Agent Will

Ah, the property ladder.  A fine British term in reference to the steps many take from initial smaller property purchases to larger ones.  Generally, the first step is considered the starter home/condo and as wages rise and mortgages are paid off the property owner is able to take on bigger and bigger debt/responsibilities with the eventual arrival at their dream home.

I like to look at it differently.  The property ladder, for me, revolves completely around leverage and ability to handle that debt and how the market behaves over that time.

Let’s make one thing clear:  Prices do not always rise.  They can, and do, fall.  And that should not worry you unless your well being is entirely dependent on the market always rising.

You see, you need a home.  You will need one for the entirety of your life.  When you buy your first home (I’m not talking about investment properties, just personal residences) you are taking your first step on to this property ladder of life.  You are putting money into the market and the only time you should ever be concerned that prices will fall is if you ever plan to completely divest, sell, your personal residence.  That is the only time you should care if the market falls.

In 2001 you could have bought a studio in downtown Vancouver for under $100,000.  Today you cannot find anything for that.  In fact, that same studio will cost you about $240,000.  In 2001, you could have bought a townhome on the west side for $338,000 while today that same townhome averages $726,000.  And in 2001 the average detached house sold for $676,000 while the average asking price today has gone over $1.6m.  Besides the obvious increase in prices, what does this tell us?

Those who invested in 2001 have gained great equity, but only on paper.  No one actually realizes their gains until they completely divest themselves from the market.  Some people try to time the market and do just that, sitting out and renting while waiting for a crash.  This is not a good idea to follow with your primary residence.  Just ask those who did so in 2004 and now cannot get back into the market.  Erm, scratch that.  They can, but their purchasing power is heavily eroded.  Where once they sold a house, they can now only afford a townhome.

So those who bought in 2001 must be loving the rise in prices, right?  Maybe yes, likely no.  It’s been seven years and they have likely got a family now.  That condo just will not suffice.  They need to move up the property ladder yet the next step has gone from $238,00 away to almost $500,000 away.  Someone who bought that townhouse in 2001 thinking to get a house in 7 years has gone from a step that was about $340,000 away to one that seems an insurmountable $900,000 away.

In this figure, think of the first ladder as 2001, and the second as 2008.

We are in a rising market and have been for about 8 years.  Each year that prices increase the next step gets harder and harder to take as it requires greater investment and leverage.

What about those who buy today, those who are taking their first step onto the ladder and should they be worried?  Again, only if their entire well being revolves around some paper number going up or down.  The market is cyclical and will come down again.  When I do not know.  But it will and you will be well positioned to make a move.  Where the next step may be half million dollars today (studio to townhome), say the market falls 10% then the next step will be less as well (about $60,000 less!).

Where does this leave you (again, I am only speaking to the principle residence folk)?

If you believe prices will continue to rise and have been thinking to make a move up the ladder then I highly advise you start taking action today as your next step may continue to move out of your reach.

If you believe that prices will fall and are thinking about downsizing (taking a step down the ladder) then also now is the time to take action as you divest some of yourself out at a higher price point into a lower price point.

And what of those who are on the sidelines wondering what to do?  They are able and capable but have not yet committed.

Well, if you believe prices will fall, good luck with that.  Really.  But keep reading.

If you believe prices will continue up then what are you waiting for? Getting on, even now at these prices just puts you into a higher first step.  If you afford the financing and, let’s say worst case scenario, prices drop and you lose all your equity, will you be wiped out?  Only if you take your ball and go home (divest completely).  Say prices fall from your now $330,000 condo to a $220,000 condo (that would be a shock, wouldn’t it?).  You can still make payments and you sell for a loss… but buy the next level up, a townhome, for $484,000 (also a 33% drop from today).  Yes, it wiped out your equity and maybe you had to pay some savings to cover an upside down mortgage (owing more than the property is worth which a bank will let you keep on your current home but will not let you transfer to a new home, go figure) but you are not divesting completely.  Of course, you could only do this if you can pay out the balance of your mortgage.  Add in your loss from the condo ($110,000) and you are in for $594,000.  That is still less than the price of a townhome today.  In the investment world this is called averaging down.   And know that someday the market will come back up.  It always does.  It’s a cyclical thing.