Jul 29, 2022
Market corrections are just part of life — embrace the correction
By Dale Jackson
Recession risks in Canada are higher than in the U.S. as housing growth slows: Philip Petursson
Personal Finance Columnist, Payback Time
Attention homeowners: the value of what is probably the biggest single investment you will ever make is falling.
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That’s the bad news. The good news is; owning a home probably remains the best investment you will ever make over the long term.
Estimates for how much house prices will fall over the short term are all over the map, and depend on factors particular to the kind of residential property and location.
RBC Economics — a conservative and relatively accurate source for housing market projections — recently released a report calling for a 12 per cent price correction for the housing market from last February’s peak, by next winter.
“We’d argue the unfolding downturn should be seen as a welcome cool-down following a two year-long frenzy that put a huge financial burden on many new homeowners and made ownership dreams harder to achieve,” wrote RBC Assistant Chief Economist Robert Hogue in the report.
That’s cold comfort for homeowners watching their investment shrink from a valuation that never really was. Many stories are emerging in the media of homeowners selling below their arbitrary asking price and referring to the difference as a loss; like it was money in the bank.
In many cases those valuations have doubled and tripled in the past decade or so beyond the real intrinsic value of the home.
And that’s why it’s called a correction; a return of an asset price to its real intrinsic value. Economists with the Canada Mortgage and Housing Corporation (CMHC) have long said the average price of an average home has consistently risen at least five per cent each year in any 25-year period since the Second World War, and there’s no foreseeable reason for the future to be any different.
The one thing all corrections have in common is their tendency to mess with our heads because our deepest fear is that they will continue toward a collapse.
Long-term perspective is the best remedy for short-term fear, at least in this case.
The S&P 500 is a good example of how corrections correct because the index holds a diversified cross section of stocks that reflect the broader markets. Through the close of trading Thursday, the benchmark was down almost 15 per cent this year: officially a correction.
However, the value of the S&P 500 has skyrocketed about 65 per cent over the past five years.
Similarly, the technology-heavy Nasdaq 100 has gone beyond correction territory into bear market territory after sinking nearly 25 per cent from its Dec. 1, 2021 high.
Even in bear market territory, the Nasdaq 100 is up nearly 90 per cent over the past five years.
Corrections become much clearer when you look at long-term charts and realize you might be losing sleep over a short-term blip.
Oh, and corrections work both ways. As RBC points out, a housing correction brings opportunity for homebuyers — just like equity market corrections bring opportunity for investors to possibly buy below the real intrinsic value.
Here’s an idea for homeowners and investors with correction anxiety. Search for long-term price charts from credible online sources, print them out, and paste them on your refrigerator.
Each time you open the fridge you should get an added blast of cool.
Payback Time is a weekly column by personal finance columnist Dale Jackson about how to prepare your finances for retirement. Have a question you want answered? Email email@example.com.