In my previous post, I wrote about a possible housing bubble, signs of which seem to be everywhere. Just last week, I saw an ad for real estate investing in The Ottawa Citizen that started with a Frankin D. Roosevelt quote: “Real estate is about the safest investment in the world”. So, assuming that a housing bubble exists, what do I do about it?
The main function of our home is providing us shelter. I am unwilling to sell our home and start renting just because prices seem to be peaking. Even if I am willing, it is probably not a wise move. Buying and selling a home is expensive: realtor commissions, land taxes, lawyer fees and moving expenses should be taken into account. In any case, house price fluctuations have a neutral effect on most homeowners: we have to live somewhere and another house will be subject to the same price movements as ours.
Bubble or not, it makes sense for homeowners to reduce their non-deductible mortgage debt, as fast as possible. A pre-payment towards the mortgage principal immediately reduces outstanding debt and provides a guaranteed tax-free return on the investment.
Any investment (real estate or otherwise) should be made only after comparing its earnings with what could be obtained elsewhere. It is time to be fearful when everyone thinks real estate is a sure thing. What do you think, dear reader? What do you plan to do about the housing bubble (if one exists)?