Real Estate: The Danger of Rising House Prices

Housing prices have been going up, up, up over the past few years and that has many homeowners feeling pretty positive about their financial well-being. But there are a few dangers in rising housing prices that all homeowners need to keep in mind if they are going to keep their long-term financial life on track.

For starters, as household net worth has risen – largely fuelled by the housing market and equity gains – Canadians have been spending more of their disposable income. According to Statistics Canada, “While Canadians have seen their pay cheques steadily grow (from 1997 to 2004) they have been spending at an even faster pace – with household spending growing twice as fast as the average 10% rise in pre-tax incomes over the same period.

“Over the past 14 years, lower interest rates and continuing demand for housing and goods have encouraged a significant run-up in household debt. Growing expenditures and debt mean that less money is left over for savings.”*

Some would argue that the rising value of household assets – thanks primarily to buoyant real estate prices – largely offsets ballooning debt. But that argument assumes real estate prices will remain healthy – and that may not be the case with housing prices currently levelling off in some areas of the country and financing rates edging up over the past couple of years.

If the real estate boom is truly over, it could strip homeowners of one of their most important means of savings – and, although Canada 's real estate market has not fallen off as precipitously as it has in many areas of the United States , there are lessons to be learned from what is happening south of the border.

A recent research report by the U.S.-based Securities Industry Association (SIA) reported that nearly half of American households are not saving at all; and two-thirds are not saving enough to retire adequately. The SIA Retirement Study pointed to “the ‘wealth effect' – individuals saving less as their net worth increases – as a key contributor to the savings decline.”**

When you feel wealthy, you tend to spend like you're wealthy and that has led many families to spend more and save less. The trouble is, should real estate prices fall, these families will still be saddled with the debt and as a result are likely much more vulnerable to other negative economic conditions or a job loss. Moreover, real estate-based savings are far from liquid and selling a home can be difficult and expensive.

Yes, investing in a home is usually a good idea – but it should form only one part of a complete financial plan that includes a range of registered and non-registered investments based on the proven principals of asset allocation and diversification and tailored precisely to your life goals. A professional can help you make the best decisions to keep your financial well-being on track in any market.

*www.statscan.ca – Personal finance and household finance [Date modified: 2006-06-26]

**SIA press release, SIA Retirement Study Shows Americans are ‘Dissaving'; Finds Grim Situation Worsening, June 26, 2006.

A professional advisor can help make your plan work for you. (Submitted by Damon Smith, Investors Group Financial Services Inc.) For more information call 1.888.335.1362.

This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.

printer friendly

Email this article