Real-estate bubbles and your investment plans | #Toronto #Ottawa #realestate

Real-estate bubbles and your investment plans

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Dear Mike: I see that house prices jumped up a lot last year. Are we going to have another housing bubble?

Derrick in Ladner

You are probably well aware of the bursting of the U.S. housing “bubble” in recent years. Here in Canada, our home prices fell by only a fraction compared to the U.S. decline. But now our housing prices are steadily rising again. While we don’t know if we will experience a bubble, you should be prepared for the possible impact of a housing downturn — especially if you have invested in real estate or your portfolio is not well diversified.

But the big question for now is this: “Will we have a bubble?” Typically, three conditions must exist for a bubble to develop:

  • Prices are rising sharply and are too high based on historical relationships;
  • Credit is easy to obtain; and
  • Lax regulation or innovations make regulation less effective.

Currently, it appears the first two of these conditions are present in the Canadian housing market. The average resale price of a home rose 19.3 per cent in 2009, according to the Canadian Real Estate Association, and house prices have risen faster than incomes and rents.

Also, the Bank of Canada’s Financial Conditions index shows that credit is currently more available than it was before the recent recession. However, the third bubble condition — ineffective regulation — does not seem to apply, as the government is taking steps to tighten mortgage availability, and regulation remains relatively tight.

Although we may be meeting two of the three conditions necessary for a bubble, it does not follow that a bubble is inevitable.

However, a full-blown bubble does not have to develop for a housing downturn to occur — and we are seeing definite signs of increasing risks of just such a downturn.

Specifically, we are experiencing tighter lending standards and rising interest rates and mortgage costs.

We have seen an accelerating pace of housing starts over the past year; if coupled with a slack in demand, this increase in supply could put downward pressure on home prices.

If housing prices do drop substantially, how will it affect your investment plans? If you regularly buy real estate with the intent of reselling it for a short-term profit, you may want to be especially careful in weighing your actions over the next several months, possibly even reducing your housing investment exposure, if necessary.

Also, any housing downturn may have a negative effect on mortgage-related businesses — specifically, banks and financial services companies.

Consequently, if you and your financial adviser determine that you may own too many banking and financial services stocks, you may need to reduce your holdings in these areas.

And such a move will give you a chance to further diversify your investment dollars among a wide range of assets: domestic and international stocks, mutual funds, bonds, Guaranteed Investment Certificates and other securities.

While diversification, by itself, cannot guarantee a profit or protect against loss, it can help reduce the effects of volatility on your portfolio.

Clearly, a housing slump can have ripple effects throughout the investment world — and on your own investment strategy. But by being aware of the possibility of a drop in housing prices, and by being prepared to take the appropriate steps, you can help ensure that a downturn in the housing market does not result in a detour on your road to achieving your financial goals.

Mike Watkins, CFP, FMA, FCSI, Ch.P.

Watkins is a financial adviser with Edward Jones and author of the financial planning guide It’s Only Money. To ask a question, call 250-418-0114 or e-mail michael.watkins@edwardjones.com

michael.watkins@edwardjones.com

 

 

Posted via web from Toronto Real Estate News, Blog

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About Tariq Sultan
Dear Readers, I am a dedicated Toronto, Ontario based real estate professional who has been successfully meeting and exceeding the needs of his clients for past several years. I am actively involved in the insurance, financing, and mortgage industry. Real estate is not only my career – it is my passion. I strive to continuously provide my clients with exceptional service to ensure they are fully satisfied when it comes to their real estate needs. For any real estate related inquires contact me today, I will be happy to assist you. Best wishes, Tariq Sultan

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