Attention homeowners: the value of what is probably the biggest single investment you will ever make is falling.
That’s the bad news. The good news is; owning a home probably remains the best investment you will ever make over the long term.
Estimates for how much house prices will fall over the short term are all over the map, and depend on factors particular to the kind of residential property and location.
RBC Economics — a conservative and relatively accurate source for housing market projections — recently released a report calling for a 12 per cent price correction for the housing market from last February’s peak, by next winter.
“We’d argue the unfolding downturn should be seen as a welcome cool-down following a two year-long frenzy that put a huge financial burden on many new homeowners and made ownership dreams harder to achieve,” wrote RBC Assistant Chief Economist Robert Hogue in the report.
That’s cold comfort for homeowners watching their investment shrink from a valuation that never really was. Many stories are emerging in the media of homeowners selling below their arbitrary asking price and referring to the difference as a loss; like it was money in the bank.
In many cases those valuations have doubled and tripled in the past decade or so beyond the real intrinsic value of the home.
And that’s why it’s called a correction; a return of an asset price to its real intrinsic value. Economists with the Canada Mortgage and Housing Corporation (CMHC) have long said the average price of an average home has consistently risen at least five per cent each year in any 25-year period since the Second World War, and there’s no foreseeable reason for the future to be any different.
The one thing all corrections have in common is their tendency to mess with our heads because our deepest fear is that they will continue toward a collapse.
Long-term perspective is the best remedy for short-term fear, at least in this case.
The S&P 500 is a good example of how corrections correct because the index holds a diversified cross section of stocks that reflect the broader markets. Through the close of trading Thursday, the benchmark was down almost 15 per cent this year: officially a correction.
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