Real Estate

Should You Sell Your House And Avoid The Market Crash?

Rob Carrick wrote about a Vancouver couple who sold their house recently with the idea that they would rent for a while and then buy back into the real estate market after the coming crash.

I know a couple who did this same move in Toronto.  They might make out like bandits in the end, but the fact that they are on year seven of their plan makes me wonder.

After being a home owner for most of the last 12 years, I’ve gotten tired of it.  I hate the costs and all the hassle that houses bring.  However, I’m not planning to sell, since I’d probably find just as many things to complain about with a rental.

One thing I’m definitely not contemplating is trying to time the real estate market by selling my house now and buying again in the future at a lower price.

It’s easy to think that if you sell your house for high price and buy it back again at a discount, it’s a worthwhile thing to do.  And it very well might be.  But can you do it?

Let’s look at what kind of real estate drops would make this move worthwhile and then analyze some different outcomes to see what kind of benefit or loss a home owner might face if they try to time the market.

I’m going to assume a transactional cost of 10% of the selling house price.  This could vary greatly, but I’m talking about all costs – real estate agent fees, moving costs, incidentals etc.  If you don’t agree with this number, then just substitute your own. 

I’m also going ignore a whole pile of other factors like money earned on house equity while renting as well as the fact that someone renting might rent the same house or they might downsize to save cash.

First off – I’m going to use a fictional house in downtown Toronto which is currently valued at $650,000.  I’m going to pretend this is my house and I want to figure out what kind of market drop I need to make it worthwhile to sell and wait out the crash.

10% house price drop

Well considering I’ve said the transactional cost is 10%, clearly a 10% drop doesn’t do anything for me.  I would end up buying back into the market for net gain of zero.  That’s a small reward for moving twice.

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15% house price drop

This results in a net gain of $32,500.  Forget it – this isn’t close to making it wortwhile for me.

20% house price drop

Net gain of $65,000.  Not bad, but still not enough to get me to do this.

25% house price drop

Net gain of $97,500.  Ok, now I’m interested.  Almost $100,000 of after-tax money is pretty appealing.

How’s your sense of timing?

One problem with my scenarios so far is that I’m assuming I sell my house at the exact peak of the market and then buy again at the exact bottom of the market.  Obviously, this isn’t going to happen.

I suspect that to take advantage of a 25% house price drop, I would need the market to drop a lot more.  30% at a minimum and a 40% drop would be much better.  That way I don’t have to time the market perfectly.

So in other words, I would need a house market drop of around 40% and be able to time things reasonably well in order to profit enough to make the whole exercise worthwhile.

Not a small order.  Even if you think the market is going to fall, do you know the timing of the that fall?  Will it drop enough to make it worthwhile for you?  How long will the market drop take?

In my case, it’s very, very unlikely that the market will fall enough and my timing be good enough to do something like this.

Downside – What if you are wrong?

The big downside of this strategy is if you are wrong, you could end up with an insignificant profit which won’t compensate you for all the hassle involved.  Or worse, you lose money.  Maybe a lot of money.

Let’s look at some non-rosy scenarios:

You buy back in at a price that is 15% lower

In this case, I’ve packed up the house, rented for a certain amount of time and then decided to buy again.  I’ll make about $32,000 which is not horrible, but not that great.

Housing market remains flat for a long time and you decide to get back in

In that case, the $650,000 house is still $650,000, but you have paid 10% in transaction/moving costs, so to buy the same house means you are $65,000 poorer and you’ve gone through the hassle of moving twice.

Market continues to climb and you (or your spouse) panic and want back in

If the market has gone up 15%, the $650,000 house is now $747,000, you’ve paid the transaction costs and are back in your old house and you’ve lost a total of $162,000 for your troubles.

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If you can forecast a big enough drop in house prices and you can time it well enough to benefit from most of the drop, selling and renting for a while could be quite profitable.

The way I look it, there is too much downside risk for most people.  Yes, you could make a good chunk of change if things work out, but you can easily lose just as much money.  If you want to play roulette – go to Vegas. 

Real estate cycles can be incredibly long.  Think of the timing – what if you had done this five years ago – how would you feel now?  Would you still be married?

18 replies on “Should You Sell Your House And Avoid The Market Crash?”

We thought we were smart in selling out TO home in’87, it has since doubled, but we bought in a small community, where our current home has doubled.
We are now selling and buying a house for 1/3’rd current homes value and investing monies for our future estate.
Six months out of Canada, we don’t need a big house anymore.

I think this might make more sense in a downsizing situation. Big 4 bedroom, kids are gone, looking to move into a bungalow or condo. Sell now and get top dollar for your big house, wait till market softens and then buy the smaller home.

These calculations are great if you own your home outright, but most people are highly leveraged. Think about the property virgin with 5% down who could lock in 15% appreciation now and who’s only asset is their home. A 10% drop could be a huge loss to their networth.

Great article Mike! I have to say that this scenario doesn’t really make nearly as much sense as when you are dealing with income properties. Many many landlords have cashed in their chips during the run up.

The facts are that you need a house in Canada because it’s too cold to live outside. So in that sense, the house regardless of it’s monetary value is worth more for its intrinsic value which is as it should be. I could make a very convincing argument that primary residences are not investments at all. I have a 4 year old and I do know quite a bit about the real estate market. In fact if I sold my house right now I believe that it would work out really well financially. However I also know a lot about landlords because that is my business. I would not choose to subject myself to that market because simply I do not believe that the rental market as it stands is sustainable for many landlords. Landlords do have to “cheap out” on their houses because they are generally not going to be willing and in some cases able to maintain the house over time. As a tenant what do you do if a landlord can’t afford a new furnace or roof? What if they decide to sell the house, the timing may be really bad for me. I like the additional control and security owning my own house free and clear gives me.

@Howard – Well you did avoid the early 90’s crash.

@Thomas – Yes, if you have additional reasons for selling, then waiting things out in a rental makes more sense.

@AJE – The math is the same regardless of how much equity you have. Networth is a pretty useless metric in my opinion.

@Rachelle – Good point – timing the market is much easier to do (in terms of ease and risk) when it’s not your primary residence.

I have no desire to rent. If we were to move to a different city, I’d definitely give it a shot, but there just isn’t any reason for me to rent at the present time.

How can you put a dollar value on all the time and stress of packing, moving, picking a new house or rental, dealing with a realtor, lawyer, and new landlord. If you have the stomache for this, then fine. But if not, why would any sane individual put them and their family through a move just for the sake of a money??? Doesn’t make sense to me.

I agree with Justin’s comment, “How can you put a dollar value on all the time and stress of packing, moving, picking a new house or rental, dealing with a realtor, lawyer, and new landlord. ”

As someone that has moved 8 times in 7 years I do not want to sell to lock in any potential profits. It is not fun to move.

“I’m also going ignore a whole pile of other factors like money earned on house equity while renting”

But that’s the biggest reason to do it!

Timing the market and avoiding the crash are gravy — fantastic gravy if you get it right, since $30-100k is nothing to sneeze at for spending a few weeks packing and moving — but gravy nonetheless.

It’s freeing up that $650,000 to invest with that really makes the strategy work, even if housing prices just plateau from here. Without going to my spreadsheets you can back-of-the-envelope it: yearly rents in Toronto are about 5% of house prices (i.e., yearly rent for a house that sells for $650k would be about $32.5k), and that gets you pretty much the same house (there are some nice rentals out there). In Vancouver, 4%.

You have to pay ~2.5-4% in unavoidable ownership fees as an owner even with your mortgage paid off (property taxes, insurance, maintenance, amortized transaction costs, etc). Even if we’re generous and assume that’s just 2.5%, that means all that that equity is only making you 2.5% (1.5% in Vancouver) in rent savings. If you don’t have the equity, you have to pay more than than to borrow it from the bank (or take on the risk of paying more). If you do and you invest it, then that can be substantial savings.

If you make 6% after taxes and fees on your investments, then you’re ahead by 3.5%, or $20k/year after the transaction fees are taken off. In Vancouver, like the couple from the G&M article, you’re ahead by more not only in percentage terms due to a higher price-to-rent, but also because the amounts are higher ($1M houses rather than $650k), so you’re even further ahead in dollar terms ($45k per year).

@Justin & Steve – We’re talking about moving house. It’s not the worst thing in the world.

Are you guys telling me there isn’t an amount of money that would motivate you to move twice?

@Potato – I agree there could be savings by renting vs owning, but I suspect most people who try this move would be looking at a shorter time frame which would result in less savings.

You also need this money to buy a house again later on – making 6% annually after taxes is just not realistic for a short time frame.

When living in Australia between 1995 and 2005, I worked with someone who was 100% convinced that the Australian house price increases were unsustainable, that the market had peaked, and that selling out and getting back in a couple of years was a brilliant idea. Unfortunately, this was around 2002 or 2003 and all that Australian prices did for the next 7 or 8 years was to continue to increase. Last I heard from her, she and her husband had given up any hope of ever again owning their own house.

Market timing in any market is not a game for amateurs – or probably pros for that matter.

@Mark – Thanks for the story. Market timing is very difficult. The reality is that even if real estate is over-valued, that doesn’t mean it will decline in value anytime soon.

I believe it is more accurate to say that some parts of the RE Market are overvalued, certain neigbourhoods and areas will continue to grow.
Boomers will start to look for areas where they can stay active with every day being Saturday, and that has easy access to major cities and good health care.
The Georgian Triangle in Ontario and the Okanagan Valley will show sustained growth as boomers migrate there, condos in TO are overbuilt and beyond the purchasing power of today’s young buyers.
Boomers have cash and are looking to supplement retirement income, today’s young buyers need financing,mortgage rates of 6% will stop them from buying.

Let go your need to own. This isn’t like timing the stock market, it’s a much slower process. You also get paid to wait, which is why it’s not the fool’s game timing the stock market is.

If you had reasonably good timing and sold out of the US in 2004-2007, you’d be well ahead by now, but only around now-ish might you be looking to buy back in: ~6-8 years. The bust from Toronto’s 1989 peak came a little quicker, but you still had 5-6 years to sit out — and if you decided to get cozy in your rental and make it an even decade, you only missed the bottom by about 10%.

Agreed, the timing is huge, I know a few people who sold in 2007-2008 in Vancouver and, well, it’s 5 years later and now they’re looking at probably another 5 at least if the market does crash. They thought a crash was coming and were wringing their hands when GFC hit. Then the credit taps were turned to 11 and prices in parts of Vancouver are way up from then, including properties these people were eyeing on MLS. Now it’s another few hundred K on top at least. Ouch.

Something for nothing, really. Speculating up or speculating down, it’s opposite sides of the same coin, and you get what’s coming playing macro blackjack.

right now I am renting. I want to know how long should I wait for market to crash so that I buying a house.

Mike Holman, your article is well written and logical. If you can own a house comfortably, don’t try to time corrections. I agree with that. You will be better off in the long run. A home is one of your best retirement strategies.
There are two caveats that can screw things up for everyone, though.
One, if foreign investment has caused/contributed to price run up, and “they” divert their money elsewhere, who continues the momentum?
Two, on an individual level, all those people who are stretched and leveraged when interest rates rise…they will lose everything. It has happened before and it will happen again.
The cumulative impact of those two factors will determine the relative pain for everyone else.

using cities like vancouver and toronto to back up your theory is telling half the truth. you’re right, you cannot (and should not) time the market in such cities and the type of economy they’re based on. but using calgary as an example, it’s a whole different ball game,the collapse in economy with more than 40,000 jobs so far lost in alberta has caused a drop in house prices and will continue to do so till oil prices is goes up again. personally my wife and i have witnessed 4.5% drop in our home value (around $35,000) and we’re not going to wait and see our remaining $85,000 equity wiped out by the time the dust settles on this oil crash. it is financial suicide not to sell and rent for the next couple of years in such market.

I live in a housing bubble market with everyone attempting to buy at sky high prices. I bought 4.5 years ago, and am looking at selling for over a 100% gain in that amount of time. Yes attempting to sit on the sidelines waiting for the market to change may not seem the best, but rather than being intent on jumping back into the poker game because you like the action, take your earnings off the table. Markets can remain irrational for exuberant amounts of time, but you have to weigh it out. At the moment a 30% retrace would mean I lose $140,000 worth of equity currently available. I’ll rather that liquidity in the bank any day over paying the mortgage of an asset still owned by a lender, which to me is a liability.

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