It’s incongruous: they say don’t try to time the market but make no mistake, timing matters. In June 1996 I bought a house. I got lucky with the timing. No one told me I was buying a few months after the bottom of the market. Prices had dropped from 1989 to February 1996. Yes, dropped for the previous eight years.
Many people haven’t been around long enough to remember price drops, and many of the others, tend to only remember the good times. This is known as “recency bias”. We can get lulled into a false sense of security thinking that what has happened in the past will continue indefinitely. But it likely won’t. Looking at the current real estate environment, I have concluded that now is a smart time to sell, and I have followed my own advice. Here is why. We’ve been blessed in Toronto with significant price increases in real estate for several decades now; many of us have come to expect them. For example, in Toronto and the GTA prices increased between 11% and 30% year-over-year for at least the last 18 months (one exception was April 2021, when average prices decreased -1% due to the Covid shut down the year before). This is an exceptional rate of return.
These annual price increases have been underpinned by ever-declining interest rates, positive demographics, and benign government policy. However, this ‘Goldilocks’ environment may now be shifting. Everything, including financial markets, operates in cycles. Some cycles, like real estate, can outlast recent memory. Prices eventually tend to revert to their long-term average. It is questionable and possibly risky to assume that double-digit increases will continue in the long term and that price drops are a relic of the past. Events outside of our control can unexpectedly affect real estate: for example, the crash of October 1929; the gas crisis of the 1970s; the financial crisis of 2008; the provincial government regulation change in April 2017, to list just a few. I remember back in April 2017 many house deals fell through and downward price adjustments of as much as 25% were not uncommon. Sometimes price corrections are of short duration. Other times, they can last a decade or more.
It is important to pay attention to current events, the economy, and risks. What we do know is interest rates will rise. For every .25% rate increase, an additional $150 a month will be added to an average mortgage payment. Another factor is sentiment and perception of the market.
What people think will happen can affect what does happen. Inflation and government policy are also important risk factors that can substantially affect real estate, positively or negatively. Here again, things may be shifting. Of course, people sell for many varied and personal reasons. Sometimes these reasons are not about timing the market to maximize the investment. Homeownership usually involves a mix of emotional and financial considerations. However, most people still want to maximize their gains by selling at a good time. No one will ring a bell at the top of the market. Personally, I’d rather be a year early than a few weeks late, because at some point the double-digit increases will only be a memory.
To be clear, I am not predicting a steep market decline. I still believe in real estate as a long-term investment. However, like all investments, it takes one skill set to know when is a good time to buy and another to know when to sell.
In my case, I put my house on the market in March. It sold in 2 days with multiple offers. Of course, I had a great agent (me)! Why did I pull the trigger and sell? I looked at my personal life circumstances and time horizon. I weighed these against the likelihood of continuing price increases and the risk of volatility or even decreases in the market going forward. I decided now was a good time to sell. This was a personal as well as a financial decision. I did buy again — something smaller and less expensive because I still believe in real estate, and I need to live somewhere. I’m happy with that decision, regardless of what the future has in store.
My advice to all my potential clients who may be thinking of selling is to examine your own circumstances, family needs, and time horizon. Decide what level of risk you can tolerate. As a trusted real estate advisor, I think it’s important to learn from the past, digest what’s happening now, and balance that with reasonable expectations of your future. If only we each had a crystal ball.
I’d be happy to discuss your personal circumstances with you, whether you are buying or selling in the Toronto or York Region real estate market.