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Do you have real estate FOMO? What you need to know before it affects your finances

Real estate losses are not impossible

Conventional wisdom is that real estate always appreciates, but that’s not the case, even in today’s seller’s market. While house prices in Canada have risen significantly over the past 20 years, Daniel Tersigni, a portfolio manager at Wealthsimple, says an increase in home values ​​is no guarantee; losses – even big ones – are always possible. Tersigni points to historical examples, such as the decline in US home prices that occurred from 2006 to 2012, as well as a sharp drop in Canadian home prices in the 1990s. “Prices peaked in 1989 and only fully recovered in 2003 after taking inflation into account,” he says.

And with interest rates on the rise, Edward Jones’s Rajit Khanna says the market may moderate itself. “Patience isn’t a bad thing right now,” he says.

Meanwhile, Tersigni says that contributing regularly to a diversified, low-cost investment portfolio could be a better way to grow wealth and achieve financial goals in the long run.

Buyers need to prepare for a wide variety of potential financial outcomes when owning a home, explains Tersigni. “If you’re stretching your budget to buy a home, keep in mind that you’re taking a very concentrated position with very high leverage that can bring positive benefits, but also carries significant risk,” he says.

How to weigh your decision

If you’re considering buying real estate but aren’t sure if it’s the best decision for your bottom line, or if you can actually afford it, here are a few things to think about.

Working with a financial advisor

When considering buying your first home, it’s important to work with a financial advisor to set your goals and evaluate what you can really afford, Khanna says. This includes developing a household budget to ensure that the cost of ownership — including mortgage payments, maintenance costs, and property taxes — is comfortably within your means, while taking into account other personal financial goals, such as raising children, travel, and saving for retirement. You can determine that renting is a better financial fit for your lifestyle.

Prepare for worst-case scenarios

In addition to crunching the numbers to determine affordability, it’s important to prepare for all scenarios. “As with any decision, you need to start with the goal and consider the full range of outcomes. What happens when things go right? And what happens when things go wrong, such as a temporary loss of income or a sharp fall in the housing market?” says Tersigni.

He recommends building an emergency fund that covers three to six months’ worth of expenses to weather unforeseen periods of income disruption. He also recommends choosing a down payment amount that will give you enough equity in your home to stay afloat if the housing market falls.

This post Do you have real estate FOMO? What you need to know before it affects your finances

was original published at “https://www.moneysense.ca/spend/real-estate/real-estate-fomo/”

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