Quote:
Originally Posted by bubbsy
How does a young family home owner prep for the potential burst??
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Well truthfully if you are sure that the bursting of the bubble is coming then you sell your house and get out of the asset before the price goes through the floor. There is a risk here in a couple of ways: (A) you have to be right that prices crater because if you're wrong then you sell and the prices never drop, and you're out of the market trying to get back in. (B) you're right and get out perfectly before the crash (woohoo!), but then are too scared to buy back in because you can't figure out the bottom. Obviously a better problem to have is (B), but you aren't really ahead there either.
I think that the commentators from the US are adept at seeing these issues now because they see the 2007 issue for them in hindsight. The economy doesn't have to crash here though, and we are already seeing a significant pull-back in housing prices in Calgary IMO. I know that people in real estate say that the drop is only 0.5%-1% and that seems a little light as March looks like we're down about 2.3%. But then you have to consider that from 2013-2014 the price change was nearly 10% (9.7%). Now we're looking at a reduction instead of almost 2.5% on the average house. So instead of having that rise you have the loss and the swing is almost 12.5%.
I can hear the naysayers already...you're comparing on a relative basis and that's not accurate; you're right but like it or not a lot of homeowners are going to do that. Truthfully when the real estate professional says we're down only a couple percent they're right, but people are factoring in growth and they're also right!
Let me leave you with some psychology here that impacts this as well. Say a homeowners property is worth $500k, and she makes 10%. The house is worth $550k and she's happy of course. Now the property loses 2.5% and is worth $536,250 which is a loss of $13,750. No big deal, except for two factors. One is that relationship I noted above where she will be hoping/expecting another ten percent gain. The other is that from a pure psychological perspective losing has a much bigger impact on people and that $13,750
feels like a loss of $34,375 (2.5 times as much). That painful loss does make people more likely to change their beliefs regarding these assets; they might want to sell to stem losses or might have a much more pessimistic outlook on the overall economy and curb spending. It works the opposite of the rising market where people aren't in and can anticipate and
feel the gains before they actually get them.
Anyway, tl;dr things aren't great for the real estate market today in Calgary. I personally am not panicked and not selling my house to lock in gains. Maybe it crashes, maybe it just pulls back. I don't treat my house as an investment though so I could be a in a different position than a lot of others.