…“This anecdote comes courtesy a family friend. A bit of background is perhaps appropriate here. Family immigrated from Asia over 20 years ago and has amassed equity of about $1MM or so. Couple is in their early 60s. Currently they live in a $750K house with basement suite and have about $400K invested in equities and cash. The house has a $200K VR mortgage.
…Last weekend they bought a $1MM 3 year old house which has 4 br up, 3 br down that can be converted to basement suite. They were pre-approved for $800K mortgage. This is based on them renting out part of the house and one of them working. The other is retired.
…They are thinking about selling their existing property (they also are thinking about renting it out if they can’t sell for the price they want). Their plan is, when they retire in a few years, to liquidate the other house and pay off their soon-to-be primary residence’s mortgage. They will be collecting a meagre CPP and OAS, and plan to supplement these with rental income from the basement. …They simply do not want anything to do with equity/security markets. There is little cash flow to be had for low risk these days, so they claim, and previous attempts to make money through stock/bond markets have produced poor results relative to what their peers have amassed in real estate.
…They are also aware of a few friends of theirs who have recently downsized into townhouses/condos from detached dwellings where they were renting out basement suites. It turns out these people were amassing an extra $15-20K per year in undeclared income on their suites that is no longer possible through downsizing and are now ruing the move. So the situation they now face is that they want a way of producing secure income, tax-efficiently — never mind they can get 5-6% tax-efficient divvies — as well as collecting CPP and OAS. They also want the ability to host visiting family in a larger home.
…So there’s an ongoing element of hedging going on in this market, where people are concerned another leg-up in prices will render their desired retirement home unattainable. They are doing the maths now where they can, with such a purchase, eke out a retirement in a comfortable and relatively expansive home with some rental income. After this purchase, in a few years, they will have a few hundred K of liquid savings and purchased a $1MM home.
…This family will not be living well — relatively little income — but they will be stable and comfortable. They do not *have* to sell, so long as their living/medical/repair expenses remain contained. What’s scary isn’t that this family is so heavily invested in real estate, it’s first that their incomes are low enough they will be relying on OAS despite considerable equity. Second they will be spending very little in the years to come, hardly a boon for the local economy by any stretch. One wonders if Vancouver is prepared for the drop in consumption that could befall an increasingly house-poor city in the coming years.“
- jesse, at VREAA, 10 Oct 2011 4:48pm
Couple in early 60′s.
Current home: $750K market value, $200K VR mortgage (plan to sell “in a few years”, but, for foreseeable future, holding.)
Second home: $1 Million market value, $800K mortgage
Other investments: $200K equities/cash ($400k minus $200K downpayment on second home).
RE being carried: $1.75 Million
Percentage of net-worth in RE: 184%
1. Thanks for the remarkable story, jesse.
2. The couple have 184% of their net-worth in RE at a time in their lives when they should probably have no more than 35%-40% therein. These guys are buying more when they should be scaling down. This act is a bizarre product of the psychological climate regarding RE in this town.
3. If RE prices drop 25%, they lose almost half of their total net-worth; a drop of 50%, and this couple are almost completely wiped out. They likely see the chance of any significant price drops as being non-existent. If they lose 50-100% of their net-worth, they will be emotionally devastated; it will colour the rest of their lives. They will never recover. They are playing with far bigger stakes than they imagine. [note to fred - that's 'stakes', not 'steaks' -ed.]
4. They are speculators; they are speculating heavily that prices will remain strong. But they would likely be shocked and perhaps offended to hear anyone describe them as speculators. They don’t realize it but they are gambling, as sure as if they took their money and went to a casino, and put it all on Red. In fact, a successful professional gambler would likely calculate that the casino option is a better bet than holding this position in Vancouver RE. Professional gamblers understand risk; this couple do not.