Posted by Tim Stobbs on December 30, 2009
I’ve previously discussed the concept of a potential housing bubble in Canada, but apparently that speculation is also going on in a few other places such as well such as China and some fears about the US re-inflating their housing bubble again.
Regardless of if these are real bubble or not since 2008 we have collected learned that a housing bubble can send debt shock waves around the world. Yet what does it all mean for the average person? Well here’s my list of some common hazards to a housing bubble.
- Buying a House at the Peak. This is likely the worst case event to have happen. You get sucked into a buying a house near the peak of the market and then if the market falls you end up owning a house which has a bigger mortgage than what it is worth. At this point that extra debt you took on at the peak can’t be gotten rid of by selling you have to eat the extra interest and principle costs. The good news is if you don’t have to move soon you can spread out the pain over a number of years. The bad news is you still paid too much for your house.
- Spread Things Around. Yes just about every world market got nailed when the US housing bubble burst, but some specific markets in the US did a lot worse for housing prices. So the rule of diversification still applies, you don’t want all you money in a single country or even city. Spread things around a bit especially in your real estate investments as you likely have too much money as is in your local real estate market compared to the rest of your assets.
- It’s Better to be a Lender than a Borrower. Owing debt sucks since you are at the mercy of others for interest rates and getting credit. Especially so when the credit markets start to cease up. So keep your own borrowing to a modest level and keep a decent credit history they can come in handy when things get tough. Also some fixed income investments is a good idea for just about everyone since bonds actually did well overall in 2008/2009 and so provided a nice hedge. Just don’t forget point #2 above still applies to bonds as well.
- Panic. The top risk to you in a housing bubble collapse is very simply just one thing: you. So regardless of how bad things are looking remember to NOT PANIC. The trick to avoiding panic is having a plan and sticking to it or even selectively ignoring the news for a few weeks.
So that’s the obvious hazards I see in housing bubbles. As you might have noticed there isn’t a lot of difference to them to most other risks to your financial health. What else would you add to that list?