Don’t Buy a Home … Part 2: Past Performance

Past Performance May Not Be Repeated.

Now, I'm not a real estate agent, but I think these are some key points to consider.

Whenever a mutual fund in Canada advertises, I seem to see this phrase in their disclosures: “Past performance may not be repeated.” Or often, I see “Past performance does not guarantee future performance.” This is a key point: just because an investment performed well in the past is no proof that it will continue to do so down the road. The same might apply to real estate.

It has been magical couple of decades for real estate in Canada, especially for Vancouver real estate. A number of factors have contributed to this: low interest rates, government stimulus programs like the RRSP Home Buyer’s Plan, first time home-buyer tax credits, and high-ratio / low down payment mortgages.

Also, many traditional measurement factors for measuring real estate like the price of home versus the price to rent or the price to median income are at levels never seen before in Vancouver real estate. There are also different markets in Vancouver for single-family homes versus apartment-style stratas. For the most past, stratas haven’t seen the same huge increases in value they’re not in as limited supply. If a developer can get a few lots in a row, they can likely put together a bunch of low-rise apartment condos or perhaps even a high-rise.

It’s foolish to invest in a mutual fund based solely on its track record. The same applies to real estate. Just because your uncle sold his house for three times what he paid for it ten years ago doesn’t mean that the same will happen to you.

Now I’m not calling a real estate crash. Some, like Garth Turner, had called for a crash as far back as 2006 and earlier. I do think that if you’re counting on a similar pattern of increases in real estate value to fund your retirement or lifestyle, so may be disappointed down the road.

Check back next week for the next installment in this real estate series: Leveraged Investing Carried Extra Risks. You can also drop me a line to hear more.

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