Q. Five years after buying out my former spouse’s share of the matrimonial home, I decided to sell two years ago and watch the market for just the right downsize, anticipating that my eldest would be attending university out of province. 

Then came COVID, and plans changed. Now I have an 18-year-old and a 14-year-old living and working in what was supposed to be a temporary rental home. It appears I’ve missed the window for purchasing during the pandemic and am watching my 2019 dollars lose value on the real estate market day by day. 

Long story short, I’ve decided to take a prolonged break from house hunting and want to put the equity from my 2019 sale in a safe place that will also earn enough to at least keep up with inflation. What are my options? The short-term GICs and HISA I’m currently using break my heart with their low returns.
–Liz

A. Downsizing is a great opportunity to reduce monthly spending and accelerate or add to someone’s financial independence. But timing a downsize can be tricky. There are some would-be downsizers who are hanging on for “investment” reasons given continued real estate price appreciation. In your case, Liz, it seems you are worried you sold too early and should have stayed put in your matrimonial home a bit longer. Hindsight is 20/20, of course.

Timing markets is tricky, too. This applies to stock markets, real estate or any other asset. If everyone knew stocks were overvalued by 10%, they would all sell until the market fell by 10%. If everyone knew stocks were going to rise, they would all buy. In practice, there are always buyers and sellers at any given point in time, and markets ebb and flow. The same applies to real estate. Supply and demand influence prices, and prices can be too high or too low, with the perfect time to buy or sell only known in retrospect. 

Real estate has been in an upward trend in many Canadian real estate markets for the past 25 years. There has been an unusually long and steep increase in prices in many cities—and not even a pandemic can stop it. There has been a 9.6% year-over-year price increase through January 2021 in the Teranet-National Bank National Composite House Price Index.

I feel people put too much emphasis on what financial advisors, real estate agents, economists, and other people say about stocks and real estate. Despite extensive research and best intentions, it can be difficult for anyone to anticipate what is going to happen next. Nobody has a crystal ball.

Investing a down payment fund is difficult at the best of times, but especially now given low interest rates. Canadian, U.S., and international stock markets have all had annual losses of 30% or more in the past, so going all-in on stocks with money you need in a year could see your down payment fund reduced by one-third. Even a balanced fund can lose money in a given year. In 2008, during the financial crisis, the average Canadian balanced mutual fund with 50% to 60% per cent in stocks lost over 15%. 

If you had a three- to five-year time horizon, Liz, it is much less likely you would lose money in a balanced portfolio. With five or more years, a diversified stock portfolio is also unlikely to lose money, making stocks a great long-term investment despite the short-term volatility. I can appreciate your concern about GICs and savings accounts. Rates are 1% to 1.5% right now and not even keeping up with inflation.

Low rates could work to your advantage, though with several asterisks. If you were willing to take on some investment risk, you would need to be aware of the potential for losses over a one- to three-year time horizon, or even longer. If your down payment is big enough that you could qualify for a mortgage well in excess of your needs, you could invest some of your money in stocks. You could do so knowing that if your investments fell, you could take on a larger mortgage to wait for your investments to recover and potentially pay down some of your debt at that time. After all, in the same way interest rates are low for savings, interest rates are low for mortgages. Alternatively, if you chose to sell your investments at a loss in our notional scenario, you could be left with a smaller down payment, and you would need to be aware of that risk. 

There are other risks as well. What if you lost your job or you or one of your children had an emergency that meant you needed to access your investments at a time when they could be worth less than they are now?

My own general inclination is to keep cash you intend to use as a down payment imminently in cash or near cash. You cannot expect to earn more than 1% to 1.5% right now. If you invest the money and have exposure to stocks, just know that your down payment could be worth less when you need it, and you may need to decide between selling at a loss or taking on a larger mortgage. Your risk tolerance, comfort level with debt, and how much extra down payment you have compared to what you need to qualify for a mortgage are important factors in this decision. 

Just remember, if you are experiencing a fear of missing out on real estate appreciation over the past two years, there is another risk to taking risk with your savings. Imagine investing in stocks, losing money, and cashing out due to either panic or needing the money for your home purchase. You may look back and regret having missed out on that paltry 1% return on a GIC or savings account. There are risks to not owning real estate or stocks, but there are also risks to owning them as well. 

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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