“Many of my boomer contemporaries think they will “live off the real estate equity” forever.”

Posted on 21 February 2012 | 40 Comments

“I am a boomer (sold, sadly before the huge boom, and now rent) and can say that many of my contemporaries do indeed think they will “live off the equity” forever. Several of my friends and acquaintances have purchased houses, condos or whatever in places like Vernon or Chemainus, where prices appear cheap, in the hopes of renting them out at Vancouver rents to provide income for a pleasant old age. In every case, when an emergency has come up in one of these far-flung rental properties the costs have skyrocketed and home equity loans or lines of credit have been tapped. When interest rates go up, along with all the other costs associated with owning, these pensionless people will be screwed big-time. The other group of people that should keep bankers up at night are those that took out second or third mortgages to become “property developers” near their own homes. There are several older individuals that I know on the west-side that bought knock-downs for well over $1 million and had houses constructed thinking that they will be able to sell them for a huge profit. Almost every one of the houses I know of is still for sale after hitting the market last year. These are the types that will have to sell at some point or risk losing everything. The other thing that I’ve noticed is the sheer number of empty houses for sale – how long can and will they sit there before the owner/developer hits the wall and is forced to sell?”
- Observer at VREAA 19 Feb 2012 at 11:58am

This entry was posted in 02. Profiting from the Boom, 14. Social Effects of the Boom, 15. Misallocation of Resources and tagged , , , , , , , . Bookmark the permalink.

40 Responses to “Many of my boomer contemporaries think they will “live off the real estate equity” forever.”

  1. jesse | 21 February 2012 at 6:07 am | Reply

    I wonder how much of Vancouver’s dependence on real estate can be explained by chronic low productivity. The parallels to certain other parts of the world are disturbing.

    • vreaa | 21 February 2012 at 6:22 am | Reply

      We think you are correct.
      Are there statistics that do a good job of quantifying ‘productivity’?

    • Renters Revenge | 21 February 2012 at 7:39 am | Reply

      Chronic low productivity combined with a strong resource/commodity sector, commonly known as Dutch Disease. Canada has such a bad case of it that I think they may have to rename it Canada Disease. It is affecting real estate because income from the resource sector has nowhere productive to go and therefore goes into the speculative economy instead.
      http://www.statcan.gc.ca/pub/15-206-x/2009025/ct017-eng.htm

      • Raging Ranter | 21 February 2012 at 12:04 pm |

        Actually Renter’s Revenge, there’s some pretty good evidence that the so-called Dutch Disease is a figment of some economists’ over-active imaginations. The best evidence being the Dutch. During the late 1970s and 80s, the strong value of the Dutch currency forced Dutch industry to adopt productivity improvements and innovation. – something that would not have happened had they opted to devalue their currency instead of adjusting to a higher one.

        It’s not the “high” C$ that’s hurting us now. We are merely seeing the chickens come home to roost after being overly dependent on a devalued loonie in the mid-to-late 1990s. If there’s one lesson I remember from my International Monetary Economics courses from the mid-1990s, it’s that a currency devaluation NEVER leads to a long-lasting competitive advantage. It’s just never happened in history. Much like a credit-fueled real estate bubble, the “wealth” effect of a cheap currency is illusory. Once prices and wages adjust to the existing exchange rates, a new round of devaluation is required just to maintain the competitive advantage. This is called the J-shaped currency devaluation (due to the approximate shape of the graph – that of a ‘J’ lying on its back), and it’s well documented. New Zealand underwent several “J-shaped” devaluations in the 1970s and 80s, as did Canada in the 1990s.

        In any case, the loonie hasn’t really risen in value at all – it simply hasn’t devalued as much as the USD and the Euro. Given the pummeling their economies have taken, we should count ourselves lucky. At least we have a thriving commodities sector. That is a blessing, not a curse.

      • ToL | 21 February 2012 at 12:49 pm |

        Average weekly wages have gone up at least 15% in most industries, including real estate, in the last 6 years alone.
        http://www40.statcan.gc.ca/l01/cst01/labr76a-eng.htm

      • Farmer | 21 February 2012 at 1:48 pm |

        Many thanks renter Revenge for a fantastic chart. It says so much more than mere words can ever tell. Why do we even bother talking about this stuff when the graphics are worth a thousand words.

  2. loomis | 21 February 2012 at 6:24 am | Reply

    Low productivity is a side effect of a real estate boom. Money that would have otherwise been used for productive investments gets diverted into non-productive asset classes like housing. At the end of the day, the housing boom amounts to non-productive consumerism.

    • vreaa | 21 February 2012 at 6:28 am | Reply

      The ‘misallocation of resources’ that is a profound deleterious effect of bubbles.

      • loomis | 21 February 2012 at 7:23 am |

        vreaa – It boils down to the illusion of wealth vs real wealth. It used to be you worked hard and saved money for a large down payment on a house you could afford. Now the notion is out there that if you own a house you are rich on equity and don’t have to work. The tech and housing bubbles were largely driven by the lure of easy money without work. Easy money is the worst and most delusional drug of all. Real wealth requires work, that will never change.

    • hazu chan | 21 February 2012 at 12:32 pm | Reply

      It depends on how you define productivity. Economists will also include “home production”, things like cooking and cleaning and hobbies outside of market labour. So one could say part of the higher valuations comes from the productive home opportunities (i.e. leisure). And that is somewhat consistent with observations that people spend more time enjoying the outdoors or staying home and cooking and gardening. I’m always surprised at how many international retailers consistently fail to stay in business in Vancouver.

      • ToL | 21 February 2012 at 1:09 pm |

        What I heard from international visitors was that Robson boutigues stocked inventories from several years ago. Holt Renfrew slashed prices as much as 50% on branded fashion goods that otherwise won’t sell.
        Milan is still “the place” for to shop for the coveted Valentino, Gucci, Armani, Ferragamo, Versace and two dozens more brands. LOL. And Milan has La Scala.

      • debtless | 21 February 2012 at 10:09 pm |

        “It is a temporary, refundable income tax credit for first-time buyers who purchase newly‑built… paragliders?”

        Forget the house. Gimme a rebate to buy stuff. Now.

      • Farmer | 21 February 2012 at 11:03 pm |

        Some Americans already figured out that the total amount of stimulus and easing was just about equal to the total value lost in the housing correction and so rightly demanded to know why the government did not just write checks and pay off all their mortgages. I kind of wonder too. The math is just crazy.

      • Basement Suite | 22 February 2012 at 5:15 am |

        “so rightly demanded to know why the government did not just write checks and pay off all their mortgages”

        That would hardly have been fair to those who did not buy way too much house, those who tried to be “prudent” during the bubble. Even more reward for low earners who bought mansions they couldn’t afford. That would have been lunacy.

  3. Basement Suite | 21 February 2012 at 6:37 am | Reply

    “When interest rates go up”

    Don’t hold your breath.

    • loomis | 21 February 2012 at 7:18 am | Reply

      Basement Suite – I agree that central banks will try to keep rates low to keep the Ponzi scheme alive as long as they can. Rates can’t stay this low forever though. An inflation crisis that can’t be covered by creative inflation stats may prompt a spike in rates. These are some scary unpredictable times we are in.

      • Basement Suite | 21 February 2012 at 7:50 am |

        I don’t think they care about inflation anymore, but lets hope, eventually, it costs something to borrow a dollar.

      • debtless | 21 February 2012 at 8:37 am |

        loomis, your intuition has validation

        “The present trade dispute between the U.S. and China is reminiscent of the background to the two Opium Wars. Once more, the issue is the humiliation and plunder of China as a “thank you” for China’s favor of having provided consumer goods for which the West was unable to pay in terms of Western goods suitable for Chinese consumption. The only difference is the absence of opium in the dispute.

        Oops, I take it back. The role of opium in the current dispute is played by paper. Paper dollars, to be precise. In 1971 an atrocity was made that I call the Nixon-Friedman conspiracy. To cover up the shame and disgrace of the default of the U.S. on its international gold obligations, Milton Friedman (following an earlier failed attempt of John M. Keynes) concocted a spurious and idiotic theory of floating exchange rates. It suggests that falling foreign exchange value of the domestic currency makes it stronger when in actual fact the opposite is true: it is made weaker as the terms of trade of the devaluing country deteriorates and that of its trading partners improves. Nixon was quick to embrace the false theory of Friedman. No public debate of the plan was permitted then, or ever after. Under the new dispensation the irredeemable dollar was to play the role of the ultimate extinguisher of debt, a preposterous idea. The scheme was imposed on the world under duress as part of the “new millennium”, shaking off the “tyranny of gold”, that “barbarous relic”, the last remnant of superstition, the only remaining “anachronism of the Modern Age”. The ploy was played up and celebrated as a great scientific breakthrough, making it possible for man to shape his own destiny rationally, free of superstition, for the first time ever. Yet all it was a cheap trick to elevate the dishonored paper of an insolvent banker (the U.S.) from scum to the holy of holies: international currency. The fact that fiat paper money has a history of 100 percent mortality was neatly side-stepped. Any questioning of the wisdom of experimenting with is in spite of logic and historical evidence was declared foggy-bottom reactionary thinking.

        The amazing thing about this episode of the history of human folly was the ease with which it could be pushed down the throat of the rest of the world, including those nations that were directly hurt by it, such as the ones running a trade surplus with the U.S. Their savings went up in smoke.”

        Antal E. Fekete
        http://www.professorfekete.com
        Professor, Intermountain Institute of Science and Applied Mathematics

    • Sterling | 21 February 2012 at 8:22 am | Reply

      I think rates will go up, but not till around 2015, then Vancouver is in doo doo. So says the Bernanke.

      • Basement Suite | 21 February 2012 at 9:19 am |

        No, because the good professor will promise another 3 years of free money just before the clock is up, then again when that clock is up. If rates went up substantially (read, at least a whole whopping 3%) before 2020 I would be very surprised.

      • Farmer | 21 February 2012 at 12:55 pm |

        Incredibly, there is actually a case to be made for mild deflation and low growth. One of the real fears out there for the US economy and many others that are heavily indebted is the prospect of rising interest rates. How will the debts be serviced then if they can not be serviced now? Should the economy actually heat up we will have inflation pressures that are only typically dealt with by rising rates. Rising rates are a companion of inflation.

      • Basement Suite | 21 February 2012 at 1:40 pm |

        There is continued inlflation, and the reported magnitude of it is only reduced by repeatedly changing the definition of inflation. If the heavily indebted cannot service their debts, too bad, should we make rates negartive and pay them a stipend for holding so much debt? IMO they need to take their medicine. Eventually, it would mean a healthier global economy if central banks just stopped kicking the can down the road already. Rip the bandaide off.

      • Farmer | 21 February 2012 at 1:57 pm |

        Maybe not such a good idea Basement Suite. I can not understand why everyone is in such a rush to have a conclusion to every problem the economy is experiencing. Why ‘rip the band-aid off” as you suggest? What will that accomplish except expose the wounds the economy is suffering from and permit infection to seep in. We are in a recovery mode, friend. That takes careful management by the custodians and it is always a balancing act. Let us not be in such a hurry until we see the results of the changes our policy makers have brought forward first. The last damn thing we all need is an actual crash in prices!

      • Basement Suite | 21 February 2012 at 2:16 pm |

        “The last damn thing we all need is an actual crash in prices!”

        I disagree with respect to things that are way too high thanks to a decade of free money. I.e., houses. Yes I do want a major crash in house prices here. Was it good for the US? I argue yes. Did it hurt? Sure, but they had it coming, just like we have it coming. This idea that we can just keep borrowing unlimited money and it’s all free, it the cause of this global situation. Everyone wants a free lunch and no one wants it to end. The Greeks screaming about fiscal responsibility measures, oh how awful, no more free lunch? Rioting in the streets! Obama happy to run a trillion dollar deficit indefinitely, and the “independent” Fed run by Helicopter Ben in his back pocket. There is no incentive for fair pricing, or fiscal responsibility at the personal or national levels, as long as money is free, it is prudent to NOT be prudent, now. To borrow a dollar should cost something. Do I suggest we slam on a 5% target rate next week? No. Do I suggest get started right now, with a .25% hike, and start a steady, slow program of weaning the world off heroine? YES I DO.

      • Farmer | 22 February 2012 at 5:50 pm |

        OK. Now I think I see where you are coming from Basement Suite. When I first read your comments I was thinking you were one of the anarchist lot who would happily tear down the system in order to get a deal on a house for themselves. That whole “rip off the band-aid” philosophy usually belongs to the camp of people who are also conveniently gold lovers and “sound money’ advocates, Ron Paul supporters and Austrian economists.

        Not that they are all bad; just that they espouse a different kind of financial extremism that is no better than what we already have. It is what I refer to knee-jerk economics.

        Anyway, you have made good points and I do support some of them.

  4. loomis | 21 February 2012 at 8:32 am | Reply

    Basement Suite – Central Banks do care about inflation as they are actively targeting it now thinking it will solve the problems they created. So much for entities that were created to foster price stability.

  5. loomis | 21 February 2012 at 10:01 am | Reply

    Basement Suite – Your analysis of the 1971 ending of the Bretton Woods Agreement is spot on. You can go on Youtube and see a clip of Nixon’s August 1971 speech announcing the ending of the gold standard and how he blamed speculators for wreaking havoc on the U.S. dollar. He forgot to mention it was the guns and butter polices of LBJ that he was trying to pay for with printed dollars, causing a run on gold. Speculators are always blamed for government folly.

    An interesting historical footnote, Nixon imposed wage and price controls in the early 70′s when inflation hit 4%. As wrong as his policies were, they at least acknowledged that inflation was a problem. If only he’d have figured out that it was the ending of the gold standard that caused the inflation in the first place. He could never grasp how rising prices are the result of inflation, not the cause. Now Central Banks are targeting 3% inflation!

    • Basement Suite | 21 February 2012 at 10:47 am | Reply

      As you noted below, it was not my analysis, but I also agree it was an interesting quote. They will always “target” just above whatever their creative numbers currently report. They are creative enough to keep redefining things to keep that reported number manageable. But even if they eventually had to report 4% inflation even after dropping out absolutely everything that we use in everyday life (inflation excluding things you actually need to buy), their target would simply move to 5%. They just don’t care about it.

      • Basement Suite | 21 February 2012 at 10:52 am |

        I will add, their idea you hear every once in awhile that inflation in the last 3 months might have been bad but now is moderating so therefore forget the last 3 months and embrace 0% interest, is a load of crap. If you get a year’s worth of high inflation in 3 months, then inflation returns to their target for a few months, and this happens every year, guess what, real inflation is twice their target. Think step function.

  6. loomis | 21 February 2012 at 10:03 am | Reply

    debtless – Sorry it was your analysis not Basement Suite’s. Both of you have made good points though.

    • debtless | 21 February 2012 at 2:48 pm | Reply

      “If only he’d have figured out that it was the ending of the gold standard that caused the inflation in the first place” – loomis

      A little foreign exchange chicanery was involved, as I understand. Internationally, producers thought payment in US $ was like a goodly backed certificate. It probably seemed smart at the time, US was going up and up. But really, Americans want-it-now debt was expanding. Mom and pop values had deteriorated to where being nice didn’t fill the joy hole any more. Shop, shop, shop. US got the goods and sent back little squares of paper. Bit of a perfect storm, stirred up by the Fed looking to dump debt internationally. Now we know the game is up….oh, oh here’s another war with a gold trader–Iran. The only reason Canada has done well for so long, we set up a border before anyone knew we were camping on a jackpot. But in the end, we are just a raw material spigot and as long as we keep the tap on, nobody troubles about little ol canucks. Keep stackin until they figure out what to do with us. Maybe you’re rational, but I think you got a touch of esp.

  7. Best place on meth | 21 February 2012 at 10:54 am | Reply

    Hopefully the interest rate on everyones line of credit is going way up this spring.

  8. Gord | 21 February 2012 at 12:55 pm | Reply

    Just a little on-the-ground stuff from my neck of the woods, where my GF and I currently rent a rancher at $1600/month.

    We live between the border crossings on 0 Ave in extreme South Surrey. Five years ago, this area (between 0 and 8 Avenues and the Pacifc and Peace Arch crossings) was, in mnay ways, a forgotten zone. Some ALR land mixed with solid old homes and cabins on massive lots, with oodles of natural brush and forest mixed in. But in the past few years, all of that has changed.

    We moved here, into one of those older homes, a half year ago. I was stunned at the time as to the level of recent development in this area and how the landscape had changed. But that’s nothing compared to what’s gone on since. BOOM – another hunk of forest gone and another bunch of row homes/townhouses/SFH’s go up. Boom, boom, boom, over and over again. Indeed, I just checked the MLS map view and see there are currently 75-plus homes for sale (90% of which are brand new or halfway built) just in this little neighbourhood alone.

    But what’s happened in the past three weeks, while we were on vacation, is perhaps even more incredible. There were precious few untouched patches of raw land remaining, and probably the biggest of those, in just three weeks, is gone. We’re talking several acres here folks, and what was natural forest/brush is now leveled, void of foliage, and filled with more earth-moving equipment and workers than I’ve seen previously anywhere in the vicinity. I have no idea what they’re going to put there, but this is one large area and could certainly fit a ton of townhouses/houses, particularly if they cram them in as they have everywhere else.

    Now, you gotta understand – this work goes on unabated. Weekends, in the pouring rain, and well into the evening. It just doesn’t stop. And the natural forests have been replaced with a forest of another kind – a forest of Open House and For Sale signs. In fact, I think I’ll get out there and snap some pics later this week. Seriously, for an admitted “bear,” it’s quite the sight to see this building boom not only conintue, but ramp up. I’ve read that housing makes up 25% of our GDP, and I’ve gotta say that this little area alone has kept hundreds of workers working and scores of associated businesses in the black, non-stop, since I’ve moved here.

    BTW, townhouses in this area *begin* at $400,000. Houses (with virtually no yard) begin at $600,000 for the bare bones and quickly move to $700,000 and more should the buyer want a few amenities. And my god, they slap up these things quickly.

    I don’t really have a conclusion. Just wanted to share a few firsthand observations. Just a wee bit of extra craziness from the land of the popping bubble.

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