Do you have real estate FOMO? What you need to know before it affects your finances

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Real estate losses aren’t impossible

Conventional wisdom has it that real estate always appreciates, but that’s not the case, even in the current seller’s market. Although Canadian housing prices have appreciated significantly over the past 20 years, Daniel Tersigni, a portfolio manager at Wealthsimple, says that gains in home values are not a guarantee; losses—even large ones—are always possible. Tersigni points to historic examples, like the decline in U.S. housing prices that occurred from 2006 to 2012, as well as a steep decline in Canadian housing prices in the 1990s. “Prices peaked in 1989 and didn’t fully recover until 2003 after accounting for inflation,” he says.

And with interest rates set to rise, Rajit Khanna of Edward Jones says the market could moderate itself. “Patience is not a bad thing at this point in time,” he says. 

In the meantime, Tersigni says that regularly contributing to a diversified, low-cost investing portfolio over the long run could be a better way of growing wealth and achieving financial goals.

Buyers should prepare for a wide range of possible financial outcomes with owning a house, explains Tersigni. “If you stretch your budget to purchase a home, keep in mind that you’re taking a highly concentrated, very leveraged position that can provide benefit on the upside but also holds significant risk,” he says. 

How to weigh your decision

If you’re thinking about purchasing real estate but you’re not sure if it’s the best decision for your bottom line, or if you can really afford it, here are a few things to think about.

Work with a financial advisor

When considering buying your first home, it’s important to work with a financial advisor to establish your goals and evaluate what you can truly afford, says Khanna. This includes developing a household budget to make sure that the costs of ownership—including mortgage payments, maintenance expenses and property tax—fit comfortably within your means while taking into account other personal financial goals, such as raising kids, travelling and saving for retirement. You may determine that renting is more financially suitable for your lifestyle. 

Prepare for worst-case scenarios

Beyond crunching the numbers to determine affordability, it’s important to prepare for all scenarios. “Like any decision, you should start with the goal and consider the full range of outcomes. What happens if all goes well? And what happens if things go south, like a temporary loss of income or a sharp decline in the housing market?” says Tersigni. 

He recommends building an emergency fund that covers three to six months of expenses to weather unforeseen periods of income disruption. He also recommends choosing a down payment amount that will provide you with enough equity in the home to stay above water should the housing market see a decline.

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