What If There’s A Housing Market Crash?? House Prices & Their Impact On Reverse Mortgages

Many folks I talk to are constantly worried about a housing market crash in Canada and what it would do if you took out a reverse mortgage.

Other folks are worried that their home won’t go up in value enough to offset the reverse mortgage interest.

I’m going to walk you through the history of home prices in Canada and show some historical numbers and future projections to help show the reality of house prices and put your mind at ease.

For the purposes of this video and article, I’m going to use average prices across Canada at the time of publication – these will obviously change over time.

There is a lot of conflicting data out there on house prices, the data I used was from the Canadian Real Estate Association, Global Property Guide and StatCan.

As always, you can read the article in full below or watch the video version: 

House Prices & Reverse Mortgages

House price growth is important to the math as to how a reverse mortgage works to ensure you don’t lose all your home equity.

When you use my free reverse mortgage calculator, you can see the numbers on this yourself and how it offsets the reverse mortgage interest.

As you still own your home completely, you get to keep 100% of the increase in value in your home, despite having a reverse mortgage for 10% to 55% of it’s value.

But many folks worry about this, specifically:

• What if there’s a housing market crash?
• What if my home’s value doesn’t go up?

I’m going to answer both of these questions for you.  

The Media Makes It Easy To Worry About Housing Market Crashes…

Watching the news and how they report on the housing market doesn’t help with your worries.

And the headlines from some of the main media companies are very sensationalist when it comes to the housing market.

For example…

CBC talks about the housing bubble trouble that we should fear:

Visual Capitalist called our market the most overvalued in the world – yikes:

The National Post says the housing market crash is an “accident waiting to happen”:

 

 

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Why You Shouldn’t Worry About These Predictions (And The Sensationalist Media)

The media (as well as many in the real estate industry) in Canada have been almost obsessed with calling a housing bubble and a market crash for over a decade (and more).

Predictions like the ones above have been going on for years.

In fact, I’ll let you in on a little secret about these media headlines:

Let’s start with the CBC headline…

• This headline is from 2010, as you can see from the published date that I circled
• House prices are up 113% or $383,570 since this headline was written
• I guess we shouldn’t have feared that housing bubble trouble…

• This headline is from 2015, as you can see from the published date that I circled
• House prices are up 67% or $290,788 since this headline was written
• Apparently the market wasn’t quite as overvalued as they thought…

• This headline is also from 2015, as you can see from the published date that I circled
• As noted, house prices are up 67% or $290,788 since this headline was written
• I guess it didn’t work out so well on the short bets they made…

• This headline is from 2020, as you can see from the published date that I circled
• House prices are up 27% or $154,142 since this headline was written
• Perhaps you didn’t need to be that afraid (very afraid) after all?

House Prices & Predicting A Crash

While the media will continue to predict a housing bubble or crash – almost every month of every year – the reality is that if you could accurately predict when a housing market crash would happen, you’d be a multi-millionaire (or billionaire).

House prices will naturally go up (sometimes by a lot) and down (sometimes by a lot) but over the past 50 years (and in the long-term) you can expect roughly a 3-5% increase in value.

And even if you bought right before a major crash, recovery from a crash is generally quite quick (usually 2-3 years) & in the long-run you’d still see growth in your home’s value.

Furthermore, you don’t need to worry about things such as capital gains tax when it comes to your home – I discuss this in more detail in this article.

For example, here are some of the larger housing market corrections of recent times

The point is that the housing market has always recovered from major crashes (and usually quite fast – within 2-3 years).

In the long run, when crashes do happen they’re not much more than a blip along the way to seeing solid returns on your investment.  

Projecting House Prices Into The Future

The average price of a home in Canada right now is around $722,600.

So what will the average price look like 10 years or 20 years from now?

• 10 years from now that would be around $1,077,276 at 4% growth (a 49% increase)
• 20 years from now that would look like $1,606,038 at 4% growth (a 122% increase)

But I already hear you say: “Those numbers seem too high?”

The time value of money is a difficult concept to understand – especially over such long periods.

One useful exercise that helps you to see how realistic these projections are is to look back 10 years or 20 years.

How do these projections compare to what has happened over the last 10 or 20 years?
 

Historical Home Prices

The average price of a home in Canada right now is $722,600, as I mentioned above.

• 10 years ago, it was $431,812 – so it has increased by 67% – more than the 10 year projection that I made above, which was 49%.
• 20 years ago, it was $256,820 – so it has increased by 181% – more than the 20 year projection that I made above, which was 122%.

In the same way that you – right now – reacted to those 10 or 20 year projections of house prices into the future, if you’d told folks 20 years ago that the average price would be almost 3 times what it was, do you know what they would have said?

“Those numbers seem too high.”

What they also show is that, if anything, the 10 year and 20 year projections I posted above might actually be a little conservative compared to the home price growth we’ve actually seen over the previous 10 and 20 years.  

What About The Short Term?

There is always short-term risk, even if housing will remain a good investment in the long-term.

If you plotted 4% annual growth in home prices on a chart it would look like this:

But that chart isn’t close to reality.

There will be periods of high growth (home prices go up by more than 4%, even as much as 10-30%).

There will be periods of low growth (home prices go up less than this, even go down as much as 10-30%).

Ultimately in the long run all these periods of high growth – sometimes 10-30% increases – and low growth – sometimes 10-30% decreases – will even out to the historical averages of 3% to 5%.

But it is correct to say that in the short-term (under 5 years) there is always some risk – just that there is both upside risk & downside risk.

The last point is an important one – there is equally as much upside risk as there is downside risk in the short term – many folks focus on the downside risk and forget about this.

 

Long-Term Thinking

This is why you need to think about a reverse mortgage as a long-term plan (or a lifetime mortgage – which is what it is designed to be).

If you are thinking long-term you can ignore short-term fluctuations (both upwards and downwards).

In the long-term – and even in the medium term over a 5 year period – the risk of your home not going up in value is almost non-existent.

If you look back over any 5 year period in the last 50-60 years in Canada, you’ll struggle to find even one 5 year period time where house prices didn’t go up over the course of the entire period.  

 

In Summary – House Prices, A Housing Market Crash & Reverse Mortgages

It is easy to be concerned about house prices – particularly since the media has been talking about a bubble and housing market crash for well over 10 years now.

Every month another ‘expert’ prediction or article about how overvalued – or in a bubble – our property market is will be published.

In reality you simply need to focus on the fact that in the short-term house prices will go up (sometimes by a lot) and they’ll also go down (sometimes by a lot) but in the long-run they have consistently shown (not just in Canada but almost every major country) that they will go up by around 3% to 5%.

A reverse mortgage should be seen as a long-term (even lifetime) mortgage and therefore you can ignore all the ups and downs safe in the knowledge that – over time – house prices in Canada will continue to go up. 

 

Get A Free Reverse Mortgage Assessment In 90 Seconds

You can get a free reverse mortgage assessment – from a Chartered Accountant – who’ll then advise you if this is a good solution for you, or if something better works.

All it takes is 90 seconds – click here to get started.

Mich Sneddon, CPA, CA

A Canadian Chartered Accountant and licensed Mortgage Professional – creator of Reverse Mortgage Pros – the #1 reverse mortgage specialists in Canada.  I make it my mission to educate Canadians about how reverse mortgages work so that you can make an informed and educated decision that’s right for you and your family.