Some discussion here about market timing in real estate this week and whether it can be done. Thought I’d add my 5 cents to that discussion.
Market timing in the real estate sense would be to either buy or sell based on expectations of where the market is going. There are several kinds of market timing in real estate:
- For non-owners, choosing to delay buying based on an expectation that prices will decline.
- For owners, choosing to sell real estate on the expectation that prices will decline and perhaps that it can be bought back at a cheaper price later.
- Buying or acquiring additional real estate much earlier than originally planned based on an expectation that prices will increase quickly.
Mostly we hear about the first on that list, and then occasionally we see people attempting the second.
In the stock market, there is pretty good evidence that market timing doesn’t work, but what about in real estate? Having read many thousands of very intelligent and convincing arguments about why the market was either under or overvalued in the last 10 years, I’m inclined to think that although the local fundamentals like incomes and market conditions can be used to make reasonable predictions, the macro-level factors (credit availibility, housing policy, market sentiment, immigration, etc) are so influential that you can’t have much confidence in those predictions.
On top of that unpredictability the transaction costs are murder. If you want to sell your average house ($830,000 as of April) at what you believe is the top of the market and buy back in later, first you might pay a Realtor the typical commission of about $28,000 to get rid of it. That puts you down 3% right off the bat. When you buy back in (maybe the same house is $700,000 now), you get hit with the property transfer tax of $12,000 and another $2000 in legal and other closing costs. So the little maneuver cost you a BMW 3 series in fees before accounting for any time. Even if you smartened up and reduced your real estate commissions the PTT cannot be avoided.
On the selling side then the picture looks pretty grim. You would need a pretty big drop (at least 10 or 15%) to make it worthwhile, and you’d have to be pretty close to timing the top and the bottom to make it work. What’s working in your favour at least is that the market is typically pretty slow. Our market bottomed out in 2013 and started slowly improving after that. It improved steadily for a year (green line) without prices moving much, and it took almost 3 years before prices started taking off. That’s a lot of time to recognize a buying opportunity.
Same at the top in 2008, the market had been slowing for years.
The great financial crisis was about as close as the market gets to a flash crash and that still played out over about 6 months. This is not the stock market where if you miss a few trading days you can leave a large proportion of your return on the table.
On the buying side it’s a bit more of a grey area. The market remains very difficult to predict, and as we’ve seen in Vancouver, it can remain irrational far longer than most people can afford to wait. That said I do believe that you can look at some fundamental metrics like months of inventory to make pretty decent price predictions in the short term, and other metrics like affordability to gauge the level of risk in the market.
In 2008 we looked at $300,000 condos selling on 6% mortgages and it did not compute. How could it make sense to pay some $1600/month when our apartment cost less than half that to rent? I didn’t understand affordability measures back then but it seemed out of whack and it was. Condos languished at or below those prices for over 8 years (more if you take into account inflation).
Instead of getting on a property ladder with all the bottom rungs broken, we saved, interest rates dropped to rock bottom levels, our incomes increased, and I started to feel that the risk I had seen in the market in 2008 had faded. We bought in mid 2013 but I didn’t have the feeling of that it was the bottom. At the time I was expecting another 5-10% decline that ended up not happening. Worked out well, but since the decline in detached housing was not as large as in condos, we could have also bought in 2009 and gotten the same deal 4 years earlier if we could have stomached the risk and a larger mortgage. The other thing to consider is that the same strategy would have backfired miserably in Vancouver.
All that said, should you time the market? In general I’d say no. The chance of the best market conditions coinciding with the time you want to buy are pretty slim. Better to buy when you are ready, or conversely, not buy if it seems too risky or if renting is cheaper. You can use the Wait or Buy Tool to run some scenarios and in which cases waiting would make sense (I’ll update this tool sometime soon). There is only one foolproof way to time the market and that is to jump out of a high priced market and move to a lower priced one, just like the Vancouver buyers were doing to us last year.
Looking forward though I remain hopeful (perhaps foolishly) of the potential in market timing. The last two corrections we had were very mild in the mid 90s and the 2008 – 2013 period, with most of the correction coming in the form of lower interest rates, increased incomes, and declines in prices when taking into account inflation. Those kind of corrections are difficult to take advantage of because the nominal decline is barely enough to cover transaction fees. I’m fairly certain that the next correction in Victoria will look quite different from those two. There is no room to move on interest rates, and when the market runs out of steam we will see a significant pull back in prices and overshoot when it declines. I’ll be keeping my eye out for that opportunity when it comes.