Market Watch - 2010 - November

The current market conditions

The average MLS price compared to Average Family Income is continuing to rise. This means that, as real estate prices are rising, families are spending a larger percentage of the family income on housing costs.  The ratio of Average MLS price to Average Family Income is fast approaching 4.5. It is interesting to note that the last time we reached this ratio was in the year 1989. 1989 was also the year in which real estate prices started to decline, and this decline continued for a period of almost 5 years. It took 10 years (i.e. until 1999) for real estate prices to reach the same level they were at in 1989; and in terms of real prices (i.e. prices adjusted to inflation), it took until 2008 before property prices recovered.

The risk

Is this a good time to buy? As always, the risk is falling prices. How much can they really fall? In the previous downturn in real estate prices in Canada (1989 to 1995), the average price went down from about $250,000 to about $180,000, a drop of about 30 percent.

The potential gain

During the previous rise in real estate prices (1989 to 2010) prices went up from $180,000 to about $420,000 (Note - this is, if we ignore the short-term downturn in prices which occurred during the US real estate crisis of the previous 2 years). We have seen a constant rise in prices of about 130% over 11 years. This rise certainly demonstrates that, long term, investing in real estate carries with it potential growth.

 Those who wish to buy real estate for investment purposes, should carefully consider their goals and decide whether they are looking for a short-term investment or a long-term one.  An investor who is looking to buy at a low price, make some improvements and quickly sell at a profit , could be adversely affected by short-term fluctuations in real estate prices. 

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