The ugly stuff going on in the stock market lately could happen in housing.

So follow the same 10-year rule as a home buyer that you should as an investor. If you can’t wait a decade or more for your transaction to make financial sense, don’t do it.

Carrick Talks Money

It’s time to start getting real about housing – the longer it keeps rising, the sharper the ensuing adjustment will be. We live in a jittery, news-saturated financial world today that can take shifts in sentiment about assets such as oil or stocks and amplify them into wipeout trends. Houses don’t have immunity. They are financial assets, just like stocks, gold bars and gallons of oil, which is to say prices move both up and down.

It’s happened before. Numbers from the Canadian Real Estate Association show that after reaching $254,197 in 1989, the average house price in Toronto fell so long and hard that it took until 2002 to set new highs. Vancouver housing prices averaged $148,861 in 1981 and didn’t crack that level again until 1988. Calgary hit $107,739 in 1981 and didn’t surpass that level again until 1989.

In the stock market, the way to protect yourself from the risk of big declines such as this is to commit to a holding period of 10 years or more. Five years won’t do for stocks – never kid yourself about that. Example: For the five years to June 30, 2012, the S&P/TSX composite index and S&P 500 both lost 0.7 per cent and the Morgan Stanley Capital International Europe Australasia Far East (EAFE) Index – it’s basically an everywhere-but-North-America index – lost 6.5 per cent a year. Note: The S&P and EAFE returns are priced in Canadian dollars.

A 10-year hold should work for housing, unless we get a crash like the one in the United States in 2008 or in Toronto in the late 1980s. Neither seems likely based on current market conditions. If you do buy a house for 10 years, you need to think long and hard about your purchase because you won’t have the recourse of addressing your house’s shortcomings by moving up in a few years.

First-time buyers, make sure there’s room for kids, and that the local schools are up to your standards. If you’re planning a move up to a larger home in your late 40s or 50s, think twice about buying a big barn that will feel too large when the kids have moved out and it’s just you and your spouse living there. As an insurance policy in case you outgrow your house, check for renovation potential. Could you, for example, add a bedroom in the basement?

The 10-year rule has implications for millennials looking at condos as a first foray into the housing market. In a column earlier this year, I made the case for members of Generation Y to skip the condo purchase if they aspire to quickly move up to a house (read it online at tgam.ca/ECys ). The 10-year rule very likely rules out a transitional condo unless it has room for a baby.

One way for home buyers to act on the warnings we’ve seen from the Bank of Canada and others about overvalued housing is to decide not to buy until prices fall. But home buying is more than just a financial calculation. People buy for lifestyle and life cycle reasons that make more sense to them than what the Bank of Canada says. The 10-year rule is especially for these buyers. It gives them a mantra if house prices fall after they buy: “We’re here for 10 years or more – plenty of time for prices to bounce back.”

Falling prices is a worst case for housing. We could also get a flat period or years of minimal growth that doesn’t keep up with inflation. The 10-year rule covers you in this type of market by keeping you in place long enough for growth to return to the housing market.

In the stock market, the decline is an entirely normal setback after a long period of gains. The same is coming to housing at some point, and a 10-year perspective will help you get over it.