As an agent, with any prospective buyer/investor, I always get asked the same question - "What if the market crashes?". This is a big fear for everyone, and rightly so. However, if you constantly live in fear of what may happen in the future, it becomes really hard to move forward with a big decision like purchasing property. Many agents and advisors will say "property always goes up!". Still, this isn't enough to alleviate the fear, so let's examine this topic a little more.
Most people agree that there are 3 essential components for basic survival: food, water, and shelter. Let's examine how prices have changed over the last 40 years in each of these categories.
I downloaded these data points from the bureau of labour statistics, and almost all food categories give the same upward trajectory (no matter how heavily subsidized the food component is). As the population grows, and health care technology extends the average life span of an individual, we can likely expect that prices will continue to go up as demand continues to grow.
Data Source: https://data.bls.gov
The following chart shows the change in cost for water treatment, vs all other items in the CPI basket. As you can see, the cost of water is also growing at an incredibly high rate as water scarcity becomes an issue globally. Demand will continue to drive these costs higher over time without a doubt.
So now let's address the topic that is on everyone's mind. I am using the American HPI (Home Price Index), as it contains one of the biggest housing corrections of all time. Remember 2008 and the financial crisis? The chart below displays data up until 2014, and yet you can see that the trend continues to move in the upward direction. in 2018 we can safely assume these numbers are even higher. Demand and inflation will continue to drive this trend upwards. This is where most people form the opinion that real estate always goes up. This appears to be true over time, but if you try to time the market such as 2008, that is where the horror stories come from.
But not everyone purchases real estate, how about those who rent?
Below is the Rent Index from 1983 to 2014 - as rents are not really an asset class (rent is driven more by demand vs investment demand), this actually gives a better picture of how the demand for shelter is growing. As you can see, it actually follows a very linear growth trajectory as demand for shelter is at an all time high.
Let's overlay these two charts on top of each other to get an idea of rent vs housing prices. What happens to rent when the housing market crashes?
Rent was relatively unaffected by the most severe housing correction in North America. As an owner and a landlord, this gives me more confidence to continue investing in rental properties. By gauging the rental growth trends, and monitoring mortgage rates, I can ensure that when I purchase properties I can weather any correction so long as the investment economics are sound. Those who held onto their properties and rented them out, are likely much better off today than those who sold in a panic at a loss.
So back to the original question! What happens if the market crashes?
As an Owner: Do you still need a place to live? If yes, time is on your side. Be diligent with spending, patient with the market, and pay your mortgage on time and you will be fine. If times get tough, rent out the basement or 2nd bedroom to help pay the mortgage down. Remember, everyone needs shelter!
As an Investor: Who cares? Unless you are trying to time the market and sell at a specific time, investors can purchase based on projected future growth and today's rental prices to ensure cash flow for the long term. If we are to believe that prices will continue to trend upward with inflation, time is definitely on our side.
Aside from death and taxes, nothing is 100%. So always do your own due diligence so you can make your own properly informed decision.
Until next time!