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www.insideHALTON.com · OAKVILLE BEAVER Thursday, February 28, 2013 · 18 Consider the options when home buying I t is time to sound the alarm again on potential real estate price declines. There continues to be news about the risk that the real estate bubble might be coming to an end. Many people incorrectly think real estate prices can only increase. In the world of finance, all asset classes can appreciate or decline. Economically it is as simple as supply and demand. If the demand for real estate declines, the price will soon follow. There is already evidence the demand is falling for Canadian residential real estate. Several factors affect demand. Professor George Athanassakos from the Richard Ivey School of Business has done research that supports a price decline. He thinks demographics are key. The higher the percentage of the population ages 20-64, the stronger the demand for housing because people in their working Dollars & Sense By Peter Watson years buy real estate. Athanassakos predicts Canada's changing demographics, caused by our aging population, will put downward pressure on the demand for real estate and translate into lower prices. Another danger sign is the value of housing as a percentage of Canada's Gross Domestic Product, which is now more than seven percent. That is above the historic average and close to the two previous highs of the late 1970s and 1980s. In both cases, there was a decline in real estate value. A significant factor of demand is affordability. When our current historic low interest rates increase the Canadian debt, over-extended consumers will not be able to afford the current high price levels. When your housing carrying costs increase regardless of being in the house-purchasing age category, no matter how much you like a property, you will not be able to afford it. Towards the end of last month, Moody's Investors Services reduced the credit rating on five Canadian banks citing their risk exposure to the Canadian real estate market. Our federal government has made changes to lending practices to encourage a real estate slow down. Both the federal Minister of Finance and the Governor of the Bank of Canada have been cautioning overzealous real estate purchasers. Potential victims of a real estate price correction are retirees and their children. Will retirees be economically disadvantaged if the value of their house is less than expected? Many young working families have stretched their budgets to purchase a family home. Real estate, for many, is their largest single asset. Not only do you have a high percent of your wealth invested in the family home, but it is also the place you live. It is a large part of your life. Our suggestion is that you think through several different scenarios with changing values for your house. If prices decline how will that affect you? -- Submitted by Peter Watson, MBA, CFP, R.F.P., CIM, FCSI, Certified Financial Planner