“We live in a penthouse condo purchased for $800,000 in 2007 which we’d have trouble selling for $600,000 today. Who cares? I intend to leave here in horizontal mode. This place siphoned off less than a fifth of our estate, in cash. With no mortgage to pay and regular dividends flowing in, we can afford to gaze at the snowcapped coastal mountains and try to invent ways to spend money. Life is good, and we earned it by saving every spare penny during the first half century of our lives. Living below your means is the key to lasting happiness. Debt is slavery.”
- David at greater fool.ca 9 Apr 2012 10:16pm
David is correct. Owners in his position should not worry about a possible housing crash.
His net-worth is $4MM, and a 50%-66% drop in his $800K condo (a paper drawdown of $400K-$533K) would only represent a drop of 10%-13% of the value of his assets, and would likely not excessively interfere with his financial wellbeing or comfort in retirement.
His leverage to RE is 0.2, meaning that if RE drops 50%, his total net-worth drops 10%.
He can afford to own a $800K property, should not worry about the RE market, and should simply get on with his life.
But, how many owners in Vancouver are in David’s position? Only a very small minority.
Many longtime owners have ratios close to 1 (meaning that their RE holdings represent most of their net-worth).
And a large number of owners in Vancouver have ratios of >1, and a good percentage have ratios far higher, 3 or 4 or 5, or even 10 or more.
Remember, a young couple buying with 5%-down and no other assets has a ratio of 20. If prices drop just 5%, they lose everything.
This ratio is crucial in estimating the effects of a bust on individuals and on the community.
In a significant housing price collapse, many will see all of their accumulated wealth completely wiped out.