House Prices: 9 Reasons NOT to Panic

(May 14, 2012 )

Recent article by Larry MacDonald in Canadian Business tells people not buy into the media hype, and that our market is not likely to crash like the US did in 2008.  Here are 9 reasons why we should not panic and sell our homes:

1.  Over many decades in the past, the media always blows things out of proportion.  Focus on long term trends and don't give too much weight to recent events.  Housing crashes is historically a low-probability event.

2.  Financial journalists give the impression that it is easy to sell homes when prices are high, and buy back into the market when prices are low.  Experts can't even time the stock market, why would the same plan work so easily for the housing market?  Don't forget the transaction costs that eat away possible gains.

3.  Selling your home to rent, and waiting until market drops is very risky.  Inflation alone will consistently drive the prices higher, and weakening your chances of buying back at a lower price.

4.  With interest rates being its historic low, favourable "mortgage payments versus income levels ratio", makes it easier for homeowners to ride out the ups and downs to the market.

5.  Interest rates are controlled by the Bank of Canada, and the government tends to only allow the rates to raise when the economy (employment and income levels) strongly tends upward.

6.  Finance Minister Flaherty has already taken steps to restrict the level of mortgage financing in Canada, to avoid excesses and reckless borrowing that helped to lead to the US housing crash.

7.  Your home provides intangible benefits like being close to good schools, nice neighbourhoods, convenient locations, etc.  All of which would be disrupted and hard to replace if you treat your home as purely an investment asset, to buy and sell based on the market.

8.  Canada is very different than US - we have a more stable and regulated banking sector, different mortgage laws and home ownership policies. 

9.  Canada has a highly expansionary monetary policy, rather than US, who had pushed their short-term interest rates until it surpassed long-term rates, and ended up creating the catalyst for over-valuation.

So relax homeowners, the crash in US during 2008 was once in a lifetime event from which Canadians had the good fortune to be spared.