Thursday, 4 June 2015

Can You Time the Real Estate Market?

First of all, I'm not going to pretend that I have aced timing as far as real estate goes. Yes, I'm a real estate salesperson, and I have learned what not-so-good timing is and what better timing can be, but any one who tells you that he or she can perfectly time the real estate market to maximize your real estate investments is making an educated guess at best or is the kind of person who could make you believe they could levitate a table.

Of course, it's not such complete guesswork that no one can predict anything.  We, as human beings, like to look for patterns to make sense of our world. Here is one of the most common patterns referenced that attempts to show real estate investors how to time the market.

This graph follows the basic principals given to real estate investors:  Sell high and buy low. And generally speaking, this is not a bad place to start. There is some truth to this. The problem is, if the whole world worked this simply, many of us would be a lot richer by following a graph.

Let me take my current house as an example as to why this sell high and buy low thing can be tough to predict. I bought this house in 2010. It has probably increased in value by around 35% since then with some updates here and there, but no gut jobs or major overhauls. When I met the sellers back in 2010, I asked them why they were selling. They told me they were leaving their home because they believed the Toronto market was at its peak (please see "boom market" above). In their minds, it was time to to cash out. The rest of the world had falling house prices. We must be next. Plus, in their minds, we were due for a correction after such a sustained period of increasing home prices in Toronto. They planned to rent until property prices dropped (see "recession" above). Then they would buy cheap again and ride the increases to the top of the boom cycle. Seems easy enough.

This was a pretty straight forward approach by the sellers of my current house to time the market. They had strong convictions that they were at the top of the boom cycle when they sold to me in 2010. According to their calculation, 2010 should have had the highest prices in Toronto's history.

In the end, this couple did make some good money on the sale. They received twice as much for the house than they paid for it. Still, if they were renting and waiting for the market to crash, they made a big mistake. To get back into the market now in 2015 with the money they made off the house would net them a much smaller property.

The moral of my story? You have it! It's tough to time the market. No matter what you hear, it is difficult to know where the tops and the bottoms of these cycles will actually occur, and to what extent of time these peaks and valleys will occur. If you choose the right spot, you come off looking pretty smart, though I suspect part of that has to do with some luck.

At the end of the day, I'm not sure the real estate market consistently follows such a cycle as the graph above. What happened in 2008 in Toronto? Did we have a real recession that caused real estate prices to dip slightly for a very short period or was that merely a temporary blip in the upswing caused by external factors from other parts of the world?

Aside from a small blip in 2008, our last trough was in 1989. That is a very long time for sustained growth. It's easy to see why the doom and gloomers are calling for a crash any day now if they buy into the bust and boom cycle. We appear overdue for a crash. But we're not crashing. And it is possible that it may be a very long time until there is a price adjustment on real estate in Toronto. The truth is, there are so many factors influencing a boom and bust cycle, it's difficult to make a realistic prediction. Interest rates, housing supply, local economies, international economies, public policy, mortgage restriction, migration and immigration patterns, age demographics, and public transit are just some of the factors that could influence real estate prices in a given city.

I think there is only one group of people who should be open to cashing out their homes. And that is retirees. If there is a dip in prices, they may not have the time to wait it out until their investment improves, especially if they want to take advantage of the equity they accumulated in their homes to enjoy their retirement. They can put their money into easier assets that won't potentially slip in value and be safer.

For the rest to us, holding a property long enough, even in a downturn, has historically led to a property values in Toronto bouncing back and continuing their climb, even from 1989. You just have to wait it out. This is not me trying to predict the future, but it is an educated guess based on my human desire to look for patterns based on historical data.


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