In a December 12 piece for the Financial Post
, TriDelta Financial president Ted Rechtshaffen outlined the grim situation that majority of Canadians would face if ever such an episode came to pass.
“To summarize this doomsday scenario, your house value will drop and selling will be tough, your taxes will go up, your investment portfolio will suffer, the economy will drop and possibly you will lose your job,” Rechtshaffen wrote.
“We know that real estate has cycles just like every other investment, and it has been quite a while since we have seen a sizable decline,” he added. “It is definitely coming. It is only a question of when.”
The most effective step that one can take is to immediately minimize one’s risk profile.
“If more than 60 per cent of your total net worth or equity exposure is in Canadian real estate, you might want to consider selling or downsizing to lower that exposure. For example, if you have non-real estate assets worth $400,000 and a $1 million house and a $400,000 mortgage, I would suggest you have $1 million of net worth, and your equity exposure to real estate is actually 100 per cent. This person would have to sell their home, and buy something worth $600,000 or less to get to a 60 per cent real estate exposure.”
Investment diversification is also key to survival in this climate.
“If you are overly exposed … then it is even more important to have meaningful investment exposure outside of Canada or at least outside of Canadian Financials, mortgage funds and REITs,” Rechtshaffen said. “We see too many people that believe that these sectors are bullet proof, but unfortunately they are layering on added risk to their large personal Canadian real estate exposure.”
Liquidity should not be underestimated, as well.
“When times are tough, cash is king and debt can be a tremendous weight,” the wealth advisor explained. “If your debt minus your non-registered investment assets is more than double your annual household income, then you should take a hard look at how you will be able to manage a recession.”
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A hypothetical 25 per cent decline in Canadian home prices will have far-reaching impacts on the economy and the market—but fortunately for owners, they can work to mitigate the worst effects of a crash.