“I was recently ambushed by my family and endured what can only be described as a financial intervention. I got the “cheaper than rent!” lecture, followed by “get on with your life” and “it’s part of growing up”.
I am the lone holdout among my siblings, all of whom recently purchased “cheaper than rent” strata units in the suburbs that cost far more than their old rental units in town. Their mortgages alone cost more than they used to pay in rent. And of course this does not include strata fees, insurance, property tax, repairs, maintenance and any potential future increase in mortgage payments if interest rates go up in the next 3 decades.
When I pointed this out I got a blank stare followed by “but we don’t want you renting forever”. There’s a real blind spot when it comes to understanding the true cost of owning vs. renting. It’s impossible to have a rational, informed discussion when the people you’re talking to have their own set of imaginary facts. Like when they told me that “real estate doesn’t go down in price”, which is demonstrably false. When I mentioned that it had in fact gone down many times in the past and we happened to be witnessing the greatest global real estate correction in living memory I was met with more blank stares. They were clearly embarrassed for me that I had such an odd set of beliefs and eventually just gave up and talked amongst themselves about their futures flips and dream houses they would build with their imagined profits.
It should be noted that all of them purchased in the last 18 months, and none of them have sold or profited. Two of them arrived in cars gifted by my parents, as they can’t afford a car now. The fact that they can’t afford basic transportation now that their “cheaper than rent” condos are draining their bank accounts is lost on my parents who rewarded them for “getting on with their lives”. Two of them also spent most of the last year without functioning kitchen appliances and could not cook and/or store perishable food items to feed their families because again, the “cheaper than rent” condo cost so much they couldn’t even afford a $100 craigslist special. And again, they were bailed out when Santa Claus delivered shiny new appliances. I guess that’s also “part of growing up”.
I never myself bring up the subject of real estate around them, but it is THE topic when we’re all in the same room together. It didn’t used to be this way. And most of the people in the room have worked or did work for a financial services company so they should be able to do the basic math and realize their error.
I’m not against owning, and I don’t believe that real estate needs to be cheaper than rent to be worth buying. Sometimes when you pay more you get more. And I understand that they’re building equity so long as the prices stay high and they do the required repairs and maintenance to at least keep the place worth what they paid for it. The problem right now is that the home equity being built up is more than cancelled out by the drastically higher costs of owning. They’re betting on indefinite price increases because in reality they can’t afford these places and will need to sell sooner rather than later. They’re all talking about selling even though they only bought in 2009. And they all imagine they’ll buy something bigger and better with their profits.
As for my parents, I don’t know what they’re thinking. This is an emotional issue for them and they feel like realty savants because their modest home is worth more than they paid for it in the 80s. They’re financially bailing out their kids who borrowed house-sized mortgages for their starter condos, and pressuring their other kid to do the same. I don’t get it.
- ‘nobody you know’ at VREAA, 9 October 2011 at 11:46 am
A wonderful account; many thanks ‘nobody you know’.
It takes an immense amount of personal fortitude to keep your head when all about you are losing theirs.
You eloquently describe what other Vancouver housing bears have experienced in various forms of social interactions.
You also describe the inherent speculation in all purchases (“They’re betting on indefinite price increases”).
- vreaa
Great anecdote. Scary stuff. Thanks VREAA
Thanks Ben. I’m a daily reader over at your site and am using some of your investment guidelines as a template for my own retirement and down payment savings. We’ve methodically paid off our debts, built up an emergency fund and are now living well below our means while saving for the future.
It’s my understanding that not only do most baby boomers not have enough for their retirement, but they don’t know that they’re short and therefore aren’t doing anything about it. I refuse to be in that situation when I’m older.
the true blind spot for renters is that unless you’re able to save 60-80K/annum, you will put yourself further and further away each year you delay buying. If house values are flat or negative you benefit from renting, but honestly, that’s not often the reality for Vancouver, is it?
Hahaha, Hardy! That’s a good one. Thanks for the laugh.
I will agree partly. If you are renting because it is cheaper, you must take the excesss you are saving and invest it in order for it to be a wise financial decision. In our apartment, we save about $50,000 per year by renting over owning and we do put the money aside and invest it in a balanced portfolio. However – you don’t have to save 60-80K – you just have to save the excess while real estate is no increasing in value. If RE is increasing in value, it is difficult to come out ahead by renting because of the leverage effect of owning real estate.
you save 50 thousand $ per year just by renting ?!? may I ask you how much rent do you pay and for what ?
Not unreasonable. I rent a house for $30k/yr that could easily be listed at >$2m. With 20% down, I’d have a $1.6m mortgage. With a 4% mortgage, I’d be paying $64k/yr + property tax of $6k. So, that’s already a savings of $70k-$30k=$40k, even without taking into account maintenance.
So you’re saying my friends 301k condo in Highgate is going to be worth 420-460 in 2 years?
I will let him know since he is wanting to sell asap, but similar units have remained the same price for the last 2 years.
Or are you saying detached only cause of course everyone only buy houses.
Or in 4 years you could build a house in Costa Rica at that savings rate.
Wonderful post, finally prompting me to comment here. I’m a first time long time. As my name implies, I am a PhD still living in the basement suite where I did my undergrad. I gross >100k. All my spare income has gone into the stock market. Am I down? Yes, but only about 5% right now overall. I just see Vancouver RE as such a horrible investment right now, the graph appearing like the left side of the Nortel stock chart pre-bubble burst in 1999. The above post voices many of my concerns that have kept me out so far. Incidentally, to your siblings, if they buy a condo and RE prices double, they can’t just sell and use the profits to buy their dream home, because their dream home has also doubled. Patiently waiting for the BoC to eventually raise interest rates.
give us more facts about yourself “nobody you know”
If you give us age, relationship status, income (be honest, this is the most frequently lied about stat), birth order, etc. and I will tell you why you are renting rather than owning.
You are likely single, no kids, earn less than 50K, and are last in birth order. Sound about right?
I think you family has a point. You have a responsibility problem
In upsidedown Hardy land, “responsible” means buying at the top with so much borrowed money that you can’t afford a refrigerator.
“You are likely single, no kids, earn less than 50K, and are last in birth order. Sound about right?”
Nope. Wrong, kid on the way, wrong, and wrong.
And I’m not down on owning real estate. I just won’t devote a ridiculous amount of my income towards a starter condo when it would prevent me saving what I need for retirement, which I consider to be far more important than landing on the “buy” side of the rent vs. buy debate.
My comment was posted yesterday in response to diablo’s admission that “part of my sense of being an independent, fully functioning adult is to not have to cut a cheque to a landlord every month.” Diablo doesn’t feel like a real man unless he can say “I own this”, whereas I’m not too hung up on being a renter right now and just want to get my finances squared away. I’ll buy something when it makes more sense and doesn’t require me to indefinitely delay my retirement.
exactly, buy when it makes sense for you. But keep in mind what is real. A crash of 50% in Vancouver is not real, neither are falling prices year over year. What is real is 5-8%/yr increase on detached homes and very few opportunities at discounts. Keep it real nobody
Your statement is disingenuous. Troll. Do not feed it.
Hey Hardy,
I know I should not feed the troll (probably the same one as always), but I respectfully suggest that you are an complete moron.
I am the third of four. My wife and I each make 100k+. I am a shareholder in the engineereing firm I work for. We have 400k plus in liquid assets and no debt. Modest car is paid for and credit cards balance is zero every month. When my Dad was terminally ill last fall I was the power of attorney and still am for my mother’s affairs.
Your little’theory’ is a gigantic pile of steaming horseshit constructed to inflate your own ego, justify your own confirmation bias and assuage your actual lack of self worth.
I rent 3 bedrooms north of King Ed, between Main and Cambie for less than 1500/month. Admittedly it is an older ‘character’ house and gets a little drafty in winter, and would likely be torn down if sold, but we like it and the location can’t be beat.
Our income and assets are greater than those of my wife’s two sisters families combined, (one owns a condo on the King George highway in Surrey and the other lives in Iowa) and my mother-in-law, (who at 63 has a 200k mortgage on a condo and is lucky she has a gov’t pension to fall back on) looks down her nose at where we live and thinks we can’t provide for our impending first child. We will ponder this while we spend a month in Maui after our child arrives.
Please take your self righteous assumptions and place them up your ass along side your head.
Thanks for the embedded anecdote.
Not sure why but I was reading up on groupthink today. Seems like the entire country is overcome…
http://en.wikipedia.org/wiki/Groupthink
Hardy’s premises all amount to “housing prices always go up in Vancouver”; with subset: “detached houses are going to keep going up 5-8% p.a. in perpetuity”.
To argue anything else with Hardy is to not be “real”.
And note that the implication is that everybody who can possibly buy, should buy, now, asap.
And, of course, those who don’t “have a responsibility problem”.
—
Needless to say we disagree with Hardy.
The only way to show Hardy that price drops in Vancouver can be very “real” is to show Hardy the price drops when they are actually happening (as Hardy clearly has no capacity to reflect on history: early 80′s; 2008-9; etc). We fully expect, however, that none of us will get a chance to do that because, when the crash occurs, Hardy will evaporate from this site.
“Hardy’s premises all amount to “housing prices always go up in Vancouver”; with subset: “detached houses are going to keep going up 5-8% p.a. in perpetuity”.
To argue anything else with Hardy is to not be “real”.
Real estate goes up and down, but mostly up. And in Vancouver the down markets are brief and modest.
5-8% increase annually is not my premise, it’s reality. Most people plan their lives around what is real.
Expecting the once ever event of 30 years ago (50% property correction) to happen again is akin to planning your retirement around winning a lottery.
If you keep expecting improbable events to occur you’ll just make yourself bitter, and angry, and resentful.
Maybe Hardy should look at the 50% off signs in Kelowna? Except for real estate doesn’t go down so that must be a fabrication….right?
Hardy will, of course, point out that his central premise is that “housing prices always go up in Vancouver”, so price drops in any other place on the globe are simply irrelevant to the discussion.
http://tinyurl.com/69mh2cj
I haven’t heard anyone saying that real estate never goes down. But Vancouver is a different animal, and detached Vancouver is a far different animal indeed.
I think the signs in Kelowna are for condos, right?
It tickles my funnybone to see these high dollar condo projects in Osoyoos, Penticton and Kelowna. These units were 500K+ for a 1 bedroom. 50% off is probably still too much money.
Good anecdote. I’ll highlight a scarier one later on today.
Excellent.
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.
Wow. Thanks.
Will headline, with a few thoughts.
It would be interesting to eliminate the property-tax deferral for seniors and see if these people and others with similarly low incomes start making different decisions about holding on to their SFH’s. People talk about “boomers” being a significant factor in the real estate market now and going forward, but I believe that a significant number of older-than-boomers, even boomers’ parents, are still in their SFH’s in Vancouver — one reason, among others, for the shortage of such properties in the city. I visited several yard sales/estate sales on the west side this summer and was struck by how often what was happening was that “younger” family members (some in their 60s) were closing down houses of seniors who clearly had stayed in their houses until it was just physically impossible to do so. Of course, for most such people there will be no question of “timing the market”; that is, even if prices have dropped, they will not — will not be able to — hold off selling when their circumstances mean they need to realize their equity to support themselves.
A friend of mine was recently “gifted” a considerable amount of money by a family member on the condition that he buy a house in a particular new infill development (in another large city in Canada). The house costs way more than they could normally afford (their incomes are good, but modest) and they will still have to take a basement tenant to make the mortgage payments.
OT: China realty goes BOGOF
Wow. The brakes have been hit even harder than some anticipated.
Will this effect us in Vancouver?
Either directly or indirectly, one would imagine that it would.
has any housing activists trashed the garbage cans in China town yet? Free housing now!
“you save 50 thousand $ per year just by renting ?!? may I ask you how much rent do you pay and for what”?
my guess is that the renter is including money not spent by owning and adding it to the real money saved.
Otherwise the pre-tax income needed to save this kind of must be about 150K, plus another 15K for rent
his words are quite clear :”we save about $50,000 per year by renting over owning”. I still think there’s an extra 0 there.
As I’ve said above, I save $40k + maintenance costs. Not far from $50k.
I think I’ve got it, but it’s just a matter of perspective if one is not really putting those money aside.
diablo, I think you are right…. we make around $140k and we save $60k plus the contribution to the company pensions. we don’t buy because we consider the local market over evaluated ( which in Vancouver terms it is cheap). can we buy cash? maybe in 1-2 years but at this prices i prefer to pay rent $12k a year and walk to work.
Pompous asshole – is it so hard for you to believe that renters can save 50K per year? You think the only way to build wealth is to buy into the Vancouver RE fantasy. Can’t wait to see you flushed down the toilet when the price drop picks up some momentum.
Jesse, the thing that leaps out at me from your anecdote is that this couple is in their sixties and yet the banksters approve of them carrying one million dollars in debt….($200k on the first house and $800k on the new place…)
Wow……they better pray housing never corrects and/or mortgage rates never go up.
oh, but banks in Canada are way more prudent than the ones in the US … NOT
http://ca.news.yahoo.com/everyone-taking-more-debt-older-canadians-even-more-142359868.html
Right on cue..
From the article:
“..property values go up and down, but debt remains.”
The bank probably even sold them mortgage insurance. If they die the house is paid off.
Its interesting that Jeff Murdock and others have explored the amount of savings that can be realized when one rents.
However, such a discussion will be incomplete without analyzing its corollary. Bulls always state that it would take lots of discipline for one to save the difference between rent and mortgage. Which makes house ownership a form of forced savings.
If you are financially illiterate and irresponsible home ownership is not gonna make you financially savvy. All the financially irresponsible home owners I know have zero equity, despite all the price increases. This is because such people always use their houses as an ATM and take out all these home equity loans for vacations, new SUVs e.t.c. If you are a good saver you will save money either as a renter or home owner. The reason for buying a home now becomes “pride of ownership” and not speculation.