Double, Double, Boil and Trouble

Clink. Clink. Clink. Can you hear that? It’s the sound of people bleeding money in Regina. Why do I think people are bleeding money? Well because our insane little real estate market just finished jumping off a cliff the other day for me.

You see a couple blocks from here a home about 50% smaller than mine just went on the market for $350,000. Which means even if I’m being very conservative the market value of my house just hit an interesting milestone. I’ve doubled in value since I bought the house in 20 months. Yep, that’s right my house value if I sold tomorrow would be at least $380,000.

Why I find this significant is I believe we are now past the initial correction. Granted that for a long time this providence didn’t have a lot to offer, so it had depressed real estate values compared to any other of the Western provinces. Now we have moved past the correction point and are being fueled by pure supply and demand issues. You can’t get a decant house in this town anymore without getting pulled over hot coals with price. Bidding wars are back on for homes and once this ends we should see a correction back down. The issue is I have no idea where the spike in house prices is going to end or how far the correction will go down (if nothing else it should have a nice yo-yo effect on my net worth).

In short I feel this is a dangerous time to be buying a home here. I don’t feel it is impossible to get a decent deal, but it sure getting hard to. You might get stuck buying near the peak and watch your home value fall shortly after buying it (if you don’t believe this is possible I suggest you look now at any US city).

So people would think it would be a good idea to just rent right? Well there are problems with that too. With the house prices shooting up rents have been following a little behind and that assumes you can find one. Vacancy is well under 1% and then you have people selling out complexes and turning them into condos. Renting isn’t even safe anymore.

Therefore it is a very fluid market which seems to be changing daily. I do feel sorry for those people who are looking for a home. This does bring one interesting lesson to my mind. Buying a home over renting has one significant advantage that often gets over looked. The current market can’t affect my mortgage payments, but it is affecting rents. So even if my property taxes go up it will be minor in comparison to my mortgage payment. Effectively you minimize your exposure to local inflation pressures by owning your home over renting. Now isn’t that an interesting idea for planning a 45 year retirement?

5 thoughts on “Double, Double, Boil and Trouble”

  1. CD, interesting situation you are in! Congrats on the increased home valuations. One thing that you might want to consider in “locking in” your home value is getting a HELOC based on current prices. At least that way, you can use the HELOC the invest when you see fit. That is, if you’re comfortable with leveraged investing.

  2. This, I think, is one of the major arguments supporting home ownership, inflation protection. Inflation protection is often missed in online discussions since most rent vs buy calculators only let you put in a single inflation number. I wonder if someone (*cough* hopefully not me) should make a ‘monte carlo’ rent vs buy calculator that shows you our of 100,000 attempts using a range of percentages what the odds are of home ownership coming out ahead.

    Though home ownership comes down to more of a personal preference than a financial call most of the time, I think another major thing in favour of home ownership is that your obligation ends eventually. Even from your first payment you can feel the end approaching, and it gets closer and closer with every dollar you put toward the mortgage.

    I purchased a house last April on the east coast (the real east coast, not Ontario) and am spending a ton more than when we were renting, though for a much bigger place. Having a great set of neighbours, a nice street, a deck to BBQ on , and a yard to kick a ball in have already more than paid for the place. If there are financial advantages, that’s just a bonus, they are not the primary factor in us moving.

    P.S. values in my city aren’t going crazy yet, my house was 102K and more than enough for a family of 4, it’s close to a library, elementary and middle school, walking trails, 24 hour grocery, malls, and movie theaters. It wasn’t much of a decision wasn’t we found it and did our first tour.

  3. In Edmonton, my condo value doubled in about 20 months as well. I think it hit 110% at the peak, and then started dropping. I locked in a HELOC at close to the peak for investing. Other than that, one should turn a blind eye to the values as big gains (or big losses) can make people do unwise things.

    Unless, of course you’re planning on selling or buying in the next little while.

  4. Hey CD,

    Count me in as one who bought at the peak. Last year the pressure was on to buy sooner rather than later to avoid being pinched by ever increasing property values. All signs pointed to continued growth (around March ’07) and my wife and I bought in. Unfortunately, as the market stalled, investors got cold feet and flooded the market with product (7-8x the average number of listings I believe). This led to a reversal in buyer/seller relations and forced a market correction.

    Our net experience has been a slight devaluation in our current home (from Mar. ’07 levels – though it appreciated from our purcahse date of Apr. ’06). Unfortunately, that devaluation will carry into our upcoming mortgage on the new home and result in higher mortgage, longer amortization and increased carrying costs.

    Not a pleasant pill to swallow. Our saving grace is that the increase in mortgage payments won’t go up significantly, though we will be paying over a longer period (on paper anyway). The reality is that we will eventually receive monies to cover our mortgage and won’t need to worry about paying it off ourselves.

    Regardless, we’re a little more stressed about the move than we’d like to be, and the first year will be tougher than we planned, but we’ll manage. The silver lining is that, should we look to build again, we’ll be making more of a lateral move than an upgrade, and will be more likely to benefit from an upturn in the market (which IS anticipated again between now and the end of ’09). I don’t know if we’ll take the plunge for sure, but we’ll be watching!

  5. FT,

    Actually I’m thinking of getting out of leverage investing. So far I have yet to like it.

    Trac,

    Don’t look to me to come up with a calculator THAT good. I’m good at some excel stuff, but not that good! Otherwise I agree with your points.

    Nobleea,

    I do want to downsize later on, so right now this market is more entertaining than anything.

    Will,

    Ouch. Sorry to hear you got burned already.

    Tim

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