Market Volatility and Your Down Payment
Being a first-time homebuyer in a hot real estate market like the GTA is stressful. In Toronto, the average sale price of a home is almost $1.4 million, and that is in the dead of winter, when the market used to be as cold as the wind outside.
This year is even more stressful, with new listings decreasing by 2.5% at the end of 2019, and sales increasing by 17% in December. As is usually the case when supply decreases and demand increases, we have seen prices in Toronto steadily rise in the past few months. Among industry watchers, there is growing concern that this spring will see prices return to their mid-2017 all-time high.
Adding to the already pervasive fear of being priced out of the market is the daily news of the stock market tumbling, as fears of COVID-19 becoming a global pandemic spread faster than the virus itself.
Last week the Nasdaq Composite and S&P 500 are down nearly 3%, while the TSX Composite here at home is down almost 2%.
The timing of this market downturn could not be worse though for many first-time homebuyers who are overexposed to equities in their investment portfolios. As a result, their purchasing power in an already torrid real estate market has been diminished.
The desire for short-term investment growth in a competitive real estate market is understandable. As prices increase, buyers want their down payment investments to grow as well.
However, this practice comes with a lot of risk, and goes against traditional financial planning. Pragmatic buyers should be rebalancing their investment portfolios six to twelve months before they are looking to buy a home.
Specifically, they should be sheltering themselves from market risks, such as the turmoil of the past week, by moving their investments from equities to bonds.
Bonds will not provide the same potential return as equities, but they provide greater stability. With that stability buyers will be better able to predict their real estate purchasing power.
Barring an unforeseen market force, such as further spillover from fears of COVID-19 spreading, the Toronto real estate market is likely to return to its 2017 boiling point. If Stephen Poloz remains concerned about Canada’s sluggish economic growth, he may add fuel to the fire by lowering the Bank of Canada’s key interest rate in the near term, leading to lower mortgage rates.
Purchasing a home in the GTA is stressful enough without having to keep one eye on the stock market. First-time homebuyers need to start focussing on protecting their purchasing power rather than trying to increase it.
The best first step is to have a financial planning professional review your current investment portfolio and make conservative ETF or mutual fund recommendations, based on the goal of purchasing a home in the short-term.
