Financial planner and FP columnist Jason Heath helps readers shed light on everyday financial decisions. Send your questions to personalfinance@nationalpost.
Milan asks In 2009 I bought a condo that cost me $315,000 and now it’s worth about $275,000. I would like to move into a townhouse but I am stuck with the loss. I don’t see the market improving any time soon for my condo to break even when I sell. Do you think it’s a good idea to sell this place, take the loss and then take advantage of the lower interest rates and buy something that I would like to have long term? I have $130,000 including TFSA and savings (excluding RRSP) as cash that I can use for this new place if I want to go in that direction.
Jason Heath responds Market timing is the practice of buying or selling an asset based on a prediction of the future market value. The practice purports a knowledge of the short or medium-term price movement. Wouldn’t we all like to buy low and sell high?
It’s controversial as to whether or not market timing is a viable investment strategy. The broader investment industry certainly wants us to think it’s a secret that they have mastered, even though financial market returns are simply a consolidation of all the returns of the participants. Some underperform, some outperform, but overall, we just gravitate toward the average. Very few can be extraordinary.
Milan’s question is really two-fold. He’s considering whether or not to time real estate and interest rate markets. Beyond that, he’s contemplating a financial decision that will bring him a sense of material happiness.
I’ve been adamant in my opinion on real estate prices in Canada and continue to believe that although strong gains in the coming years are less likely, strong decline also remains unlikely. In fact, the Bank of Canada’s new governor, Stephen Poloz has suggested the same and the Bank’s most recent Monetary Policy Report even comments on the now “sustainable path for the housing sector.”
As far as interest rates, the Bank of Canada said this month that monetary stimulus will remain in place as long as there is “significant slack” in the Canadian economy, the inflation outlook remains muted, and imbalances in the household sector continue to “evolve constructively.” In other words, rates aren’t moving any time soon. And while rates are unlikely to move lower, they’re also unlikely to move up in any rush.
I have a slight bias towards the theory of efficient markets. That is, that most investments are fairly valued most of the time based on all available information. In that regard, for Milan to try to time the real estate or interest rate markets is unlikely to benefit him in the long run. In fact, I think that Milan’s answer may lay more in what he wants. He says a townhouse is something that he would like to have long term.
Financial decisions are a combination of wants and needs. Many Canadians are gravitating towards wants over needs as reflected by our record high debt to income ratio. But balance is important, in finances as in anything. Saving for tomorrow can sometimes prevent living for today just the same as living for today can leave you in dire financial straits tomorrow.
Whether or not to move from a condo to a townhouse should ultimately be based on his own financial and lifestyle considerations — not real estate market or mortgage rate timing.
Beyond that, whether or not to sell an asset should not depend on what you paid for it. This can be a detrimental investor psychological phenomenon that causes people to hold on to losing investments until all is lost.I often pose this question to investors who have lost money: if you had the value of the investment in cash, would you buy it today? If not, sell it. And if you’re Milan, it sounds like your answer should be to sell the condo and buy the townhouse.