Anecdote extracted from ‘Two properties, one complex problem’, Financial Post, 1 Apr 2011 [hat-tip SM]-
“In British Columbia, a couple we’ll call Harry, 36, and Felicia, 33, have a 15-month-old daughter and a complex problem. Their total combined monthly take-home income, $7,594, plus $400 of rental income, adds up to $7,994 per month. It covers current expenses, but for the future, income gains will have to come from Harry’s job.
Felicia, recently diagnosed with a neurological condition, is on long-term disability that pays her $2,394 a month after tax. Harry, an architect, works four days a week for monthly take-home income of $5,200. Their combined income services mortgages of $606,000 on their house and $384,000 for a rental property. Those two mortgages with associated property taxes take $5,420 out of their monthly take-home income. Property taxes take another $509. That’s a whopping 74% of after-tax income. “
“Harry and Felicia have just $20,000 in RRSPs or other financial assets, not including $2,400 in a registered education savings plan. Expenses eat up total after-tax income with almost nothing left for little extras.”
House $ 650,000
Rental property $585,000
House mortgage $606,000
Rental mortgage 384,000
Student loan 4,680
Net Worth $272,720
This, people, is why the Vancouver RE market is so very, very ill.
Harry and Felicia have 450% of their net worth in RE (yes, 450%, not a typo).
If RE drops just 20%, they are wiped out.
When RE drops 50%, they will have a negative net worth of $345K.
($618K drop in value of RE – $273K current net worth).
They are relatively young, but this setback will colour their financial health for decades to come.
Again, we see rabid speculation in the guise of normality.
There are many in this kind of situation, and only a very small percentage will be able to lighten up before the market crashes.