The Patz McMillan Team

 As the rosy-glow of hot-hot real estate markets noticeably fades, how many Canadians who bought property during this fervour are asking themselves, "What have I gotten myself into?"

Was there time for clear, deliberate thinking in the heat of multiple offers, flash sell-outs of new condominiums and the intense "now-or-never" tempo that enticed even the marginally financially-able to "buy big?" Amid current media speculation on hard and soft landings for real estate, concern and fear is a discernible undercurrent. But do we really understand what we're nervous about? Identify specific real estate vulnerability and you'll keep media reports in perspective and stay ahead of calamity.

Where does your financial vulnerability lie? We may not like to think about bad outcomings, but we should know at which levels and for which changes our real estate ownership is at risk:

• General economic downturn.
• Increased interest rates.
• Market-driven decreases in property value.
• Climbing monthly condominium fees and reserve fund deficiencies.
• Rising property taxes and local assessments.
• Escalating energy costs.

A full-scale economic crash or depression is probably not on the horizon for Canada, but globalization, for all its positive effects, has also made us vulnerable to repercussions from economic downturns outside our borders. This "who knows for sure" uncertainty is best counterbalanced by the knowledge that you have the flexibility associated with being on solid financial ground.

Historically-low interest rates fueled past activity and promise to cushion market shifts in the future, but how much of an increase is too much for your situation? Vulnerability to interest rate increases arises at renewal time for fixed rate mortgages. Paying off the principal, or original amount borrowed, is a powerful strategy for counteracting renewal at a higher rate. Check with the lender (if you didn't ask for specifics before you signed on) and find out how often and by how much you may pay off principal. Reduce the balance by a few hundred or thousand and you may save many times that in interest charges over the life of the mortgage. At renewal time, the decrease in mortgage balance may offset any rate increase, keeping your payments the same or even lowering them. Playing around with an online mortgage calculator will also reveal that shortening the amortization period, even by a year or two, to the largest payment level you can safely afford, will reduce the overall amount you pay.

Variable-rate mortgages take advantage of declining interest rates, but can expose borrowers to risk when rates increase. To reduce uncertainty, plan ahead to determine your bail-out level, in view of mortgage terms and fees charged for locking in your rate.

Real estate markets have shown such steady growth over the last decade that, on the whole, there should be room for slippage before wide-spread problems arise. If you bought at a price peak or through multiple-offer bidding, you may not recoup the full purchase cost until the local market recycles to that level. To increase flexibility in selecting an earlier sale time, concentrate on property improvements that do not require large cash outlays, but that typically increase saleability and property value like landscaping.

Media reports of declining real estate prices (read "property values") may create a false impression of complete downturn. Many neighbourhoods, regions and types of property like waterfront continue to hold their own. There are always locations that remain highly desirable. This patchwork value response reflects the local nature of real estate markets and makes blanket statements about the real estate market merely unsettling generalizations.

Stay in tune with your local real estate market by tapping into the knowledge pool represented by committed real estate salespersons and brokerages. You may decide to monitor the market by taking regular advantage of the free market evaluations real estate professionals offer.

Condominium owners face the additional challenge of living with the financial repercussions of property management decisions make by others: the condominium board, contracted property managers and other owners. Although many buyers are attracted to this style of ownership by the advertised "lock the door and go" freedom, an absentee mentality may place the initial investment and monthly affordability of the unit at risk.

Effective condominium management protects and improves property value through judicious, cost-effective maintenance and anticipation of major repairs. Poor management means eroded value, unnecessary costs and big bills when roof and other major repairs are not covered by reserve funds. The difference between effective and poor management is largely the degree of involvement and commitment of the condominium owners.

Rising property taxes and energy costs have become expected annual pressures. Attention to detail can help reduce energy costs, but taxes are the big challenge. Provincial and municipal politicians who feel directly accountable to their vocal and involved constituents (that's you) should respond to demand for revisions to out-dated real estate taxation systems. Ontario's computerized market-value system has been formally recognized as an unfair financial burden, but only time and loud insistence from taxpayers will set the system right.

Don't just worry. Seek out accurate information and knowledgeable professionals to learn the facts and create effective strategies. Peace of mind lies in reducing financial vulnerability before any specific need arises -- and that includes attacking credit card debt, too. Anticipation is power.


Written by PJ Wade