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www.insideHALTON.com | OAKVILLE BEAVER | Thursday, December 25, 2014 | 54 Bank of Canada warns your house may be overvalued Dollars & Y Sense our house could be worth 30 per cent less than you think. That was Canada's central bank warning. Stephen Poloz, the governor of the Bank of Canada, released the latest research in early December warning Canadians that their homes are overvalued by 10-30 per cent. We have had similar warnings before from the Bank of Canada, as well as from other credible sources. The warning is signi cant because according to the 2012 report by Environics Analytics, more than three quarters of household wealth is tied up in real estate. A signi cant decline in house values would seriously hurt many households as well as the entire Canadian economy. The question is how serious is this warning. Should we pay attention to it or ignore it and hope the governor is wrong? It is the governor's role to use the in uence of the of ce to advise various segments of economy that affect the country at large. A watchful warning is prudent; otherwise, too stern a warning might trigger a rush Peter Watson Guest Contributor with Canadians selling their houses. The numbers suggest the risk of a decline in house prices is very real. Some would conclude the governor's warning was intentionally gentle so as not to cause a sharp decline in real estate values as people suddenly sell their houses. A house is no different from any other purchase. There are advantages and disadvantages to purchasing a house. Like buying a car or taking a family vacation, there is a price you are willing to pay. Up to the year 2000, Canadians paid about three times their annual income to buy a house. Suddenly, the cost of a house is ve times their annual income. One argument supporting higher house values is that we have shifted our desire towards purchasing and continuing to own a house. More money is spent on housing and less is available to spend elsewhere. If you own a house, townhouse or condominium, you will have to assess the nancial risk of your home being overvalued. If you are nancially comfortable, then you are not at risk. It might not be a signi cant concern or hardship to you if the value of your house dropped by several hundreds of thousands of dollars. You accept that risk because you enjoy living in your home and that is a natural consumer choice that might be right for you. However, if you do not have extra funds there are two risks to consider. If you have a mortgage or a line of credit against the equity in your house, what happens if interest rates increase? We suggest you prepare a family budget for the next few years to determine what funds are coming into the household from income or other sources, and how much are you spending. Now, assume interest rates increase by two or three per cent and you re-do the budget. Do you have a cash ow risk if your house suddenly has higher nancial carrying costs? The second suggestion is to estimate how a decreased value of your house will affect your retirement. Have you assumed the equity in your house will be a source of cash ow to help with living costs after your employment income has stopped? Personal nance is all about making nancial decisions that are best for you. What are your priorities and how do you want to allocate your funds to support those priorities? The nancial value of the family home has increased and for many it is the largest asset. Managing the nancial risk of home ownership for many should be the number one priority. -- Submitted by Peter Watson, MBA, CFP , R.F .P ., CIM, FCSI., Certi ed Financial Planner UP TO BOXING D On Now at The Brick! For more details go instore or online @thebrick.com. SEE OUR FLYER IN TODAY'S PAPER OR VIEW IT ONLINE AT BADBOY.CA NEVER UNDERSOLD! SALE 90 AY ON NOW! % OFF Follow Oakville Beaver staff on Twitter @Oakville_ Beaver or @NewsHooked @mikedgregory @BeaverSports @Halton_ Photog TOP 20 FRI DEC 26 6-8AM! DOOR CRASHERS DECEMBER 27 - THE MAGIC FAMILY SHOW DECEMBER 30 - VARIETY SHOW WITH DARREN DECEMBER 31 - THE MAGIC OF ORION ONTARIO'S LARGEST INDOOR AMUSEMENT PARK OPEN 12PM-6PM ON BOXING DAY JANUARY 2 - HICCUP THE CLOWN MORE SHOWS & DETAILS AT FANTASYFAIR.CA INSIDE WOODBINE CENTRE 500 REXDALE BLVD AT HWY 27. FANTASYFAIR.CA 416-674-5437