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 a stir this fall. The TD Bank is talking about an "unprecedented" correction by the end of 2023. Homes in the Greater Montreal area have already lost 9% of their value since the spring, and real estate agents feel that the market has "hit a wall.
It's been so long since house values have been going up that we've kind of forgotten that the lift also works the other way. This 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 pre-crisis values.
I admit that when it comes to real estate, I'm the worst person to play the guessing game with. That's because my brain has been "broken" by my years in the US.
The American debacle
As a correspondent for La Presse, I lived in Los Angeles for seven years, from 2006 to 2013. Older readers will notice that these dates coincide with the bursting of the American housing bubble.
When I arrived in LA, everyone was talking about real estate. Prices had been rising sharply for years, and there was no sign that it would stop: immigration was strong in the state, the refrain went, the economy was doing well, unemployment was so low it was breaking records, and the whole world wanted to move to California.
Then interest rates rose and the floor disappeared. The average home value in the state collapsed by 40% in a few years.
The hardest hit areas were those in the far suburbs of San Francisco and Los Angeles. However, no neighbourhood was spared. Near my house, dozens of "For Rent" and "For Sale" signs were yellowing in front of houses that no longer interested anyone. With all the despair - bankruptcies, stress, divorce - that this implied.
It's human nature: we are attracted to assets that rise in value. But when their price falls, they immediately cease to fascinate.
When I came back to Quebec, I was breaking my friends' ears with my apocalyptic predictions about house prices. Fortunately, no one listened to me, and time has proven me wrong: prices have continued to rise.
Until today.
Personally, I've stopped caring about rising prices, or looking for a reason to lower them. We shall live and see.
The essentials of a financial strategy
What I've noticed is that we tend to see buying a house or condo as the beginning and end of a financial strategy.
We justify it by saying that real estate is "solid", it's "tangible", we can "touch it and see it".
A convenient reasoning, which hides the real 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" houses in the 1990s. But nobody wanted them.
That's why I like the formula popularised by Garth Turner, director of Turner Investments at Raymond James.
Turner recommends starting with the number 90, and deducting our age. The result should be the percentage of our net worth (the value of our assets minus the value of our debts) devoted to residential property.
According to this rule, a 25 year old should have 65% of his or her net worth in his or her home, while a 60 year old should have 30% of his or her net worth in his or her home.
We accumulate financial assets throughout our lives, often in a pension plan or an RRSP, so the value of our home is no longer of great importance to our finances when we reach retirement age.
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'd sleep better if the worst-case scenarios imagined by our big banks were to come true.
We recently talked about the importance of saving. One reader, who does not want to be named, writes:
"I have saved all my life. Now retired, I'm still saving. It's simple. I've been budgeting and recording my expenses since I was 15. And the thing is, saving is a budget item. I don't save what's left, but I plan for it. We also have to look at our consumption. There are no small savings. I don't deprive myself. It's not depriving ourselves to discriminate between what we need and what the delusional merchants want to sell us. The dollars I earn, I just want to make the most of them.
Source : Article by Nicolas Bérubé on the lapresse.ca on the 23th october of 2022
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