Five years ago, I decided not to buy a home in Toronto. “Clearly” a bubble in the market was about to pop and I didn’t want to be the fool who failed to time the market. After all, the crash was inevitable. Article after article by learned economists after learned economist pointed to logical reasons for the inevitable crash: high debt-to-income ratio, cheap financing for anyone who had a pulse, an economy overly dependent on real estate, a shaky local, national and international political atmosphere.
Only recently have I come to terms with the fact that I was the fool who tried to time the market.
A study of investors between 1926 and 2011 conducted by Charles Schwab Company confirmed that a 20-year holding period never produced a negative result. Not so if you were an investor who tried to time the market. While this research was conducted with respect to stock markets, the same holds true for real estate. There is no get-rich-quick scheme.
What’s more, those who’ve successfully pulled off quick flips and “no money down” real estate investments often misattribute their success to their approach or brilliance and ignore the much stronger factor playing into their success: plain dumb luck. Taking advice from these people is akin taking advice from a lotto winner: “Quit your job and buy lotto tickets – it works!”
Study after study shows that the best way to avoid falling prey to irrational and detrimental investing behaviour is to take the long-term approach. Regardless of whether the market is overheated today or crashing tomorrow, the market – 10 or 20 years from now – will go up. Some markets will take longer and others shorter. This is true of Toronto’s market.
Many buyers in Toronto are still holding off on purchasing – as I did – in order to “wait and see” (read: “wait for the bubble to burst and be the genius who made a killing!”). This strategy, on its surface, seems logical. Who doesn’t want a deal?
It’s logical, however, only until you look at the research: waiting for the perfect time will cost you. As Charles Schwab’s study showed, “the cost of waiting for the perfect moment to invest exceeds the benefit of even perfect timing.”
Accordingly, if you are able to cover your mortgage comfortably, if you’ve saved for the inevitable problems that come with any form of ownership and if you plan to hold for at least 10 years, then it’s the right time to buy in Toronto. This is true no matter what the market is doing.
This perspective, however, doesn’t come without some caveats. For example, where you buy is important. I also wouldn’t buy property that has soil contamination issues and I certainly wouldn’t buy anything I couldn’t afford or wouldn’t be easily rentable. With this in mind, you still can make money in Toronto’s market. The critical point to remember, however, is that overnight success takes a minimum of 15 years.