How to invest down payment funds while timing the real estate market

Timing markets is also very difficult, because markets are not always rational, nor are the countless factors influencing them easily predictable. This applies to stock markets, real estate or any other asset. If everyone knew stocks were overvalued by 10%, they would all sell until the market fell by 10%. If everyone knew stocks were going to rise, they would all buy. In practice, there are always buyers and sellers at any given point in time, and markets ebb and flow. The same applies to real estate. Supply and demand influence prices, and prices can be too high or too low, with the perfect time to buy or sell only known in retrospect. 

Is real estate a secure investment?

Real estate has been in an upward trend in many Canadian real estate markets for the past 25 years. There has been an unusually long and steep increase in prices in many cities. There has been a 5% year-over-year price decrease through April 2023 in Teranet-National Bank National Composite House Price Index, representing a record contraction. But over 5 years, despite the pullback, annualized growth has been 5.9%.

I feel people put too much emphasis on what financial advisors, real estate agents, economists, and other people say about stocks and real estate. Despite extensive research and best intentions, it can be difficult for anyone to anticipate what is going to happen next. Nobody has a crystal ball.

Investing for a down payment

Investing a down payment fund is difficult at the best of times, but especially now given low interest rates. Canadian, U.S., and international stock markets have all had annual losses of 30% or more in the past, so going all-in on stocks with money you need in a year could see your down payment fund reduced by one-third. Even a balanced fund can lose money in a given year. In 2008, during the financial crisis, a typical Canadian balanced mutual fund with 50% to 60% per cent in stocks lost over 15%. In 2022, losses were typically in the 5% to 10% range and 10% to 15% for investors with a higher allocation to U.S. stocks.

Timing the markets with investments

If you had a three- to five-year time horizon, Liz, it is much less likely you would lose money in a balanced portfolio. With five or more years, a diversified stock portfolio is also unlikely to lose money, making stocks a great long-term investment despite the short-term volatility.

Guaranteed investment certificates (GICs) can be a good option or a home down payment. If your purchase is imminent, you may need to stick to 90-day or cashable GICs. If you have a year or more of runway, you can earn a higher interest rate.

If you were willing to take on some investment risk, you would need to be aware of the potential for losses over a one- to three-year time horizon, or even longer. If your down payment is big enough that you could qualify for a mortgage well in excess of your needs, you could invest some of your money in stocks. You could do so knowing that if your investments fell, you could take on a larger mortgage to wait for your investments to recover and potentially pay down some of your debt at that time. Alternatively, if you chose to sell your investments at a loss in our notional scenario, you could be left with a smaller down payment, and you would need to be aware of that risk. 

There are other risks as well. What if you lost your job or you or one of your children had an emergency that meant you needed to access your investments at a time when they could be worth less than they are now?

What to do with cash for a down payment in the future

My own general inclination is to keep cash you intend to use as a down payment imminently in cash or near cash, including GICs. If you invest the money and have exposure to stocks, just know that your down payment could be worth less when you need it, and you may need to decide between selling at a loss or taking on a larger mortgage. Your risk tolerance, comfort level with debt, and how much extra down payment you have compared to what you need to qualify for a mortgage are important factors in this decision. 

Just remember, if you are experiencing a fear of missing out on real estate appreciation, there is another risk to taking risk with your savings. Imagine investing in stocks, losing money, and cashing out due to either panic or needing the money for your home purchase. There are risks to not owning real estate or stocks, but there are also risks to owning them as well. 

Read more about investing and mortgages:

• Should you hold your mortgage inside your RRSP?
• Contribute to RRSP or pay off mortgage?
• Should you accelerate your mortgage payments—or invest?
• Should you hold your mortgage inside your RRSP?
• Mortgage renewal calculator

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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