The cost of buying and selling: Many sellers think of only the cost of selling which by itself is a good amount, roughly 5% of the sold price of your home. You should also account for the cost of moving twice and the cost of buying your next home. Even if the prices drop, Emma and John have no way of knowing to what extent and would it cover the associated costs.
Emma and John should also account for the hidden costs, such as the amount of time and stress associated with the selling and buying process. Many buyers endure days and weeks of search to find the right home.
The cost of borrowing money (interest rate): Many factors influence the interest rate, such as inflation, the need to stimulate the economy, and even fiscal changes south of the border in the US. Hence, no one can predict the future interest rate when Emma and John finally decided to enter the market. In the long run, the higher interest rate may chip away some of the saved money as well.
Changes to mortgage approval: Real estate financing is dynamic with regular changes to the approval process. These changes are commonly introduced to adapt to the changing reality of the real estate industry. Emma and John may find it challenging to qualify for a mortgage once they are back on the market.
The opportunity cost: Real estate is a long-term investment because of the extensive cost and challenges of selling and buying. No one will dispute that in the long-term real estate prices will increase. So, in the long run, your home equity will be working hard for you. It is crucial to understand the opportunity cost. In this case, if you do not have the expertise and conditions to put your money to a better (harder) use, you lose the opportunity to enjoy the gain on your home in the long run. That is the opportunity cost; In other words, you are better off keeping your equity locked in with your home if you can not create a better opportunity with your money.
Note that capital gain is a tax-free income on your primary residence in Canada - a crucial benefit to homeowners. A significant difference from other investments.
Some people have the expertise to make their money work harder in different industries such as the stock market and business. Such investors create an investment opportunity that outweighs the benefit of locking their savings in real estate.
Conclusion: Certain things in life are not easy to predict, such as the long-term weather forecast, the Real estate market, and the interest rate. Yes, some educated predictions are made, however, with a healthy dose of uncertainty. The opportunity cost indicates that you should never forgo an opportunity if you can not replace it with a better one. Your home equity benefits you in the long term; you would better leave it alone if you do not have the expertise to make better use of it. Emma and John were smart to educate themselves before taking a leap of faith. Your gut feeling should never play a role in making a big decision like selling your home and staying out of the market for some time.
The above Real Estate article was provided by David Khosravi, a leader in his field in North York, Willowdale Real Estate, Reach out to David via email: email@example.com or by phone: 416.990.2424