Title: The downturn trade-up

Sub-title: Down markets are often the best times to trade-up into a better home.  All it takes is guts.

 

By all indications Canada’s new and resale housing market continue to be see tough times. Recently released data regarding housing starts, average selling prices and a variety of other indicators, almost universally point south and forecasters are adjusting predictions to conform to the new realities.

 

Yet despite the bleakness, much of the information out there reflects averages. In certain markets and categories, things don’t looks so bad at all. According to one expert that’s especially true for households that are thinking of trading up from their existing homes into more attractive properties.

 

“The market for bigger and luxurious homes is far more cyclical than it is for standard properties,” says Hélène Bégin, a senior economist at Mouvement Desjardins. “What that means is that bull markets in housing tend to favour those who are trading down to cheaper properties, bear markets tend to save money for those who are planning to upgrade.”

 

Never waste a crisis

Bégin has a point. Experts say that with crisis often comes opportunity and current events are almost certainly no exception. Despite current uncertainties, for those sitting on the fence regarding whether or not they should trade up into a better or more attractive property, now may prove to have been a great time to do so.

 

At first glance, the idea of upgrading one’s home at a time when real estate prices are trending downwards seems counter intuitive, particularly for those who need to take a loss, when they sell their existing homes. But that is precisely the point; says Bob Linney, a spokesperson for the Canadian Real Estate Association. “Don’t forget that while your home may have decreased in value, when you are trading up, the one you are buying will have probably decreased in value a lot more,” says Linney.

 

One example suffices. Let’s assume that two or three years ago you bought a house for $300,000. But now, after you and your partner have brought a kid or two into the world, you want to upgrade to a home worth $500,000. The only problem is that your first home’s resale value has fallen by 10 percent. That means if you sell right now, you’d have to take a $30,000 loss on the property, which sounds terrible.

 

The good news is that the $500,000 home that you want to buy will almost certainly have come down by at least 10 percent as well. So the $50,000 savings you will get on the new home that you are buying ($500,000 x 10 percent), will more than make up for the loss you will have to take when you get rid of your existing property.

 

In fact, although the various provincial real estate bodies generally do not supply selling price data by price brackets, there is significant anecdotal evidence out there that more valuable properties tend to decrease in far greater percentage terms than do starter homes. That means those who trade up during down markets would see even greater savings.

 

But who has the guts?

The only problem of course with all of this reasoning is that it works well in theory. But practice is a whole other story. In fact according to Bégin, during down markets such as the one we are in right now, buyer psychology tends to grab the upper hand and it becomes extremely hard to figure out when the bottom will hit. Furthermore that bottom may not come soon.

 

 “Although the number of houses sold in Canada rose (during February) compared to the previous month, the annual change shows that the trend is still clearly downwards,” says Bégin. “The plunge (on an annual basis) in the number of transactions is evidence of a slump. Given that the recession has caused significant damage to the job market in the past few months, and that household confidence is extremely week, the residential sector will almost certainly continue along this downward path during the months to come.”

 

Bégin is not the only one to hold a lukewarm view regarding prospects for Canada’s housing sector. The Canada Mortgage Housing Corporation also recently forecasted that housing starts will fall significantly this year compared to 2008, with the weakness expected to last at least until the end of 2010.

 

That said, anyone purchasing any asset, particularly a long-term asset such as housing would be ill advised to try and pick a precise bottom before acting. Experts say that achieving that sort of market timing is near impossible. That said, over the long term, those who can keep their cool, while everyone around them is losing theirs – they are the ones that usually come out ahead.  And that generally includes investors who trade up real estate properties during down markets. 

 

Peter Diekmeyer (peter@peterdiekmeyer.com) is a Montreal-based economics writer.

 

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