Tag Archives: RE_ATM

Moody’s Downgrades Canadian Banks – “High levels of consumer indebtedness and elevated housing prices leave banks more vulnerable”

“Moody’s Investors Service has downgraded the long-term credit ratings of six Canadian banks, including Toronto-Dominion, Bank of Nova Scotia, Bank of Montreal and CIBC. National Bank and Desjardins were also downgraded. The ratings agency lowered each of its ratings one notch, citing high levels of consumer debt and high home prices as threats to the Canadian economy.
“High levels of consumer indebtedness and elevated housing prices leave Canadian banks more vulnerable than in the past to downside risks the Canadian economy faces,” David Beattie, vice-president at Moody’s said in a note.
Canadian consumer debt has risen to a record-high 165 per cent of disposable income in the third quarter of 2012, up from 137 per cent in mid-2007. Bank of Canada governor Mark Carney has repeatedly warned about these levels, but they remain stubbornly high.”

– from ‘Moody’s downgrades 6 Canadian banks’, CBC, 28 Jan 2013 [hat-tip Bally]

Spot The Speculators #95 – “Each had a house with a mortgage. Then they bought a new residence and used a line of credit to add a rental apartment to the new house. Their $1.5-million of debt is 12 times their gross employment income.”

“A couple we’ll call Tiff (49) and Sandy (45) turned their long-time friendship into a union when they bought a house in British Columbia and combined their fortunes in 2008. The relationship came with a lot of baggage, however. Each had a house with a mortgage. Then they bought a new residence and used a line of credit to add a rental apartment to the new house. Their $1.5-million of debt is 12 times their gross employment income.
Revenue from the income properties barely covers their total costs — mortgage and line-of-credit interest, taxes, utilities, insurance and maintenance. Add in falling prices in the sliding B.C. housing market and the couple is subsidizing losing investments.
They save only $100 a month for RRSPs and $25 a month in an RESP for a Sandy’s nine-year old child from a former marriage. At mid-life, the couple, each of whom works for a large publishing company, has just $31,000 of RRSPs and almost no cash.”

They started with 25% conventional down payments, but now find themselves with about 10% equity in the rental units as a result of falling property prices and debt-financed buyouts of former partners. Their return after paying all interest costs, utilities, insurance and taxes is negligible. Unless they can raise rents drastically or realize future capital gains, the investments are flops.

A financial crisis triggered, perhaps, by unemployment, illness or accident would require them to add debt, for they have just $2,000 in cash. If interest rates rise by 1% or 2%, they would be forced to refinance, but they already have 30-year amortizations. To pay more interest, they would have to face deregistration of some or all of their $31,000 of RRSPs, heavy taxes on payouts or, in the worst case, bankruptcy.

Family Finance asked Adrian Mastracci, a portfolio manager and financial planner at KCM Wealth Management Inc. in Vancouver, to work with the couple. He is candid in describing the issues.
“The couple’s problems are far too much debt, especially for properties that are poor investments, and an excessive concentration in real estate, for each unit is within just blocks of the others,” he says.

Real estate has produced substantial gains for homeowners in parts of B.C., but the boom is waning. When interest rates rise, prices could fall further, for most people buy what they can afford and, with higher borrowing costs, they will afford less.

– from ‘Bad real estate investments leave couple with $1.5-million in debt’, Andrew Allentuck, Financial Post, 11 Jan 2013 [hat-tip JoeQ]

Summary of finances for this couple:
Assets $2M [$1.862M in RE at current market prices; $137K other]
Debt $1.542M [3 mortgages, 1 LOC, CCs, Car loan]
Net worth $456K [Assets minus Debt]
Ratio of RE holdings to Net worth: 4.1 to 1
Put another way, more than 400% of their net worth is in RE.
(I find this figure as shocking as the debt to income ratio of 12)
If/when the market price of their RE holdings drop 25% they would be wiped out.

What, me, a speculator?
Just innocent locals doing what innocent locals do, right? Building wealth with RE.
How many more out there are in similar situations?
– vreaa

“The bank called us and offered us a $300K HELOC on the $315K leaky condo without us even asking for it.”

“Our personal experience in 2008 really shook my confidence in how mortgage and HELOC approvals are handled by banks.
We used to own a 1Bedroom 1 Bath 780 Sqft “Penthouse” in East Vancouver, one block to Commercial Drive.
It was a good location, we renovated it from the inside, great so far… However the building had major issues from the outside and needed a complete rainscreening job. The Strata members fought each other for a long time and renovations were postponed while the damage got worse. Our share when it finally got done $78K.
We had no mortgage on it at the time and were able to get a loan from CMHC for the repairs which we took because it was interest free. Anyways, we sold the place for 315K after the renovation was done and made a good profit as I had bought it very cheap, back in 2001 when everybody was afraid of leaky condos and there were no buyers for this even though the location was great and the unit was nice from the inside.
Here is the part that shows the recklessness of lending though: After we were approved for the CMHC funds one of the major 5 banks who we were banking with at the time called us and offered us a HELOC on the place without us even asking for it.
I asked them how much could they give us and the answer was that based on the location, size and age they can give us up to 300K if we wanted to.”

Mike at VREAA 23 Dec 2012 2:14pm

“Vancouver is a lonely place for financially responsible people.”

“There are some of us who still view life realistically but Vancouver is a lonely place for financially responsible people.

My partner and I are alike when it comes to finances. Our friends have been buying houses, condos, cars, boats, and all the toys in the world on incomes we know are similar or smaller than ours. Often we get lessons on how easy it is, “just put $10000 down and you’ll have $700 payments, its so cheap these days.” That would be a fine statement if we were talking about housing, unfortunately many of our peers talk in such a way of car payments. I get nightmares imagining what it must feel like to spend $1000 +gas on a car with my income. Dreadful thought, but I know first hand of people who do this without a second thought.

With housing its no different. We purchased a condo in 09, at a small monthly discount to renting. Our mortgage is just barely 2 times our annual income. We feel the need to get rid of this debt as soon as possible. Yet, we have friends who have bought both houses and condos in the past year valued 4 times that of our condo! These people earn the same money!

I would venture to say people are so conditioned to debt these days, they feel naked not having obscene monthly payments. When a car if finally close to paid off, they trade in for the newest model with biggest possible payment, or newest cruiser, or newest Bowrider.

The irony of it all? It makes us feel poor! We look at our friends, over extended, loaded on debt, enjoying all the spoils of life. The appearance of the wealthy elite.

Us? No consumer debt, used cars, and a big savings accounts, even bigger investment accounts.

This is partly why Vancouver is such a hard place to live, if not for us both being grounded and reminding ourselves that by 40 we will have enough cash-flow to retire or work part time, we would likely go insane and cave to the temptations. Its hard not to feel vindictive, and wish financial reckoning upon the indebted masses who get to enjoy the spoils without the work.”

Burt at VREAA 25 Oct 2012 8:39 am

Burt has our sympathy; it isn’t easy running against one’s herd, or even just sitting out while the herd is running.
The one note of surprise in the post regards Burt’s early retirement. It would be interesting to see his retire-at-40 math, given current interest rates and investment environment.
– vreaa

“Far too many middle- and lower-income buyers threw borrowed money at real estate, then compounded the error with expensive upgrades throughout.”

“It might surprise you to learn that rich Americans, people who could pretty easily buy any make or model they like, tend to drive inexpensive cars. A study by car pricing site TrueCar found that eight of the 10 best-selling autos in the country’s 10 wealthiest ZIP codes averaged less than $40,000.”

“The takeaway is clear: Your money should work for you, not for the salesperson. If you buy a car beyond your means and, worse, finance that pricey ride, you are throwing good money after bad.
Exactly the same thing happened during the [U.S.] housing boom. Far too many middle- and lower-income buyers threw borrowed money at real estate, then compounded the error with expensive upgrades throughout. Granite countertops, stainless-steel appliances, fancy pools and outdoor decks, usually bought with illusory home equity loans.”


‘Which Cars Do Rich People Drive? Cheap Ones’, marketriders.com, 9 Aug 2012

“My parents, who bought their place in North Van about 25 years ago, have used Helocs several times to pay for scientology training.”

“My parents have used Helocs several times to pay for scientology training. Yes, they are full on couch jumpers. They bought their place in North Van about 25 years ago.”
midnight toker at VREAA 17 Jun 2012 2:45pm

People have dipped into the RE_ATM for all sorts of things they previously wouldn’t have been able to ‘afford’, increasing their leverage to the RE market as they do so.
This spending will come to an abrupt halt when prices stall and reverse course.
– vreaa

Notary Poll – “More than half of B.C. homeowners have refinanced their home or property.”

More than half of B.C. homeowners have refinanced their home or property, a new survey by Mustel Group for the Society of Notaries Public found.
Of those who have refinanced, 49 per cent used the money for renovations; 23 per cent to buy other real estate; 23 per cent for other investments; 10 per cent to purchase a new car; and 8 per cent to consolidate or pay off other debts.
“B.C.’s homeowners have enjoyed a healthy real estate market in most areas of the province,” said John Eastwood, president of the Society of Notaries Public of B.C. and a South Delta notary. “Many homeowners find themselves in the fortunate position where the current value of the house or property has far surpassed the price they initially paid, meaning a significant amount of their equity is tied up in the home. Mortgage refinancing allows them to access this equity without having to sell or downsize.”
Homeowners were split on whether the value of their homes would go up in 2012, with 44 per cent saying they expect an increase and 52 per cent expecting prices to stay the same.
In Metro Vancouver, 54 per cent said they expect prices to go up, with 34 per cent not expecting increases in the next year.
“There’s always a lot of interest in house prices and market forecasts here in B.C.,” said Akash Sablok, a Vancouver notary. “The reality is that most people live in their homes and those homes are their biggest investment and equity holding so it’s important to understand both the implications and opportunities this presents whether you’re looking to buy, sell or refinance.”

‘More than half of B.C. homeowners have refinanced: poll’, Vancouver Sun, 30 May 2012

HELOCs are common. They result in increased leverage to the RE market; an increased vulnerability to falling prices.
Note how this poll suggests that 96% of BC owners believe that in 2012 prices will either go up or stay unchanged. Which means only 4% say prices will drop. (Freaks!)
Also, note the universal “homes are an investment” belief.
– vreaa

Mortgage Rules Tighten

“The federal Finance Department is moving to further tighter mortgage rules to address concerns over high Canadian household debt. The government announced Wednesday it will reduce the maximum amortization period for a government-insured mortgage, lowering it from 30 to 25 years, and also drop the upper limit that Canadians can borrow against their home equity from 85 per cent to 80 per cent. …
Under the new rules, mortgages amortized over a period longer than 25 years will no longer qualify for CMHC insurance, making it effectively impossible to get a highly leveraged mortgage of more than 25 years in Canada. …
Canadian mortgage rates have been near record lows for months. …
CMHC first introduced insurance for 40-year-amortizations in 2006, when it also moved to provide mortgage insurance on 100 per cent financing.”

– from ‘Mortgage rules to be tightened further by Ottawa’, CBC News, 20 Jun 2012 [hat-tips to Told-you-so and Dimitri Tishchenko]

“She and her husband have been spending the money that their house “made” for the past 7 years. They now owe double the mortgage that they originally put on the house, but the house is “worth” three times as much.”

“A nice lady told me that she and her husband have been spending the money that their house “made” for the past 7 years. They now owe double the mortgage that they originally put on the house, but the house is “worth” three times as much. Based on the area and date of purchase, I estimate that they mortgaged 300k, spent another 300k of their equity, and now sit on 900k of nominal equity (and of course owe 600k). They used the income so she could stay home with kids, and he could set up his own business.
However, the wife has recently had to take a job… because the husband is getting very worried that values may contract soon, and this means they will need to start paying down the mortgage… and means no more HELOCing.”

‘The Poster Formerly Known as Anonymous’, at VREAA, 17 Jun 2012 11:54am

If you have a $300K mortgage on a $900K house, and housing prices drop 33%, you lose half your equity.
If you have a $600K mortgage on a $900K house, and housing prices drop 33%, you lose all your equity.
– vreaa

“I know people in my own neighborhood that funded a 3 week trip to Europe for four people through a HELOC this spring.”

“I know people in my own neighborhood that funded a 3 week trip to Europe for four people through a HELOC this spring. Can you imagine how long it would have taken to *save* for that trip with all the other expenses they have going with a family of four? It would have taken them YEARS. In this instance, though, the HELOC money was akin to winning the lottery, and yes, they were far less prudent with the spending. I doubt that it occurs to them that they are just amortizing that trip to Europe over the next couple of decades or so.
People tend to be much, much more cautious with money they’ve actually earned, rather than have fall into their lapsfrom the HELOC gods, so to speak.”

Told-you-so at VREAA 11 Jun 2012 8:47am

Easy Money Fuelled The Vancouver RE Mania – “Suddenly in about 2006 or so, we were able to borrow as much money as we wanted and didn’t have to prove anything.”; “I work in the financial industry and I see people with huge loans their incomes can’t justify all the time.”

“A lot of first time buyers don’t realize how qualification for a mortgage has worked historically since the about 1950. We have had multiple mortgages since 1987. In order to qualify for a mortgage between 1987 and 2006 (approx.), we had to prove income as follows:
1. three most recent tax returns
2. they averaged our income over those three years
3. provision of pay stubs
If you were self employed:
1. three most recent sets of financial statements
2. they averaged the income from those three years
3. provision of pay stubs for any supplementary income
We were never able to borrow more money than proven income could justify. With our last mortgage before all the EASY credit, the bank didn’t even want to give us a 25 year amortization, since we were approaching 50 years of age.
Suddenly in about 2006 or so, we were able to borrow as much money as we wanted and didn’t have to prove anything. In addition, we were able to change our amortization in the middle of our mortgage term, without penalty (reduce our monthly payment). No income verification took place and we were offered a 30 year amortization automatically.
Now everyone wonders how we got here? Lending money to people who can’t afford to pay it back is a recipe for disaster. Welcome to disaster.
We don’t own a house anymore, we are sitting on a pile of cash and renting…happily.”

– Canayjun at VREAA 5 Jun 2012 10:24am

“I work in the financial industry and I see people with huge loans their incomes can’t justify all the time. It astounds me. I spoke with a mortgage broker who told me that in recent years, people would apply for a mortgage and show their notice of assessment from their tax returns. The income on the NOA would be about $10k, however they would state their income much higher, and the mortgage would be approved based on this higher amount. It was ridiculous. A mortgage broker from a bank also called me to verify that one of my clients was self-employed “Sure,” I said, “but he’s never actually made a dime from this business, in fact he’s always had losses.” The mortgage broker assured me that that was no problem, they just needed to know he was “self-employed.” And I know for a fact that this individual was not rolling in unreported income either, maybe a little ($10k at most) but not a lot. He and his wife are essentially living on credit. There is big trouble coming.”
– pricedoutfornow at VREAA 5 Jun 2012 10:59am

OSFI’s Melessanakis Asks “Are Canadian banks equipped to handle a 40% drop in home prices?”; Mortgage Broker McLister Retorts “The idea of 40% price drops is ‘farcical’”

Previous failures of Canadian financial institutions were due to bad real estate lending and sharp falls in housing prices, and these can happen again, Vlasios Melessanakis, manager of policy development at the Office of the Superintendent of Financial Institutions, wrote in documents obtained by Bloomberg News under freedom-of-information law. …
“Canada is not immune,” Melessanakis wrote March 21 in internal notes responding to a posting on a mortgage-industry website. “Just because nothing happened in Canada in 2008 (a U.S.-centered crisis), does not mean that Canada is not vulnerable to a housing correction now.”
Melessanakis wrote his comments to colleagues in response to a posting on a mortgage-industry website, Canadian Mortgage Trends, that criticized proposed standards published by Canada’s top banking regulator on 19 Mar 2012.

Ottawa-based OSFI suggested requiring lenders to take “reasonable steps” to verify borrower incomes, establish standards for measuring borrowers’ ability to pay their debts, and limit the size of loans secured by the equity in people’s homes. The draft guidelines are based on mortgage-lending principles set by the Financial Stability Board, a Basel-based group that coordinates global financial rules.
“How many new lending ‘guidelines’ can the market bear before it breaks?” wrote Robert McLister, a mortgage planner who edits the website.
“The market may break because the fundamentals are not sound (i.e. overvaluation of homes), not because of OSFI guidance,” Melessanakis wrote in response.

There’s “no question” the proposed OSFI guidelines will curb demand and hurt housing prices, McLister said in an interview. “OSFI had good intentions here, but some of this policy is certainly misguided,” he said, when asked to react to Melessanakis’ comments.
McLister pointed to banks’ low arrears rates on mortgages as evidence more rules aren’t needed. Melessanakis wasn’t convinced.
“This can change fast,” he wrote in his notes. “Are the banks equipped to handle a 40 percent drop (what occurred in Toronto market in early 1990’s)? Need to stress test to find out.”
McLister called the idea of a 40 percent decline in housing prices across the country “farcical.” Such a decline is “not going to happen, period. But in some places like Vancouver, maybe Toronto, obviously you’re going to have greater risk there of price volatility,” he said by telephone.

OSFI’s guidelines suggest lenders limit home-equity lines of credit to 65 percent of the property’s value. The regulator also recommends that HELOCs be paid off over a specific amortization period, like conventional mortgages.
While McLister wrote that those rules “portend a big slowdown in HELOCs,” Melessanakis responded that the loans have “contributed significantly to growing overall household debt.”
“This is not sustainable,” he wrote. “If (or when) housing prices drop, households will be vulnerable,” echoing comments made by Flaherty and Carney.
Melessanakis also disputed McLister’s point that many of OSFI’s recommendations are already employed by “scores of lenders.” “Not all, and not on a consistent basis,” the OSFI official said. “There are some enhancements in lending practices that are needed.”

– from ‘Banks Not Immune to Housing-Related Failures: Corporate Canada’, Bloomberg, 15 May 2012

Forty percent off is a fair downside target, but we see it going lower.
The ‘farcical’ quote will be archived in the ‘Bull Hubris’ sidebar, for ease of future reference.
– vreaa

‘Borrow To Get Ahead’ – “People are notorious for looking at the glass half full, or pretending things aren’t happening.”


Scotiabank Store Poster, image from this CBC News clip

Announcer: “The biggest concern for the Bank of Canada is still the record amount of debt that Canadians hold, debt that Carney expects to keep rising.”

Carney: “Some Canadian households are becoming overstretched, and Canadian households as a whole are being overstretched, which creates risk for the economy.”

Announcer: “Some experts argue that most Canadians can handle their debts, often backed by solid assets, like houses. But, even with strong hints interest rates may rise, Canadians appear to be ignoring the bank’s repeated warnings.”

Laurie Campbell, CEO of Credit Canada: “Well, to a certain degree I believe they are tuning it out, I mean people are notorious for looking at the glass half full, or pretending things aren’t happening.”

- from ‘Carney’s Warning’, CBC News, 18 Apr 2012

Spot The Speculators #82 – “They are “borrowing” wedding rings until they can afford to buy real ones as they are maxed out on their HELOC’s. When I asked them why they don’t sell the condo or apartment I was told they need them to keep going up in value.”

“My sister is getting married and planning their wedding. With a house and apartment in Vancouver and a condo at Whistler you would think they were flush but no… The entire wedding is on their line of credit and they are “borrowing” wedding rings until they can afford to buy real ones as they are maxed on what they can get on their HELOC’s. When I asked them why they don’t sell the condo or apartment I was told they need them to keep going up in value. I’ve given up giving guidance anymore but felt chills when I realized that they need the places to go up in value so they can increase their credit lines to maintain their current lifestyle….god forbid what will happen to them if (when) the value declines.”
ChemGuy at VREAA 5 Apr 2012 1:30pm

Discussion with Tom Davidoff – “A huge fraction of near retirement Vancouverites must have 75%+ of their wealth in home equity.”

Here follows an exchange via e-mail with Tom Davidoff regarding his recent talk:

“Glad to hear it went over well. I don’t think AV is available, but I hope the slides are self-explanatory. There is at least one typo that flips the sign of an idea, and I would be happy to clarify anything. I appreciate the standing offer of a soap box for my actual point estimates. I have a hideous schedule the next couple of months, but will absolutely maintain the idea on the back burner.
As you mention on the blog, a point estimate is in some ways more helpful than generalities. If I offer a point estimate, I will almost certainly be wrong. As I suggest in the slides, a fall of 30% over the next two years would not shock me at all. But I don’t think that’s the highest probability outcome. I would put something like 20% probability on a rise in home prices of 15%+ over the next two years. Not more than 40% probability of the giant drop in my mind. Between the two extremes I don’t have much to say. For the most part, prices here are driven by demand, and what people are willing to pay is in large part determined by what other people are willing to pay. That means that at any given date there must be “multiple equilibria.” External events like interest rate changes, mortgage generosity, and GDP fluctuations matter, but (a) I am not a macro forecaster and (b) I don’t think forecasters know much right now. Look at the S&P 500 over the last year: the market doesn’t know the right level within 20%, and I would guess that “smart money” drives stock prices more than it does home prices. Summarizing: I can’t tell you much you don’t already know.”

– Tom Davidoff

“You asked a specific question about a 58 year old.
If that 58 year old were an empty nester planning to exit Vancouver within 3 years, I would encourage her to think about cashing out and
renting. Why gamble with most of her wealth?
If she were planning to die in her Vancouver home and didn’t want to downsize, I would be reluctant to tell her to get out.
If she were rattling around a 5 bedroom home on the West Side but wanted to die in Vancouver, I would tell her to sell.
In between?”

– Tom Davidoff

Your probability weightings regarding future prices aren’t a million miles from mine…
I do lean more towards a higher chance of a big correction (I’d put it more at 60% chance), but agree there is a modest chance of ongoing strength.
And I agree with your estimations regarding the different possible 58 year old scenarios.
The crucial thing is that people can own in comfort if they are capable of withstanding a substantial downswing:
both from the point of view of whether their fiscal health is dependent on RE ‘wealth’,
and from the perspective of being able to refinance a mortgage against a devalued property.
But what are the numbers on this?
How many in Vancouver are consciously (or unconsciously) dependent on the presumed future value of their primary residence for their future fiscal well-being?
I’d estimate that it was, by now, a fairly large minority (25%? even 30%?).
Even a relatively small percentage of people in this position (say 10%-15% of total owners) could have a very large effect on the market if they try to realize paper profits in the face of a modest drawdown.
(Of course the flip side of this is how demand will respond to price drops.. I believe net demand will back off; others believe that people are waiting eagerly to ‘buy the dips’. I agree this is very hard to quantify/estimate.. we’ll simply have to wait and see.)
– vreaa

“I agree with your remark about dependence. A huge fraction of near retirement Vancouverites must have 75%+ of their wealth in home equity. I would guess most of these people would require a very high probability of success to gamble, say, 30% of $2 million, but by retaining ownership they are doing something pretty similar.
I suspect, but don’t know, that home equity extraction has fed a lot of spending by locals here. I have put zero effort into looking at the
“home ATM” phenomenon here, but someone should.”

– Tom Davidoff

“My brother went to renew his mortgage. The guy asked him, “Do you want to open a HELOC to borrow against your equity?” He said, “No.” Dude was seriously surprised. I’m guessing few turn down that offer.”

“My brother went to renew his mortgage. The guy asked him, “Do you want open a HELOC to borrow against your equity?” He said, “No.” Dude was seriously surprised. I’m guessing few turn down that offer.
My girlfriend works in a bank. When a customer comes in and she opens his account, a flag often comes up in the system stating he is entitled to a new HELOC, or entitled to expand his existing HELOC. And she is obligated to tell them this and ask them if they’d like to do it. More often than not, they bite. Imagine, you don’t even need to apply for credit anymore. It just falls into your lap.”
– theragingranter at VREAA 15 January 2012 at 5:02 pm

“A friend who works at one of the big Canadian banks noted that clients with $600k+ mortgages appear to be paying the principal over the years but after a while they ask that some line of credit with $30k-60k on it be rolled in the mortgage which bumps the principal back to previous years’ values.”

“Recently I had an informal talk with a friend who works at one of the big Canadian banks. I asked him if he noticed any changes in the mortgage business. He said it’s still going strong.
Interestingly though he also mentioned that he noticed an interesting phenomenon. Based on his day to day readings of a range of clients mortgages it seems individuals with mortgages about as high as $300k were actually making progress towards paying the principal. However if the mortgage was $600k or higher (most of the time this resulted from clients rolling in other kind of debt into their mortgage payments) the principal appears to have remained at the same level for the last 2-3 years. He noted that these $600k+ clients appear to be paying the principal over the years but after a while they ask that some line of credit with $30k-60k on it be rolled in the mortgage which bumps the principal back to previous years’ values.
I also asked what would happen if the clients can’t pay… does the bank take the property into foreclosure? The way he answered caught me a little off guard. It felt like he never quiet thought the process through. He said that the bank will work quiet hard to “help” the client continue paying (I’m not sure if this meant they’ll lower the monthly payment). He seemed to think that the foreclosure procedure was the solution of last resort.”

0x13 at vancouvercondo.info 30 Dec 2011 12:43am

HELOC Poll – “36% of Canadians have a home equity line of credit.”

Canadians who have a home equity line of credit (HELOC): 36%
Proportion who are “quite confident of their level of knowledge” about HELOCs: 79%
Proportion of questions that tested their basic knowledge of how HELOCs work that they answered correctly: 43%

Proportion of HELOCs used for renos and ‘major purchases': 37%
For car or vacation: 29%
For a down payment on an investment property: 9%

- from a Leger Marketing Poll [n = 1,501 adult Canadians; conducted online; late Oct 2011], commissioned by TitlePLUS program, reported at Canada Newswire 15 Nov 2011 and G&M 15 Nov 2011

When A Speculative Mania Ends, Wealth Simply Disappears – “Poof! Gone in a flash of aggregated neurons.”

When a community is caught up in a speculative mania, it seems simply inconceivable to the vast majority that prices could drop. If apparent hordes of buyers are competing to paying $1M, $2M, $3M for solid assets like houses, how could prices possibly plummet by 40%, 50%, 66%? It just couldn’t happen, surely… why would a group of people who’ve ‘agreed’ (via market pricing) that a house is ‘worth’ $3M, then ‘let’ it change hands later for $2M or $1M or even less? Surely buyers would ravenously step in at even 10-15% off [the commonest estimation of the depth of a pullback on this and other blogs]? Surely that ‘wealth’ can’t simply evaporate?
But it can and it does and it will. Most people don’t have any real feel for ‘bubble dynamics’… they don’t understand the massive upward force that expanding credit has on asset prices and, more important, the devastating effect of the reversal of that process.

In an article at ‘Elliot Wave International’, a passage by Robert Prechter describes ‘How $1-million can disappear’ [19 Sep 2011] We take the liberty to paraphrase the passage here to demonstrate it’s relevance to our RE market. -

“The dynamics of value expansion and contraction explain why a bear market can bankrupt tens of thousands of people. At the peak of a credit expansion or a bull market, Vancouver homes have been valued upward, and all participants are wealthy — both the people who sold the homes and the people who hold the homes. The latter group is far larger than the former, because the total supply of money has been relatively stable while the total value of Vancouver RE has ballooned. When the market turns down, the dynamic goes into reverse. Only a very few owners of a collapsing asset trade it for money at 90 percent of peak value. Some others may get out at 80 percent, 50 percent or 30 percent of peak value. In each case, sellers are simply transforming the remaining future value losses to someone else. In a bear market, the vast, vast majority does nothing and gets stuck holding assets with low or non-existent valuations. The ‘million dollars’ that a wealthy owner might have thought he had in his home at peak value can quite rapidly become a small fraction of that. The rest of it just disappears. You see, he never really had a million dollars; all he had was an asset that he thought was worth a million dollars. The idea that it had a certain financial value was in his head and the heads of others who agreed. When the point of agreement changed, so did the value. Poof! Gone in a flash of aggregated neurons. This is exactly what happens to most assets in a period of deflation.”

Housing always has some underlying fundamental value, we don’t believe that a $1M [circa 2011] Vancouver home can drop in price to “non-existent valuations”… but we do foresee it dropping below $500K or even $400K later this decade. It may seem inconceivable, but history teaches us that it is very possible; probable, even. – vreaa

“I manage strata titled properties in Greater Vancouver. Some people are so stretched they can’t pay for even the simplest repairs within their unit.”

“I manage strata titled properties in Greater Vancouver. Some people are so stretched they can’t pay for even the simplest repairs within their unit. One lady yesterday told a plumber to drain the toilet and turn off the water because she couldn’t afford to replace the toilet seal. She did not pay the bill and the plumber is threatening to bill the strata. I think there’s another bathroom in that unit.
Another guy in West Vancouver wasn’t aware he had to pay strata fees at all, so didn’t. There are lots of realtors who are not concerned about telling new Canadians the details. He’s got a huge mortgage and can’t afford $300/momth fees or the special levies. The strata is taking legal action to sell the unit to collect the fees. Strata Corporations can file for Conduct of Sale if the fees aren’t paid, the Court sells the place, the Strata gets first dibs and the “owner” gets what’s left. Wonder how that’s going to work when prices finally come down. A few more lost jobs will take a big toll.

Property Manager, greaterfool.ca, 14 Sep 2011 12:13pm

“I know a married pair of boomers who lived the good life on borrowed money, and now that neither are working, have been forced to put their still-mortgaged house up for sale.”

“I know a married pair of boomers who lived the good life on borrowed money, did not save and now that neither are working, have been forced to put their house (still a large mortgage on it) for sale and will be looking to buy a much cheaper house. I warned them 10 years ago but they dismissed me as a wet blanket penny pincher. I have no mortgage on my house and when they asked me for a loan, of course I said no (who would be foolish enough to lend money to poor money managers?). They are not talking to me now.”Canuckguy, at moneysense.ca, 17 Aug 2011

“33% of Canadians between the ages of 55 and 64 have an outstanding mortgage.”

“33 per cent of respondents between the ages of 55 and 64 had an outstanding mortgage.” – from a Canadian Imperial Bank of Commerce survey, as described in the Financial Post/Vancouver Sun, 16 Aug 2011.

“The main Wiggles guy asked the kids and the crowd to name something special and unique about Vancouver.”

“I was at the live Wiggles show the other day. The main Wiggles guy asked the kids and the crowd to name one thing/something special and unique about Vancouver.
Awkward confused look on people’s faces.
Someone said “maple syrup”..or “sushi”(??)…until everyone seemed to agree on “Olympics”
Come to think of it, I cannot think of anything either..”

Get Real at greaterfool.ca 11 Aug 2011 11:12pm

Damn! This would have been the cutest story if one of the kids had called out something about the housing market. – vreaa

On that note, this extract from ‘Summer Fun For Boys’, by Tim Long, New Yorker, 1 Aug 2011:
“At the beach, build the biggest sandcastle anyone’s ever seen. Pretend that it’s 2005, and take out a huge, adjustable-rate mortgage on the sandcastle which you can’t really afford. Throw lavish sandcastle parties for seashells, rocks, plastic shovels, and candy wrappers. When the bank comes to foreclose on your castle, run and find your dad. Try not to look surprised when you discover him sitting with a lady in a green swimsuit. Her name is Terri. While shaking Terri’s hand, ask her for a seven-hundred-thousand-dollar loan to cover your sandcastle debts.”

“Money is so cheap to borrow and everyone else does it”

“I have nine friends, family, co-workers in the same boat. They used their principle residence as a bank machine to do renos, buy investment properties, travel, buy new cars. Everyone almost said the same thing: “Money is so cheap to borrow and everyone else does it”
Patrick at VREAA 11 Aug 2011 4:14pm

“Dipped into the condo equity to the tune of $60K over the past four years; Won’t sell and rent because renting is just “throwing money away.” ”

TPFKAA at VREAA 23 Jun 2011 9:03am - “Got talking to a family I know. Two kids under five; a boy and a girl. The wife confided that they had dipped into the equity to the tune of 60,000 over the past four years just to make ends meet. 2 bedroom condo in 25 yo building, purchased in 2004 for 200k, now “worth” 350k, family income 3k/month net, mortgage payments 1500/month, strata fees 300, and special assessments rain down like riot debris. $900 last month, $2,000 a couple of months ago… She estimates a couple of k per year. A 2 br in same building costs $1200/month to rent. I asked why they don’t sell and rent for a while. She told me it is because the husband believes renting is just “throwing money away.” He wanted to sell and buy a house in Abbotsford about a year ago, but she did not want to leave the area they have lived in for 7 years. What is going to happen to this family if/when the equity disappears and no more RE_ATM? Even worse, their HELOCs may place them underwater.. and with a boy and a girl in a 2 br, that is no fun. What if rates rise? and the kicker… the sole income earner, the husband, works in construction. I don’t think they realise the dangers they are in thanks to being home”owners”.

Stanley Cup Finals and Vancouver Housing Prices

The 7th game of the Stanley Cup Finals comes to Vancouver this Wednesday, 15th June 2011. Boston Bruins and Vancouver Canucks tied at 3-3, obviously.

The behavioural economists may be interested in some of the parallels between Canuck play-off success and the housing markets. Apparently ‘jesse’ has already pointed out elsewhere [link anyone?] that the last two occasions the Canucks made the finals came close to peaks in Vancouver housing:
– June 1994 was at the top of the late 80′s/early 90′s bubble, followed by years of price declines.
– June 1982 was in the middle of the fastest and biggest RE bust Vancouver has seen since the 1930′s.

Now, before we all scoff at this as random chance association (which is a possible explanation, of course), consider the possibility that there may be a relationship between market strength and team performance:
1. Via psychological factors: thus: high housing prices -> wealth-effect -> over-the-top-enthusiastic-fans -> better team performance -> finals.
[I'm sure we've all been particularly impressed by the strength of home ice advantage in this series; the psychology of the fans appears to have a massive effect on team performance.]
2. Via economic factors: thus: fans flush with RE_ATM funds/wealth effect -> spend more money on tickets and trinkets -> team richer -> material benefits and psychological boost -> finals.
[Anybody care to do an analysis of ticket prices in Vancouver vs Boston? Could these numbers possibly correlate with local housing market strength? We wouldn't be at all surprised if they do.
Rusty, in a post here at VREAA pointed out that he could have purchased a package to see games 3 and 4 in Boston, including hotel and flight, for $995. Here in Vancouver, single tickets for game 5 were trading online for $2K-$5K ask.]

All of this talk may sound bizarre but there is a whole school of analysis that looks at these relationships, namely socionomics.
Ever heard of ‘Skirt Length Theory’ and bull markets? Not the best market timing devices, to be sure, but, similarly, not to be discarded out of hand.

And, before you disregard the possibility of this relationship completely, consider that the fans in Boston have not been moved to produce signs alluding to housing finance. These fan signs from Game 2 here in Vancouver:
‘NUX TIX OR MORTGAGE PAYMENT?’ and ‘HOPE THEY DON’T TAKE THE HOUSE’ [For close ups and discussion, see VREAA post, 5 Jun 2011]:

Spot The Speculators #42 – “In my neighborhood, the people who are buying the overpriced homes sold their smaller overpriced home and took on a new mortgage. They are not speculators.” [Yes, they are.]

Glenys 7 Jun 2011 in the comment section ‘Vancouver home prices poised for correction, could fall 21 per cent: report’, The Canadian Press, 7 Jun 2011 -
“For the last decade or so these reports by “experts” continually say Vancouver’s housing market is overpriced and the bubble will burst and prices will fall. Still waiting for it to happen – small adjustments that last less than a year don’t count. Still people from somewhere able to buy and keep the market high, regardless of world economy or interest rates.
In my neighborhood, the people who are buying the overpriced homes sold their smaller overpriced home and took on a new mortgage. And they were originally able to buy the smaller overpriced home because they sold their overpriced condo or even smaller home. They are willing to take on the debt because they like living here and want to live here. Not because they are speculators or investors.”

Anybody attaining more RE exposure, in an ‘overpriced’ market, based on an underlying belief that price growth will remain strong, is a speculator. This is true regardless of whether they know it or not, and regardless of whether they are selling one property to move up to another. If they are borrowing money in order to make the move up, they are using leverage in their speculation.
This is a fine example of the thinking behind the unseen, unidentified, unconscious speculation that has been a major driver to our market since at least 2003. – vreaa

Spot The Speculators #39 – 60 Year Old Couple; 75% Of Net-Worth In House; “They can’t afford it.”

From Financial Post, 25 May 2011 -
“In Vancouver, a couple we’ll call Adrian, 62, and Vicky, 58, are moving toward retirement as they reduce their work in management consulting. Their goal is to retire fully in a few years, but they are not sure if they can afford to maintain their way of life in their $1.7-million house. For now, they are spending $5,850 per month. But their current after-tax income is $2,600. Their secured line of credit, $435,000, pays the difference. Their total liabilities are 14 times their annual income. They have nearly $947,000 in retirement savings and $28,000 in other savings. The problem is eliminating debt before they retire.
“The old saying that you can’t have your cake and eat it pretty well sums up Adrian and Vicky’s problem,” Mr. Egan [a financial planner and portfolio manager] says. “Their house has an after-tax opportunity cost — what its value could earn if invested — of, let’s say, conservatively, 3% of $1.7-million or $51,000 per year or more if the return estimate is raised. They have to live someplace, but the house costs them the equivalent of rent at $4,250 per month or more if upkeep and heat are added. They can’t afford it. Either the house has to be downsized, remortgaged with a longer amortization and cash extracted or a few rooms rented out. Hard decisions have to be made.”


[in 2013, according to the advisor's five-year plan] “It is time to make a decision about keeping or selling the house, cutting debt and converting the high intrinsic cost of occupancy to an income-generating asset. Incurring more debt, as they have done by living on their line of credit, is unwise. The bill would eventually have to be paid and probably at a higher interest rate than the 3% they have been paying. Renting a room would reduce their privacy and would not produce enough income.
Sale and investment of proceeds is the best alternative. Assuming they can harvest $1.7-million less their $435,000 mortgage (about $415,000 by 2013) — roughly $1.25-million after selling costs for investment, they will need to replace their home. If they spend $500,000 on a condo, they will have $750,000 left for investment.


“If Adrian and Vicky downsize their house, eliminate debt and guard their investment returns, they should have a similar way of life to what they have now,” Mr. Egan says. “Most of all, they will have financial security.”

Discussion:

House with current market value of $1.7M. Savings of $975K. Mortgage $435K.
Total Net-worth: $2.675M – $435K = $2.24M
Percentage of Net-worth in RE: 75%

This couple is overexposed to real estate.
They look fine on paper, largely because of PR price appreciation. It would be interesting to know what they paid for the house, and thus to be able to calculate what percentage of their current net worth is solely the result of house price appreciation. Quite likely more than 50% (meaning that they likely paid less than $500K for the house). A good number of Vancouver boomers are in similar situations; many have even more of their net-worth in RE; over 100% is not unusual.
They are speculating on RE prices appreciating further, or at least not losing ground.
The advisor should advise them to sell immediately, not wait until 2013.
A 50% drop in housing prices will result in them losing 37.5% of their net-worth, and their financial future will be severely hobbled. If prices start dropping, that realization will loom large.
These are the ‘speculative holders’ who will bring their houses to market en masse when price drops establish themselves in earnest.
– vreaa

“At 1 per cent, the Bank of Canada’s benchmark overnight rate is highly stimulative”.

From ‘OECD urges Bank of Canada to raise rates’, the G&M, 25 May 2011 -
“The Bank of Canada should raise borrowing costs within the next few months to show consumers and businesses that it has a grip on inflation, the Organization for Economic Co-operation says in a new assessment of Canada’s economy.”
…at 1 per cent, the Bank of Canada’s benchmark lending target – the overnight rate for loans between private banks – is “highly stimulative,” the OECD says in its biannual economic outlook for Canada and 33 other member countries.
“The OECD considers a neutral benchmark rate for Canada to be between 4 per cent and 4.5 per cent, a highly academic target that nonetheless demonstrates how aggressive central bank Governor Mark Carney has been in fighting the financial crisis.”
“The Bank of Canada should therefore resume the normalization of policy rates soon in order to pre-empt a broadening of inflationary pressure.”

“But in financial markets, the sentiment is much different.
The odds that the Bank of Canada will increase interest rates by September last week sank below 50 per cent for the first time since March, Bloomberg News reported, citing an analysis of trading of overnight index swaps, which are financial assets whose value is linked tightly to expectations of future interest rates.”

Canadian ‘Millionaires’ – “Look, unless you want to live in a cave, or move to another country, you can’t really spend any of that wealth”

From ‘Millionaire nation: Canada tops G7 rich list’, Financial Post, 6 May 2011 -
“For every 100 households in Canada, 12.6 [have total assets of] at least US$1-million. The United States, in contrast, suffers with only 8.9 millionaire families per 100 households. Germany is dead last with 8.7 millionaire households per 100.”
“…the Deloitte figures have produced an army of Canadian paper millionaires because they include home equity…”
“There’s a much greater concentration of wealth in a tangible asset, like a house, in Canada,” Stefane Marion [economist with National Bank Financial] said. “You may own the property as an asset, but there’s no cash flow.”
And with 40% of Canadian homeowners owning their home outright with no mortgage, it is no surprise that there is substantial wealth locked into property, he added.
“Look, unless you want to live in a cave, or move to another country, you can’t really spend any of that wealth,” said Avery Shenfeld, chief economist with CIBC World Markets.

[The article ends with caveats about methodology.]

The Canadian ‘Millionaires’ cannot realize their wealth; there is nobody for them to sell to. If 8% of them tried, the markets would crash. The US bubble has burst, Germany never had a bubble, the Canadian bubble will be bursting and thus rectifying the above statistical anomalies. – vreaa

Animated Video – Retiring BC Boomers – “In five years I will realize that my money won’t last me until I’m 80. Me and millions of other baby boomers will try to sell our homes at the same time.”

Video by ‘P.’, who admits they have used poetic license and ‘exaggerated’ the positions for effect. There are, however, kernels of truth in the jest.

Toronto – “I’ve earned more from the increase in the value of my home than I have in my entire professional career as a writer”

From ‘Housing: Real insanity’, Canadian Business magazine, April 25, 2011- “Nino Ricci, [age 51], an award-winning novelist, purchased a detached home in Toronto’s Riverdale neighbourhood in 1997 with his wife, also a writer. The price was at the very limit of what they could afford, even with help from both sets of parents. They managed, however, and watched as the neighbourhood gentrified and the value of their home ballooned. “I’ve earned more from the increase in the value of my home than I have in my entire professional career as a writer,” Ricci says. “But the only way I can use that money is to run a credit line, and that’s a dangerous habit to get into.” Still, a line of credit against the value of their home is how Ricci, his wife and two kids fund a portion of their admittedly frugal lifestyle, particularly when paycheques become sporadic. During especially tight periods, Ricci makes interest payments on the credit line with money from the line itself. (“There’s nothing in the rules that prohibits that,” he says with a hint of mischief.) Ricci knows this pattern may not be sustainable. The implications of an interest rate increase worry him, but an even bigger concern is what will happen if his home drops in value. “I keep wondering, should I sell my home today? Is this my last chance to actually have retirement savings?” he says. “We’re both writers. We don’t have RRSPs or any assurance for the future.”

The RE market has led to a perversion of the way we view income.
Also, note the sentiment: “I keep wondering, should I sell my home today? Is this my last chance to actually have retirement savings?”.
Imagine the effect that earnest price declines will have on this owner, and on all other owners dependent on the market value of their homes for their financial future. They will watch their plans dwindle, and many will try to sell with urgency. -vreaa

RE_ATM – “If you bought a house in the past 10 years…work shmork! Who needs a career? I have never seen such high rolling, high spending, low income earners in my life!”

Epica at VREAA 5 Apr 2011 at 11:11am“Close friends inherited $200k in 2001. Purchased 1st home for $300k. Sold in 2003 for $500k. Bought 600k home… sold in 2008 for $1,250,000. Purchased $1,400,000 home. Windfall! …you’d think! $1,000,000 in equity!
Wrong! …$900k mortgage on the 1.4 property, co-signed by parent…35yr amortization. Why? because he is a self-employed small businessman… she is a stay at home parent, and the missing $500k was used to conspicuously consume… I mean supplement their income to the tune of 70k per year. But wait! recent HAM [hot asian money] invasion indicates that their van westside home is currently worth $1.8+ mil!!! soooo….you guessed it they now have a $900k ish mortgage and $400k heloc! I have never seen such high rolling high spending, low income earners in my life! It is frightening! There is absolutely NOTHING productive going on in this town anymore. If you bought a house in the past 10 years…work shmork! who needs a career. Be very, very afraid for the children.”

Subprime, Overextended, Whatever You Want To Call It – “Two friends of mine who are both broke bought property last year.”

jbc at VREAA 4 Apr 2011 6:28am“Two friends of mine who are both broke bought property last year [2010].
Friend #1 bought a condo for a little under $200,000 in Victoria with a down payment from a credit card and moved in with so little money he couldn’t fix his broken stove for 6 months.
Friend #2 bought a dumpy townhouse for $350,000 in Victoria and once again used the credit cards to do it. He’s worked for the government for a little more than a year and his wife is unemployed. 2 kids, #3 on the way. Maxed out credit cards once again and they can’t afford to fix the fridge. But the bank thinks they can afford to be $350,000 in debt. WTF?
Both friends can barely make ends meet with their 5% down, 35 year mortgages at record low interest rates. How on earth will they manage when rates normalize and why do banks think they’ll make their payments on time every month through the year 2045? Both of these people have sketchy job and credit history.
And these are just a couple of examples off the top of my head. If you surveyed Victoria and Vancouver readers in the 25-35 age range I’m sure you’d get swamped with hundreds of similar stories. I have no clue what these people are thinking but I know for a fact they are just scraping by right now and would be devastated with a 1-3% interest rate increase.
Oh, and retirement plan? Ha ha ha ha ha ha! What retirement plan? There’s no money for trivial expenses like retirement. It’s all about the house. Or in these cases it’s all about the condo and townhouse.”

Spot The Speculator #31 – “My neighbours (late 60s, early 70s) have decided the way to fund retirement is to go into the RE development business.”

vancouverite at vancouvercondo.info March 22nd, 2011 at 9:37 am- “My neighbours (late 60s, early 70s) have no retirement plan other than the government so have decided the way to fund the rest of their lives is to go into the development business because, as they say, real estate only goes up. They HELOCed the hell out of the teardown they’ve been living in for 30 years (never had the money to maintain or fix up) and purchased a house down the block for $1.5M ($150,000 over asking and they were the only offer). They were in a panic to get the money before March 18th because they needed the full 95% of assessed value of their own house to be able to do their deal. They are expecting to sell the development for over $3M when it’s completed – the lot they bought is 33′ x 120′ half a block in from a busy street on the west-side. I see a world of pain in their future – they were scrambling to find cash to pay for liability insurance on the development site.”

Such a profoundly illustrative story it is hard to know where to start:
– Many are relying on RE for their retirement funds.
– Many believe that RE is the way to quick wealth. This couple are aiming to get ball-park 50% return over less than a year (assuming about $750K cost of build). That kind of return only comes with high risk, but the risk appears to be invisible to Vancouver RE players.
– Local speculators are buying westside properties.
– Banks are forwarding large HELOCs for dodgy projects.
– HELOCs are fuelling RE speculation.
– At least some of the pre-18-March demand was mortgage deadline related.
– Current sentiment includes urgency.

He said “It is different now, as property always goes up in Vancouver, unlike the overinflated expectations of .com”.

‘BC is even better than ten best place on earth’ at greaterfool.ca on 12 Feb 2011 at 4:07 am- “I have just had a really strong argument with a friend. He took out a HELOC to do a granite-n-steel refurb. Plus the mandatory Porsche panakake (panamera) for the drive. He had to have a new one as well with an immediate depreciation attached.
I reminded him how he borrowed money against his stock options in the .com days and how he wound up with a loss that took him 5 years to repay. He said “it is different now, as property always goes up in Vancouver, unlike the overinflated expectations of .com”.
Then he criticized me for renting (a very nice, just renovated 2500 sqf townhouse in Shaugnessy where the owner gave me a 3 year lease) and having an ’09 Jeep (bought in cash) Libby.
When we looked under the covers and I explained I have $500k in a diversified portfolio (made me $56k in netreturns last year) and my expenses are only rent allowing me to max out my and my wife’s TFSA, RRESP and save for the kid’s education. This still leaves me about 50% of my disposable income (of my base salary, commissions always go to non reg savings) to enjoy my debt free life.
I think a year from now, I’ll buy his pancake-American porkie for cents to the dollar. He needs his commissions to make ends meet. If he loses his job, he’s in fire sale land.
If I lost mine, at my current burn rate I could survive quite well for just under 10 years.
I live KNOWING my family is safe, he lives HOPING everything stays as it is…
I do have a property, it is in Rome, Italy, where I will retire, I bought it second hand, only about 400 years old…”

Debtor, Mortgagee – “Two people sat down next to me and started talking numbers and bank accounts, scribbling on some photocopied statements.”

mflat at vancouvercondo.info January 27th, 2011 at 1:18 pm -
“Small anecdote from my lunch hour: Sat at a local, downtown sushi bar, eating and reading Google Reader on my phone. Two people sat down next to me and started talking numbers and bank accounts, scribbling on some photocopied statements. Turns out the young lady (Chinese, mid-30s, stylishly dressed, likely Canadian-raised based on accent) is having massive problems with debt, including her mortgage payments, line of credit and credit cards. The mid-30′s Chinese male with her advised to put all her payments on her line of credit rather than her checking account to avoid overdraft penalties and having to worry about payment deadlines. He also advised her to start enquiring about a HELOC on her mortgage in order to consolidate her debts due to the great interest rate opportunities. Apparently her line of credit is getting a bit out of hand. Lastly, he advised that she stop contributing to her RRSP’s for the next 6 months until she gets her credit under control.
My favorite eavesdrop of the lunch hour was hearing her say: “Can I still use my credit cards? I have to put groceries on my Visa as I don’t always have money in my checking account.”
Yes, Vancouver, this is what your wealth is built on.”

David Dodge – “Look mister borrower, you’ve gotta have an equity stake in this as well… so that if things go really bad, it’s not all on the Canadian taxpayer, part of it is on you.”

David Dodge, former governor of the Bank of Canada, on BNN ‘Squeeze Play’, 25 Jan 2011 -

Interviewer: How significant was [the recent mortgage tightening]; was it just cosmetic?

David Dodge: No, look, you’re always working at the margin, but let’s be very clear: a home purchaser is able to borrow at very low interest rates because you and I as taxpayers essentially guarantee that, when it’s a high ratio mortgage… and so it’s not at all unreasonable, again for us as taxpayers, to say, “Look mister borrower, you’ve gotta have an equity stake in this as well… so that if things go really bad, it’s not all on the Canadian taxpayer, part of it is on you.”
So, there is that issue, and that is a long standing issue, it’s an issue which I raised back in 2005… we didn’t have it quite right… I think the adjustments that the government have made are indeed absolutely appropriate.
We face a funny situation at the moment where low interest rates are appropriate for the economy as a whole but where do they have their maximum impact? They have their maximum impact on the housing market. And so it is appropriate to use that quantitative tool (ie the terms and conditions under which you can get a CMHC insured mortgage), to use that tool to dampen somewhat that effect because you really don’t want the Bank of Canada to have to raise rates inappropriately just to cool the housing market. So I think it was absolutely appropriate what the government did.

Interviewer: Do you think though it’s really going to be enough if you’ve got, basically, record household debt now?

Dodge: Wait a second, wait a second.. this is operating in a particular market, in the housing market, and what we saw was that Canadian housing prices fell sharply but then fully recovered and then overshot. So house price to income, house price to rent at the moment is at historic highs. And so we do risk, in the housing market, we risk a bubble forming, which is not helpful to anything/anybody… so I think the government took exactly the appropriate action… I might have wished they’d taken it a little sooner, but they took exactly the appropriate action, and they deserve full marks for that.

Interviewer: Is the whole credit thing a big deal if your real estate is worth more?

Dodge: Well, hang on (laughs) that was the box that the Americans got themselves into.. they bet on house prices going up ad infinitum… and of course they fell, in some places by more than 50%… and then you have an enormous problem… so I think this is absolutely appropriate policy, given that it is appropriate for the BOC to be very accommodative at this point in time.

Interviewer: But, David, what about the CMHC… massive expansion of their balance sheet from $150B now north of $500B they’ve been approved up to $600B, that’s all on the taxpayers books, why didn’t the government say//… It’s like Fannie and Freddie in the States.. that didn’t work out to well… putting a lot of that on the balance sheet of the tax-payer.. shouldn’t the government be trying to claw CMHC (back)

DD: Whoaa-whoaa…// The Canadian mortgage bond program, that’s what you’re talking about, it’s already insured by CMHC… We have the risk already… whether those mortgages are packaged in a bond, or not… The reason we have that program, why it was expanded so rapidly in 2008 and 2009 and that was to ensure that the banking system had the liquidity to carry on. Now, that program, over time, probably can be wound down a bit, so that it doesn’t add to your and my risk as a taxpayer… we’re already on the hook, we’ve ensured those mortgages

Interviewer: Almost 70% of all residential mortgages are now insured and CMHC is the insurer of last resort

DD: And that is why it is important that everybody have an equity stake in their house! (chuckling)

[*In an earlier part of the interview, Dodge also intimated that many would say that at a 85c loonie we would more or less make Canada "competitive with the Americans".]

Our comments:
Dodge always seems very sensible.
We are pleased to see him mentioning fundamentals such as price/income, price/rent, and how he emphasized their historic extremes. One hopes that those who consider these factors unimportant would note that Dodge still sees them as crucial (but we’re not going to hold our breathe on that one).
We respectfully disagree with him when, like some other commentators, he implies we are able to avoid a bubble via mortgage lending tightening: there already exists a bubble, worse in certain markets. If ‘historic extreme’ separation of prices from fundamentals doesn’t alert us to this, what would?
He repeatedly reiterates that he sees the mortgage tightening move as ‘appropriate’. But he also points out that he would have been more hawkish and moved earlier.
The interviewers are on the correct track when they ask him whether the changes are enough.
It would have been nice to have seen them ask him direct questions about the implications, say, of a price/income ratio of 9.3:1.
-vreaa

Anecdotes Counter To Own Analysis – “The strongest argument I have against this is the boomers I know personally, none of whom have been stupid with their money, none of whom got LOCs to support unsustainable lifestyles.”

Vulture Fun at vancouvercondo.info January 7th, 2011 at 5:11 pm-
“[Boomers] getting old. We hear about them often on the news, but how big an effect will they really have on real estate? I tend to think demographics will be the biggest factor in the coming crash. I know this is nothing new, but can anyone dispute the common theory on how this all plays out:
1. The oldest boomers are just turning 65. Time to bail on the house (which is too big since the kids left) and buy a condo or rent.
2. 40% of them are sailing into retirement with nothing saved. The only source of funds other than meager government programs? The primary residence. Time to sell.
3. The first ones out are winners. The last ones out get killed. Once this group starts to sell it creates a vicious cycle that drives prices down for the next ten years. Of course, not all boomers will be forced to sell, but there’ll be enough that do to have a huge effect.

The strongest argument I have against this is the boomers I know personally, none of whom have been stupid with their money, none of whom got LOCs to support unsustainable lifestyles.”

“I have a friend who has a super luxurious place and advertises it as a furnished short term rental continuously while he lives in it. He can’t afford his 5K per month mortgage payments. He will be forced to sell in the next 6 months. He is basically broke.”

Renting at vancouvercondo.info November 27th, 2010 at 4:50 pm- “A lot of high priced rentals are furnished short term rentals. They are competing with hotels. I have a friend who has a super luxurious place and advertises it through an agency continuously while he lives in it. There are several people in the same building doing this. His place has only been rented for two months of the past year. When it rents he goes on vacation or stays with someone else. He does this to make ends meet because he can’t afford his 5K per month mortgage payments. I figure he will be forced to sell in the next 6 months as he hasn’t had anyone rent it since summer and I know he is basically broke.”

CBC CPP Discussion – Panelist: “By the time somebody retires, they should have no debt”; Moderator: “But how realistic is that?”

From today’s panel discussion on CBC Radio’s The Current, regarding Canadian Pension Plan reform [23 Nov 2010] -
Panelist: “By the time somebody retires, they should have no debt”.
Moderator: “But how realistic is that?”

‘Retail’ by Brian Ulrich

From ‘Retail’, a series of photos by Brian Ulrich -
[UPDATE - At the kind request of the photographer, the images have been reposted uncropped. We urge you all to follow the link to see the whole series. -ed.]

“The consumption practices of the average 40-60 year old are alarming. $500k-$1M in RE; 3-4 newer vehicles; less than $100,000 in savings; debt $300,000+; income $120K-$200K. Buying anything that catches their fancy.”


.
mohican, a financial planner, in the comment section of his own very fine blog, housinganalysis, 11 Nov 2010 1:52pm“[Debt taken by consumers based on rising housing prices] is very concerning for the future of our society. The consumption practices of the average 40 – 60 year old are alarming. They just can’t seem to stop spending money and expect that the good earning years will continue forever with no regard for – emergencies, family issues, job loss, retirement, or really anything beyond immediate gratification.
I meet many of these people and they typically have $500,000-$1,000,000 in real estate, 3-4 newer vehicles including boat/RV/quads/etc, less than $100,000 in savings (RSP/TFSA/etc) and typically owe $300,000+ on a combination of a mortgage and HELOC. They make huge debt servicing payments each year since they typically make a healthy combined income of between $120,000 – $200,000 but everytime something catches their fancy – they go right ahead – whether it’s a new Harley, fancy vacation, or ‘lending’ their kids money to buy a house.
These personal financial practices are unsustainable and will likely result in these folks getting a very rude shock one day.”

“Are you tired of paying someone else’s mortgage? No money to buy a place of your own? We have the solution, a $0 down mortgage. Almost anyone can own their own home.”

Alex Kotai (pictured), ‘President and Senior Mortgage Advisor’ of YMS (Your Mortgage Source) is still offering Zero-down mortgages locally. As per their blurb:
$0 Down Mortgages on Owner Occupied Properties
Are you tired of paying someone else’s mortgage? You don’t want to deal with landlords any more however, you have no money to buy a place of your own. We have the solution for you in the form of a $0 down mortgage. This means that almost anyone can own their own home. We have lenders who will finance 95% of the purchase price and give you 5% cash back for your down payment so you can own your own home. Also, you have the option to have your 5% down payment gifted from family or borrowed in the form of a loan.

[Hat-tip to metalhead at VCI for the link.]

“After my conversation with my parents’ banker the other day, I guess I shouldn’t be surprised that the craziness continues.”

Patiently Waiting at vancouvercondo.info 26 Oct 2010 at 9:28 pm - “After my conversation with my parents’ banker the other day, I guess I shouldn’t be surprised that the craziness continues. You don’t need a steady income if you had one a year or two ago. Just bring in those old tax assessments. The lender won’t just be accepting of your application…no, they will be downright anxious to throw a mountain of debt on your weakened shoulders. When I said I might want to wait to see where prices go, the banker reminded that the homoaners will “just pull their houses off the market” if buyers don’t appear. Why? Banks will now let the homoaners pile on even more debt in exchange for even less freedom. Up to 125% of their property value.”

RE ATM Still Putting Out – “Now he’s vacating his digs for a lengthy reno, and being the bro, I can assure you this is all being done on credit.”

Tonguestump at vancouvercondo.info 30 Aug 2010 12:17 am“My brother got married for the second time to a woman who is 15 years or so younger that him. She probably looks reasonably good enough in lingerie that he was inspired to buy one of those concrete boxes in vancouver for 1000 dollars a square foot with 500 dollar a month condo fees. They had a baby, now he’s vacating his digs for a lengthy reno, and being the bro, I can assure you this is all being done on credit.”

Langley Realtor – “Too many homes have been used at ATM’s. It’s sad.” … “It’s the ’80s all over again; it’s already begun.”

From Langley realtor Suzanne, in an e-mail to Garth Turner, as quoted at greaterfool.ca 15 Aug 2010“Three years ago it was worth $520,000. Now the house in Langley sold for $699,000. But the owners won’t come out with anything. Too many homes have been used at ATM’s. It’s sad. And when the commission is calculated, the $21,000 owing will make them claim bankruptcy if they can’t sell it on their own. And with what’s coming, there won’t be much chance of that. It has already begun. It’s the ’80s all over again, but with mortgages at 5%, 6%, 7% – not 22% and the lower debts and home prices we used to have.”

The Froogle Scott Chronicles: Mortgaging Our Souls In Paradise – Part 8: Renovation Nervosa Finale

Brace yourself. On first reading Froogle’s latest episode, I found myself on more than one occasion spontaneously exclaiming out loud, or grimacing & ducking, or writhing in vicariously experienced psychic pain.
Boy, these guys went through a lot.

First thought: The vast majority of people that I know, myself included, are completely incapable of doing what Froogle and his wife did here. Their industry is remarkable, to do so much themselves, to be so thoroughly involved in the whole process.
Most mortal Vancouverites: “I notice a photo is hanging skew, I rise from the sofa and straighten it.”
Froogle Scott: “I rent a large rotary hammer drill to drill one-inch diameter holes fourteen inches deep in the concrete foundation walls.”
The result, of course, is that Froogle has ended up with a house where his sweat is quite literally part of the foundations, and that in itself is a unique reward.

Second thought: Froogle’s story is of a very, very diligent, meticulous, and industrious couple riding shotgun on the renovation of their house. One is amazed by the number of serious deficiencies they discovered in doing so. It leads us to consider how many homes in Vancouver have substandard, shoddy, or even dangerous construction because they were built for clients who were not watching as closely. Is such construction the norm rather than the exception?

Third thought:  By their estimation, Froogle and his wife got their renos done at fair prices, in ‘Vancouver terms’. Yet the numbers are still eye-popping. The story makes one consider how the construction industry in this city has become a hyper-efficient machine for extracting money from the banks of homeowners. This process has worked superbly up until now because homeowners always ‘knew’ that the projected future value of their house merited the renovation expenses. And there was also the additional perception of this all being somehow prudent, of it representing an ‘investment’ in one’s house (and by extension, in oneself). What could be more sensible? Use the house’s increasing value as a tool to improve itself! It seems so symmetrical, so right. This all made spending on renos that much easier.
Froogle (e08): “I’m secretly horrified. I can’t believe the size of the cheques we’re writing against our home equity line of credit. I’ve never seen or written cheques this large, with this frequency, in my life.”
Contractor (e07): “That’s what things cost now. The cost of everything is through the roof. Skilled trades are through the roof. But look at what you’re sitting on. You’re sitting on a property that’s probably going to be a million dollars in a few years.”
As a result, Billions of borrowed dollars have been injected into our local economy over the last ten years. It looked fine from the outside while the process continued. Now the money has been spent, but the debt remains.

Regardless of how the whole boom plays out, we’ll all remain indebted to Froogle for sharing his remarkable story.
As I said, brace yourself… – vreaa

Froogle and Froogletta Scott

Part 8: Renovation Nervosa Finale

Recap

Late November 2007. After fifteen months, our renovation has evolved from a start-and-stop, homeowner-managed undertaking into a bigger, more complex, increasingly expensive project run by a general contractor. The initial negotiation with Nick Costa, the general contractor, was a month of back and forth, during which Nick was difficult to pin down on numbers. Our subsequent reference check was more cursory than it should have been. My wife and I have some misgivings about hiring Nick, but we’ve put ourselves in a difficult position. Or, to be more accurate, I’ve put us in a difficult position by underestimating the scope of the work, and by overestimating how much of it we can reasonably achieve or contract ourselves, while still adhering to my ambitious vision for the renovation — all of this during a construction boom that makes finding and hiring contractors and tradespeople unusually difficult. With winter now upon us, we’re without a furnace, without insulation in the gutted bottom half of the house, and without a laundry. We give Nick an initial deposit of $20,000 on a $100,000 contract. We’ve spent an additional $40,000 on work outside the contract with Nick, so it looks like our initial estimate of a $100,000 total price tag is out the window.

We may have had our first encounter with the underground economy, when two young, inexperienced workers remove the masonry flue in the center of the house. We’ve had our first deficiency, when Dylan, Nick’s lead carpenter on our job, somehow forgets to install a strip of sill gasket between the bottom of the new central supporting wall and the new concrete footing. We’ve experienced our first attempted gouging — or at least, what feels like gouging — when Nick presents us with an add-on quote of $11,000 to remove the old basement slab and excavate a foot of brown soil beneath it, a job that has to be completed before any other aspect of the renovation can proceed. Eventually, we’re able to do the job for $3400 when we succeed in hiring Delmore, a concrete demolition contractor who uses a remote-controlled micro excavator to do the work. We’ve had our first casualty, when Leonard, the handyman we’d initially hired to help with the project, quits in anger, feeling we’ve usurped his role by bringing in Nick.

We’re learning about renovation and construction the hard way, and even harder lessons are still to come.

A disagreement, and more research

I call up the company that redid the drain tile the previous year and have them lay some more drain tile either side of the central footing, where water is collecting in the trench, and tie in the new pipe to the existing system around the outside of the house. As part of his contract, Nick brings in a plumbing company to replace the bottom half of the sewer stack, and rough in all the plumbing drains that will run beneath the new basement slab. Once the black ABS drain pipe is in place on top of the brown soil, the concrete crew is free to start work on the new slab. They’ll begin by laying in six inches of drainage gravel, which will allow sub-surface water to rise and fall without becoming trapped in soil immediately beneath the slab — the issue with the old slab. Pink styrofoam insulating board (R-10) will go on top of the gravel, with a poly vapour barrier on top of the insulation. Rebar, wired together into a mesh, and elevated a couple of inches, will sit on top of the vapour barrier. Four inches of concrete will then be poured, encasing the rebar and forming the new basement slab.

(Additional drain tile: $1166)

Excavated basement with section of plumbing drain

Nick and I disagree about the value of the styrofoam insulation beneath the slab. He thinks it won’t do anything, that “the ground is a natural insulator,” and the additional $1500 to install the styrofoam is a waste of money. Marco, the lead on the concrete crew, is adamant that slab insulation does cut the chill that occupants feel under their feet, but leaves the decision up to us.

The discussion goes around in circles for a few days. I find plenty of personal opinion on the Web arguing in favour of the insulation from both a comfort and energy-savings standpoint, but given Nick’s strong opinion to the contrary, I feel I need something a bit more solid before making a recommendation to my wife. I get back to my familiar 5:00 a.m. routine of scouring the Web for information. I’m becoming a little sick of conflicting opinion, and the difficulty of getting a straight answer, and the need to do panicky research under the gun. It takes a few frustrating mornings to find what I’m looking for, but then I do: a CMHC research bulletin that reports on actual tests done with temperature sensors “aligned vertically to measure the thermal gradient from the top of the slab through the insulation and into the soil below.” In a house with no slab insulation, the temperature just below the surface of the slab is only slightly higher than the temperature of the soil, and several degrees cooler than the air temperature in the basement. In a house with two inches of styrofoam insulation beneath the slab, the slab temperature is almost identical to the air temperature, and significantly warmer than the soil temperature. I report my findings to my wife, and tell Marco we’ll be going ahead with the insulation. It’s only a couple of weeks later, during one of my increasingly frequent calls to the building inspector, that I discover the current building code actually requires a minimum of two feet of rigid insulation running either horizontally or vertically at the perimeter of the slab. “To provide a thermal break,” the inspector tells me.

Hellhole

We discuss with Marco the band of soil that Delmore left at the base of the foundation walls as a precaution. Because the walls have no footing — they just end, not even resting on hardpan, but on the brown soil above — Delmore was reluctant to remove the last of the soil sitting against the walls too far in advance of the new slab being installed. Now that the concrete crew is nearly ready to go, the soil has to come out. We’ve kept a roll-off container for this purpose, and on the first weekend of December my wife and I get out the shovels and the wheelbarrow and go to work excavating the last of the soil in “the hellhole,” as we’ve taken to calling the basement.

It just happens that, weather-wise, this weekend is one of the most miserable of the year. We’ve been living without a furnace since April, and over the last month surviving off space heaters. We eventually borrow a good quality, oil-filled radiator from one of my wife’s brothers, which improves the heat situation to the point of being somewhat tolerable, but that’s after the weekend in question.

We work our way slowly around the perimeter of the basement, loading the moist, dense soil into the wheelbarrow. When the wheelbarrow is two-thirds full I run it up a plank at the back door, and around the house to the street, where I run it up another plank and dump it over the edge of the container. As I do this, heavy, wet snow falls from a sky the colour of sludge. The snow glops down on my toque and wool jacket, melting almost immediately and progressively working its way through multiple layers of clothing. Over and over we repeat the routine of loading and dumping the wheelbarrow, the volume of soil in the narrow band at the wall greater than we anticipated. I realize what a disaster it would have been to have attempted excavating the entire basement by hand. As we tread back and forth across the exposed soil in the basement it becomes mucky, water from days of rain forced up by the weight of our boots. We both feel murderous.

Soil dumped in the container

We finish sometime in the pre-dark of late afternoon, and retreat upstairs to hot showers — our one remaining creature comfort. I’m completely sodden, my clothes grimy with mud. After showering, we sit on the couch, both of us wearing thick sweaters and toques and wrapped in blankets, the hockey game turned up over the noise from a space heater, while we drink red wine to try to stay warm.

My jeans, post-hellhole

Dodging one bullet, getting hit by another

A problem arises — a significant one. The building inspector comes for a look and discovers that the foundation walls lack a footing, and don’t even extend down to the hardpan. Even though we’ve got the new central footing, which now provides excellent structural support to the center of the house, the inspector is worried that the house could subside around the perimeter, especially now that we’ve excavated the soil away from the interior of the foundation walls. He speculates that we may have to underpin the foundation walls by installing proper footings beneath them.

Underpinning would be difficult and costly, and time-consuming, because excavating beneath the walls to make space for footings could only be done in short sections at a time, to avoid the danger of collapsing a wall. Even for a small house like ours, underpinning could easily add $30,000 or more, and six weeks, to the reno. It would also risk disturbing the new drain tile around the perimeter of the house. Marco says they could do the underpinning, but shakes his head, his demeanour dark. “It would be a nightmare.” For that much extra expense and effort, it would make more sense to just raise the house and completely replace the old foundation. I point out to the inspector that the house hasn’t budged in 60 years, and that the structural engineer, when I asked him, said the same thing and wasn’t worried about the walls. The inspector isn’t convinced. The structural engineering drawings contain no details related to the walls. He tells us that the structural engineer will have to provide a revision that specifically addresses the walls, and sign off on their adequateness, before he’s willing to let work proceed.

I give TK (Tony Kwan), the structural engineer, a call and explain the situation. A lot rides on TK’s willingness to put his professional seal on what he’d previously stated only informally. I’m careful to hide my trepidation. We’ve come to understand that TK likes to make money, and if he smells fear he’ll no doubt sense an opportunity to extort more from us. So instead of asking, I tell him in a friendly and neutral manner that he needs to provide a revision, while subtly suggesting there was an oversight on the original drawings. And we need the revision right away. I’m relieved that he seems more interested in dismissing the inspector’s objections than in asking any further questions.

“The house been there 60 years. Your house is light, it’s all 2×4.” Then he stops himself, and briefly switches to his slower, more probing manner. “You guys going to add a second storey?”

I already know the answer to this question. “No.”

“Okay.” Switching back to Napoleonic mode. “I can do a letter. But no second storey. That might be too much weight.” No mention of any additional fee.

“Okay,” I reply. No problem at all. The disappointment at losing the option of a second storey — something I had been thinking about as a future possibility — is more than offset by vanquishing the spectre of underpinning.

A few days later I give the inspector a copy of TK’s letter, which states that underpinning is not required if there is no additional loading on the foundation walls. The letter will be kept on file at City Hall. The inspector somewhat begrudgingly approves a continuation of the work. At Marco’s suggestion, we also decide that the ends of the rebar forming the mesh that will reinforce the slab should be doweled into the foundation walls, providing a strong connection between the slab and the walls, and giving the walls some additional support. Doweling involves drilling a hole horizontally into the wall for each length of rebar, and anchoring the end of the rebar in the hole with construction epoxy. There will be a piece of rebar doweled every 18 inches on all four walls, so the dowelling represents a considerable additional expense, mostly because of the labour.

TK isn’t done with us, however. The following week Marco and his crew lay in and compact the drainage gravel, install the layer of styrofoam insulation, lay down the vapour barrier, and begin dowelling the rebar and wiring it together into a mesh. I phone TK to arrange an inspection. Both TK and the building inspector have to sign off on all the preparatory work before the concrete can be poured. TK asks what stage the work is at. I tell him the crew is well into dowelling and wiring the rebar. He asks me how thick the rebar is.

“10M,” I reply. 10M is about half an inch in diameter.

“What! 10M? Nobody uses 10M.”

“What do you mean?” Slab rebar isn’t even specified on TK’s drawings, and my understanding has always been that it’s optional. A good idea, but optional.

“It has to be minimum 15M. I won’t approve 10M.” 15M is about five-eighths of an inch in diameter.

A hurried round of phone calls ensues. From work, I phone Marco at the house and give him the news.

“What! That’s crazy. We’re three-quarters done. He’s crazy! This slab is already so overbuilt it’s ridiculous.”

Marco phones TK, and then phones me back at work. “Well, I talked to him and he’s not budging, at least until he comes for a look. It’s ridiculous.” By ‘a look’, I’m assuming TK means a site visit, each of which costs $250. And he’s unwilling to come the same day, claiming to be booked solid, even though he’s at his office, and his office is a five-minute drive from the house. “We’re going to have to pull out,” Marco says. “And it’s too late in the day to go to another site, so unfortunately I’m going to have to charge you for the lost time.” There’s not much I can say. The lost time ends up as an extra $400 on Marco’s next invoice. That evening, when I relay the latest developments, my wife is furious. From growing up in the local Chinese community, there’s something she recognizes in TK, and it’s not something she likes.

The next day the crisis resolves itself with some soothing talk from Marco, and some extra lubrication from our spiraling line of credit. TK agrees to a doubling up of the 10M rebar — a length of rebar doweled into the walls every 9 inches instead of every 18. This of course doubles the cost of the rebar work, but it’s cheaper than ripping everything out and starting again with 15M bar. Marco considers the whole thing lunacy. And TK gets to bill for an additional site visit.

(Slab preparation work: $6400)

(Additional rebar work: $2700)

Completed slab preparation work

Slicing concrete

One final job must be completed before the pouring of the slab can go ahead. I bring in a concrete cutting and coring company to cut an access door in the side wall of the concrete stairs on the front of the house, and to make a few other minor cuts in the foundation at other locations. Nick has recommended that we modify the layout of the rental suite by locating the new furnace and the hot water tank in the space under the stairs, rather than use precious square footage in the suite for a mechanical room. We like the suggestion and agree to it. Currently there is no wall between the space under the stairs and the interior of the basement because the original sheathing and studs, exposed to the humid soil under the stairs in the inadequately ventilated space, rotted away. Once a new concrete floor is poured under the stairs, and the wall is rebuilt, we’ll need the exterior access door to get at the mechanicals.

A worker shows up with a specialized concrete saw that has a circular blade about three feet across. He attaches the saw to the side wall of the stairs. The saw uses a wet cutting system, which sprays water over the blade as it cuts. The blade goes through the concrete like butter, and leaves a horrendous, gooey grey mess in its wake.

(Concrete cutting: $835)

Promise and possibility

The concrete crew pours the new slab on January 2, 2008 — the first working day of the new year. In the half dark of early morning the bulk of a concrete truck and a pump truck fill the back lane behind the house. The workers run a hose from the hopper at the rear of the pump truck into the basement. Once everyone is in place, the driver starts pumping the concrete. The crew moves quickly, one worker holding the end of the hose as the grey mix shoots out, Marco and the others spreading the mix with wide concrete rakes and trowels.

Pouring the slab

A few days later, my wife and I stand on the new slab. We feel we’ve reached a major milestone. The hellhole is no more. We stand in one corner of the basement, a smooth and beautiful expanse of new concrete stretching out before us, almost like the new year itself, full of promise and possibility. It’s been a grinding, stressful, sometimes brutal sixteen months to get to this point, but now we’re here and I feel that the worst is behind us. We’ve got a new, solid, clean, dry foundation upon which to build.

In a normal world, with normal people, that could very well have been the case. But Vancouver in early 2008 is not a normal world. It’s one in which people like TK and Nick Costa can operate and thrive. We just don’t know that yet.

(Slab pour: $7450)

The new slab

Shit

What follows is six months of shit. As a one-word summary of the Nick Costa experience, a little crude perhaps, but the most fitting.

There’s so much to choose from, I’m going to be selective and present just the most egregious incidents.

Dylan’s split personality

The flush beam and the joists. The amount of woe surrounding this portion of the construction is almost laughable — if it weren’t the key structural support for the center of the house.

As part of the new central supporting wall, Dylan and an assistant have installed a flush beam to create a seven-foot-wide opening that will eventually serve as the entranceway into the living room and kitchen. The ends of the floor joists at the center of the house rest on top of the new supporting wall, except in the area of the flush beam, where they are attached to the side of the beam with joist hangers.

At several points in this episode I’m going to be referring to this beam, the joists connected to the beam, and the joist hangers, so to help with visualizing this construction detail, I’ve included the picture below which illustrates using a joist hanger to attach a joist to the side of a beam.

Joist hanger used to attach a joist to the side of a beam

On one side of the beam, a headroom problem reemerges. Nick wants to run a single main trunk for the new heating duct system down the center of the suite, rather than split the main trunk into two parallel trunks running along the ceiling at the outer walls. Regardless of where the main trunk or trunks are located, it will involve running bulky, rectangular duct immediately below the joists. The duct will then be boxed in with drywall, creating what is called ‘a drop’. Drops are the often unsightly boxy structures typical of low headroom basement suites. They cover the various structural and mechanical components like beams, heating ducts, and pipes that run overhead. In full height basements, all this infrastructure can be gracefully hidden above a dropped ceiling, but we don’t have enough headroom to do that. Done badly, drops look terrible, and scream basement suite. Nick’s rationale is that walking under a drop incorporating both the beam and the main heating trunk at the central location will be far less noticeable than walking into an open concept living room and kitchen and having your eye drawn to a boxy drop running the length of the outer wall. My wife and I agree.

Unfortunately, the minimum vertical dimension for the main heating trunk, as specified by the heating company, is five inches. Add another inch for the drywall below the trunk line, and a slight gap between the two, and we now have a structure that extends an inch and a half below the city’s specified minimum headroom of 6’6” over 80% of the suite area and all exit routes. Nick’s solution is to cut a long, shallow notch out of the underside of each joist on one side of the beam so that in this area the trunk line can be moved up enough to meet the city’s headroom requirements. Cutting notches out of joists is dicey, given that they’re the structural members supporting the floor above — especially joists that are only 2×8 to begin with, rather than the 2×10 or 2×12 used in modern residential construction. Nick consults TK, who says that if we double up the joists by adding a new joist to each of the existing joists in the affected area, he will authorize a notch two feet long by one-and-a-half inches deep, and no more, in each joist pair. Everyone agrees on this plan of action.

Dylan does the work. When I get home and go downstairs to inspect, I’m dumbfounded. Dylan has doubled up the joists correctly, pre-cutting the required notches in the new joists, but in the existing joists he’s made a one-and-a-half inch vertical cut, then attempted to split out the notches horizontally. The result is atrocious. The splits are not a straight horizontal line, but instead veer all over the place, resulting in much more than one-and-a-half inches of material being removed from each joist, seriously undermining their structural integrity. And he didn’t do it with just one joist, realize that method was a failure, and then revert to the more time-consuming but proper method of making the horizontal cuts with a circular saw, finishing with a handsaw or a reciprocating saw those areas that couldn’t be reached with a circular blade. No, he mangled each existing joist in the same utterly moronic manner. There’s no way TK or the city inspector is going to approve this. There’s no way I’m going to approve it.

Here’s a picture of the beam and the attached joists. You can see just how much additional material the splitting removed by comparing the split joists to the pre-cut joists installed beside them, and by looking at the thickness of the little blocks of wood Dylan had to insert in the bottom of the joist hangers to allow the split joists to rest on something.

Split joists paired with pre-cut joists

I’m displeased. I phone Nick. He comes over. He admits that Dylan’s work is “a bit rough,” but doesn’t seem overly concerned. I tell him that we’re going to need to get TK back to assess the situation. If I had the experience then that I have now, I would have thrown Nick and Dylan out on their asses that very day. TK comes for a look later in the week and pronounces. The joists in question will now have to be tripled up with the addition of a third, properly notched joist added to each existing joist pair.

Drip, drip, drip

At Nick’s suggestion, we’ve decided to locate the new furnace and the hot water tank in the space under the concrete front stairs. In these little East Vancouver houses, reclaiming some additional square footage is always welcome. We’ve had Marco and his crew install a vapour barrier and a new concrete floor in what will become the mechanical room.

As the concrete floor cures I notice drops of water suspended from the sloping underside of the stairs, and dark patches on the new concrete floor. I assume that the water vapour given off by the concrete during the curing process is rising up and condensing on the cold concrete surface above. Eventually everything dries out and the space looks good. Because we’re adding the space under the stairs to the usable square footage of the house, the inspector requires that we insulate it, either with standard frame walls and fiberglass batt insulation, or spray-on foam insulation.

I’m down in the basement a few days later and have another one of those nasty renovation surprises. Drops of water are again suspended from the underside of the stairs, and new dark patches have appeared on the floor, beneath the drops. I watch as a couple of drops fall and are absorbed into the dark patches. It’s been raining for the last couple of days. I surmise that the drops aren’t condensation from the curing concrete, but rather rainwater making its way through the old concrete of the stairs.

More frantic research. Guess what? Concrete is porous. Between the grains of sand and cement that form the basis of concrete are thousands of tiny capillaries that water just loves to flow along. In fact, a phenomenon called ‘capillary attraction’ means that concrete acts like a giant sponge. In our case, the sponge is probably becoming saturated after a couple of days of rain hitting the top side of the stairs, and is shedding the excess water into the space below.

The amount of water isn’t huge, so I’m still holding out a shred of hope that it might only be condensation. The sun returns, and the space dries up. I get out the garden hose, position it outside the front door, and point it over the lip of the top step. I turn on the water and watch as it cascades down the stairs to the front walkway. Satisfied that this amount of water approximates a Vancouver monsoon, I go back inside the basement and look into the space under the stairs. Bloody Niagara Falls. So many drops of water that they’re forming into sheets and spilling down on the floor. I go back outside, turn off the water, and do a fair bit of swearing.

The space beneath the stairs

Solution time again. There’s no way we can install a new, $10,000, high-efficiency gas furnace and the hot water tank in this space until we’ve made it waterproof. It occurs to me that Nick, as a general contractor selling construction expertise, should have foreseen this possibility. Why had it been left up to the homeowner to discover the problem?

Despite the setback, we decide to persevere with the plan to locate the mechanical room under the stairs. Reincorporating the mechanical room in the suite layout would mean sacrificing the one decent storage room we’ll have, or changing from a two bedroom to a one bedroom unit, which would significantly impact the amount of rent we’ll be able to charge.

Nick’s solution is to paint the stairs with waterproof paint. Won’t the paint progressively wear off in the traffic areas? I ask. Sure, Nick replies, but you can just repaint when that starts to happen. I tell him that I’m going to explore other solutions. The problem with the stairs completely messes up the heating company’s schedule. They had been on the verge of installing the new furnace and duct system. The custom ductwork is sitting in their warehouse, ready to go. Now they’re on hold until we find an acceptable solution. My wife and I, looking forward to the resumption of heat, continue to freeze and huddle around space heaters.

One option is to get Delmore back, demolish the concrete stairs, and rebuild them with frame construction and plywood sheathing, including a waterproof, torch-on membrane immediately below the treads and risers of the stairs. We’d probably be able to save the new concrete floor, but the new drain tile, which runs around the perimeter of the stairs, would likely get disrupted as part of pouring new footings for the wood frame walls. It all sounds expensive and time consuming.

What we try first is a cementitious waterproofing compound that when applied grows microcrystals within the tiny capillaries of the concrete, progressively blocking them — or so the marketing literature states. The more water seeping through the untreated concrete, the better, because the crystals are water activated. A contractor shows up and applies the compound to the underside of the stairs — roof and walls. After a few days, the amount of water working its way through the stairs is significantly reduced, but not halted completely. I phone the contractor and tell him we still have a small, wet area on the underside of the stairs. He returns, applies more of the compound, which improves the situation further, but still a small amount of water is seeping through. And anything less than an absolute seal is no good. When I mention to TK the approach we’re taking he dismisses it. “That stuff’s no good for old concrete. It only works on new concrete.” I ask his advice and he suggests torch-on, or some other kind of waterproof membrane, beneath a protective cladding like tiles.

(Concrete waterproofing compound: $1000)

The stairs have now become a project within a project. With the addition of the concrete floor, the cutting of the access door, and the application of the waterproofing compound, we’ve dumped in enough money to this one piece of infrastructure that changing course and demolishing the stairs would be painful. We decide to persevere and my wife takes on the responsibility of finding a decent tiling company.

Short people

Dylan is tall, definitely over six feet, but he comes perilously close to joining Randy Newman’s ranks of short people (“Short people got no reason / To live. / They got little hands / Little eyes…”).

The joists in one corner of the basement need to be doubled up. This corner is where the stairs between the two levels of the house used to be located before they were removed, probably by the Portuguese brothers when they converted the bottom half of the house to a rental suite. When they closed up the opening between the two floors, they used joists that weren’t quite long enough to span the distance from the top of the outer wall to the top of the old central beam. The joists were probably scavenged from somewhere, and they got them cheap, or for free. Unfortunately, they were about six inches too short for their required purpose. To make them work, they had to run a horizontal 2×4 ledger under the joists at either end. One ledger was nailed to the side of the old central beam, and the other was nailed to the side of the double top plate — the stacked 2x4s — on the outer wall. The joist ends rested on top of these two ledger boards — an adequate solution from a structural standpoint, but an unsightly one because at the ceiling line the 2×4 ledgers stuck out from the wall and the beam. When Dylan replaced the central beam with the new central supporting wall he reattached the ledger as a temporary measure until the short joists could be paired with new, longer joists that would run from the top of the outer wall to the top of the central wall. Removing and reattaching the ledger at the central location had not been a problem because the temporary supporting walls were in place at the time, taking the weight of the joists overhead and the floor above.

The ledger at the outside wall is a different matter. Directly above it, in a storage room on the main level of the house, are two large, old-style, green metal file cabinets fully loaded with papers. A combined weight of probably a thousand pounds.

While discussing this portion of the framing with Nick I tell him about the file cabinets and offer to unload them and move them to another location upstairs. He tells me not to worry about it. They’ll install some temporary supports below the joists when the time comes to do this portion of the job. When that day draws close I remind Nick about the file cabinets and he again says not to worry. The day before Dylan is going to do the work, I tell him directly about the file cabinets and how heavy they are.

When I get home at the end of the day, the new joists are in place, paired with the short joists. But on the phone with Nick later that evening he reveals there had been a little mishap. (Why he tells me, I have no idea.) Somehow Dylan and Nick, who was there at the time, forgot about the file cabinets, or worse, are beginning to reveal intellectual challenges around subjects such as gravity, and physical properties like weight, and the load-bearing capacity of unsupported horizontal framing members. According to Nick, the instant that Dylan, standing directly beneath perhaps half a ton of loaded file cabinets, pried the ledger board from the outer wall all the joist ends in the area, with a horrendous noise, collapsed straight down about six inches, which would have put them close to the top of Dylan’s head. Nick grabbed a 2×4 stud and rushed over, and between the two of them they were just able to wedge the stud beneath one of the joists, and then quickly do the same with the other joists, preventing what might have been a total collapse, two smashed file cabinets sitting in the basement, a cracked basement slab, and a destroyed storage room floor. As it is, the storage room floor still isn’t quite right, feeling spongy and creaky underfoot, probably from the plywood subfloor being deflected and perhaps partially splintered when it was bent down by the weight of the file cabinets.

No doubt many of you have heard of the Darwin Awards. From the Darwin Awards web site: “In honor of Charles Darwin, the Darwin Awards commemorate those who improve our gene pool by (accidentally) removing themselves from it. The Award is generally bestowed posthumously.”

I’d say Dylan, aided and abetted by Nick, narrowly avoided becoming a recipient.

Once again, why?

In the previous episode, in reference to our eventual decision to hire Nick, I asked the question Why? I ask the question again, now in reference to continuing the relationship, as some of you are probably wondering why we allowed this circus to go on as long as we did. (Although, as a reminder, I have focused on the most egregious incidents, which has the effect of amplifying the horror.)

The short answer to Why? is that we don’t allow it to go on for very long. Although we hired Nick at the end of October, with the exception of the central supporting wall, his company doesn’t begin to do much work until early January 2008. On the last day of February, just eight weeks later, I phone Nick and tell him we don’t want to continue with the contract. Which is a polite way of saying, “You’re fired.” To which Nick casually responds, “Okay.”

The slightly longer answer is that we are quickly unhappy with Nick once work starts in earnest, and confront him on several occasions about the sources of our unhappiness. Workers absent for days with no prior warning, and lame subsequent excuses from Nick. Multiple blown appointments when Nick is “coming over in an hour,” then fails to show. Multiple breaches of the building code, including a single top plate rather than the required double top plate on the central supporting wall, and the attempt, which I quickly stop, to put vapour barrier directly against the concrete foundation wall, creating the perfect conditions for mould, rather than on the warm side of the new framing. Overall poor quality of framing. Nick’s demand for an early second draw — another $20,000 well in advance of the contractually-agreed-upon milestone, which is completion of the framing and the plumbing and electrical rough-ins.

Because of the overall slow pace, and the worker absences, we aren’t even close to reaching the milestone. I tell Nick flatly, “We aren’t giving you any more money. You need to reach the milestone, and the work has to be passed by the structural engineer and the various city inspectors before we’ll release any more money.” The real reason for the worker absences, I find out from Dylan and the other carpenter, is greed. Nick has eight different jobs of various sizes on the go, and five workers. This from a guy who solemnly stated he would never max himself out. Workers are continually being yanked off one job and sent to another — probably to whichever client is currently complaining the loudest — and as a result spend half their day driving around town.

There’s more, but that’s probably enough. However — in this slightly longer answer to Why? — through it all, Nick never stops being responsive. He’s a master at appearing at the precise moment my wife and I agree we’ve finally had it. Of somehow diminishing our grievances to minor hiccups, of displaying just enough construction expertise to make us think twice about giving him the bum’s rush. He has the con man’s silver tongue. But that’s not quite right. I google “con man’s silver tongue” to check my use of “silver tongue” in the context of con men, and discover The Ten Commandments of Con Artists, a list of con artist best practices attributed to a renowned, early-twentieth-century con man, Victor Lustig. Commandment #1 leaps out at me: “Be a good listener — the myth of the fast talking, silver tongued con man should be ignored.” In the previous episode, weeks before reading Lustig’s commandments, here are the first two sentences I wrote describing Nick: The following week I meet Nick Costa, the general contractor, for the first time. My initial impression is that he’s a good listener.

A shoelace snaps

A specific incident leads to firing Nick. It’s a relatively minor incident, but indicative of the core problem — and also the last straw.

As another way of conserving as much space as possible in the suite, we’ve decided that instead of swing doors, we’ll use pocket doors throughout. Pocket doors slide back and forth on an overhead track that runs above the doorway and inside the adjacent wall, thus requiring no additional space to open the door, unlike the common swing door which requires swing space into a room.

As part of framing the new suite, Dylan and another carpenter install a number of pocket door frames — prefabricated units that include a door frame and an adjoining section of wall frame that houses the pocket door when it’s open. In the master bedroom they do a sloppy job of aligning the unit with the 2×4 stud wall. Instead of the door frame and integrated wall section being directly in line with the stud wall, they veer out at a noticeable angle. A deficiency, which if left uncorrected will cause problems when it comes time to install drywall, and will cause the door to slide back and forth at a funny angle to the bedroom wall.

I have other deficiencies to discuss with Nick as well, and I phone him and ask him to meet me at the house. Together, we examine the misaligned pocket door frame and he agrees it’s misaligned and needs to be made straight. Luckily, the wall section of the unit hasn’t yet been glued to the slab, so correcting the problem should be easy. Nick assures me he’ll have Dylan and the other carpenter properly align the door frame.

When I inspect the results the next day I’m stunned. The unit is still misaligned, but now glued to the floor. Charles Bukowski: “…it’s not the large things that / send a man to the / madhouse…./ but a shoelace that snaps…” I’m in a cold fury. At the same time, in another, still rational part of my brain, I assemble these possible explanations for this latest piece of idiocy:  a) Nick forgot to tell Dylan and the other carpenter to properly align the door frame,  b) Nick lied to me and had no intention of telling them because he didn’t consider the misaligned frame a significant problem,  c) Nick did tell them, and they forgot, or  d) Nick told them and they ignored him, because they don’t respect him. The actual explanation for the misaligned door frame, and for the two dozen other things that have gone wrong, ultimately doesn’t matter. Only the results matter. And the results are shit.

This is the moment at which I fully accept what’s been a growing realization. The problem isn’t Nick’s overextended, second-rate workers. The problem is Nick’s third-rate management of his second-rate workers. The following morning I make the call and discontinue our relationship — or so I thought.

Hiatus

March and April 2008. We’ve gotten rid of Nick, but we still have no furnace, no laundry, and an uninsulated, gutted basement generating no revenue. We must keep moving forward, but we aren’t sure whether to revert to our initial approach of managing the renovation ourselves, or to go looking for a new general contractor. In the immediate aftermath of the Nick experience we don’t have much appetite to begin a search for a new general contractor, so although we know we’ll probably have to go that route eventually, for a while we try to move the renovation forward ourselves.

Our first attempt at making some progress is to contact the electrician and the plumbing company who performed the initial rough-in work in the basement. This work seems fine, and the electrical inspector has told us the electrician is reliable and does good work. My wife leaves a voicemail for the electrician explaining that we’ve parted company with Nick, but we’d like to keep him working on the job. The electrician doesn’t return the call. Months later, the electrical inspector tells us the electrician was conflicted about what to do, and felt bad, but ultimately came down on the side of Nick, because that was where future work was likely to be.

The owner of the plumbing company does return my wife’s call, and tells her he’s willing to complete our job, as long as it can be done on the quiet. He doesn’t want Nick finding out, which could jeopardize his business relationship. He says he’ll get back to us with some dates, but we never hear from him, and decide not to pursue it. It’s becoming obvious that we need to make a clean break from anyone associated with Nick.

We contact our builder friend, who’s working on the high-end renovation in West Vancouver, and ask his advice. He comes to the house to assess the situation. He considers the framing done by Dylan and the other carpenter “rookie stuff,” and the splitting out of the joist notches a farce. He and his crews have always prided themselves on the quality of their framing, but he admits they sometimes wonder why they go to the extra effort when so many builders get away with slapping together the frame of a house, and then quickly hiding all the deficiencies behind drywall. Our friend offers to give us the contact information for the framer and the drywaller on his current job, both of whom he considers excellent. As he’s leaving he looks up at the beam spanning the opening in the central supporting wall and notices something. He grabs a nearby stepladder and climbs up so he can eyeball down the length of the beam. “This beam’s sagging,” he tells us. I climb up and clearly see the slight sag. The beam has been in place only four months, so with time it could very well sag a lot more. Our friend asks if this is the size of beam specified by the structural engineer. I tell him that originally it wasn’t, a taller, narrower beam was specified, but Nick wanted space above the beam to run plumbing and electrical back and forth, so he negotiated a different shape with TK — less tall, but wider to compensate.

“Beams don’t work like that,” our friend tells us. “They get a disproportionate amount of their strength from their height, not their width. Did the structural engineer revise his drawings and sign off on it?”

“No,” I tell him. “My understanding is it was all done over the phone.” And TK’s English is hard to understand over the phone, and it’s quite possible that Nick didn’t communicate his intentions very well.

“Then this beam isn’t to spec. It’s going to have to be replaced with a proper sized beam.”

It’s starting

During this period, there are some other developments. At the end of March, I resign from the company where I’ve been working for the past three years to take a similar job with a different company. A co-worker at the first company made an identical move a year previous, and encourages me to join him at the new place. I’m initially reluctant, feeling some loyalty to the first company, but I’m worried about the company’s long-term viability. I’ve come to feel the company is badly mismanaged, and future bankruptcy is possible. The company has already been shrinking to survive, laying off a quarter of the staff the previous October — a stressful, unnerving event for a small, tightly knit company with a number of longstanding employees. I feel my position is relatively safe, however if the company does go belly up in a year’s time, I don’t want to be job hunting in the middle of a recession. I’ve been following the US economic news to some extent, not closely, but paying enough attention to know that things are not good south of the border. In fact, the US, in the first quarter of 2008, officially slips into recession. As I recall, there’s soothing talk around this time from some Canadian economists and politicians who would have us believe that a mysterious economic delinkage has occurred between Canada and the United States. The US economy might crash and burn, but somehow Canada will avoid being dragged down this time, perhaps by selling resources to the Chinese. This line of reasoning sounds like bunk to me. I discuss with my wife the various factors at play and she encourages me to make the strategic move from a shaky, small company, to a medium-sized company with sounder finances. I feel pretty good about my decision to change employers as the global financial crisis accelerates throughout 2008, and it becomes apparent that ‘global’ does include Canada, and that a five-alarm fire at your next door neighbour’s house can make your own living room a little warm.

It isn’t only mainstream media news stories about the US and Canadian economy that underpin my sentiments. For at least a year and a half, and perhaps longer, I’ve been soaking up opinions, claims, explanations, statistics, and dark predictions from the Vancouver real estate blogosphere. I don’t remember the exact circumstances, but I probably stumbled on my first Vancouver real estate blog some time in 2006, and it was probably the blog run by VHB, the Vancouver Housing Blogger. What I do know is that VHB and other local bloggers helped me think more critically and analytically about Vancouver real estate and about money. From the time we’d bought the house in September of 2003, I’d been telling myself, in a somewhat vague, uncritical way, that Vancouver house prices couldn’t keep going up forever, and yet every year, in startling fashion, they had continued to go up. Now I’d found an online community that was providing very specific and reasoned arguments why Vancouver real estate couldn’t keep going up forever, and in fact, was very likely to come crashing down. When I wasn’t frantically searching for construction information, my early mornings were no longer spent comparing houses and prices on RealtyLink to our own house. I was now a habitué of the ‘bear blogs’, or the ‘bubble blogs’ — “doom blogs,” as my wife called them. And in April of 2008, while we’re trying to keep our renovation moving ahead, come the first inklings that the doom bloggers’ predictions are starting to come true. There’s a sense that the bloggers smell blood. Through March, April, and May, Vancouver house prices stop rising, but perhaps more importantly, during what should be the prime selling season, year-over-year sales numbers plummet, and the inventory of unsold houses quickly swells, a reliable precursor to falling prices. The April 12th post on the blog Housing Analysis is ominously titled “It’s Starting.” The April 29th post is titled “Vancouver’s Next — Watch Out!” At the very moment that we’re drawing down significant amounts from a line of credit based on the unrealized equity in our house, there’s a good chance house prices could tank and that equity shrivel.

Seismic upgrading

Perhaps appropriately, the one portion of the renovation I do manage to move forward during March and April is the seismic upgrading — making the house more resistant to the forces of an actual earthquake, while pondering the possible results of a financial one. With the wood frame and the concrete foundation of the house fully exposed on the lower level, I take advantage of the opportunity to bolt the frame to the foundation, and install steel structural connectors in other locations, without having to rip off drywall and tear out insulation to do it. I also triple the studs at the corners of the house, in preparation for creating sections of shear wall — half-inch structural plywood nailed to the studs, and the top and bottom plates, of the cripple walls. In certain house designs, cripple walls are the short, exterior walls of the house that run from the top of the concrete foundation walls to the underside of the joists supporting the main floor. In Vancouver, where the mild climate doesn’t necessitate deep basements to protect against frost heave, the typical house of a certain age is basically a box from the main floor up, which sits on stilts or dominos — the short studs of the cripple walls — which themselves sit on shallow foundation walls. This design works well enough when bearing the vertical load of a house subject to gravity, but it’s inherently weak when it encounters the side-to-side shaking or shearing forces of an earthquake. Cripple wall failure is the most common residential structural failure in an earthquake. The ‘box’ portion of the house moves laterally as a single unit, collapsing the stilt-like studs of the cripple wall beneath it, and slumping to the ground. Not a pleasant thing to have happen to your house, and especially not a pleasant thing if there are tenants living in the space beneath the ‘box’ portion of the house — which will be the case with our suite, and is the case with the vast majority of basement suites in Vancouver. Attaching plywood to the cripple walls strengthens them enormously, allowing them to resist shearing forces much more effectively.

Seismic upgrading was another aspect of the renovation that Nick and I disagreed about. He maintained that unless you could establish a continuous load path — reinforcing every key connection point between framing members from the foundation to the roof — there was no point doing anything, because the earthquake forces would act upon the weakest link. He did agree with bolting the frame to the foundation. It’s true that establishing a continuous load path is the ideal situation, but Residential Guide to Earthquake Resistance, and various other sources I find on the Web, explicitly state that if homeowners do nothing else, bolting the frame to the foundation, and reinforcing cripple walls, can save a house, and its occupants.

Drilling hole for anchor bolt

The return of Nick

How does this happen? I don’t know… but it does.

Although we’ve broken off the contract, we have to settle on a final amount of money that Nick claims is owed in excess of the original $20,000 deposit. There are also some loose ends that need to be wrapped up. There are tools and supplies to pick up, and a portable toilet that has to be removed from the site. Not surprisingly, Nick doesn’t attend to these things particularly promptly. I phone him on several occasions to prod him into action. During one of these calls, I mention that the beam in the central supporting wall has sagged and will need to be replaced.

At some point, Nick phones us and asks for a meeting. He tells us that he wants to make things right, to deal with all the deficiencies, including the beam, at no cost to us. This last part is a bit of a laugher, given that we’ve already paid to have the work done properly. In fact, Nick’s own contract states that all work will be done in accordance with good quality standards, and in compliance with the applicable building code and related inspections, and “other authorities” (i.e., TK). You can’t charge clients to fix your own mistakes.

We agree to the meeting, but nothing more. Nick pitches his new line: he’s going to put his top guys on our job (thereby implying that we didn’t have his top guys before — in fact, as we’ll later find out, he’s fired Dylan). He’ll pay for a new beam and its installation, the tripling of the joists that TK has specified to account for the split joists, and the materials and labour required to fix a number of other more minor deficiencies. After the work is complete, we can decide if we want to continue with the contract or settle up and call an end. We tell Nick we’ll give him an answer in the morning.

After Nick leaves, my wife and I discuss his offer. We agree that it’s unlikely the leopard can so thoroughly change his spots, but there doesn’t appear to be much downside. I phone Nick the next day and tell him he can come back under the terms discussed once we get a revised beam specification from TK. I also tell him that every aspect of the operation — his “top guys,” the results of their work, and Nick’s management of the work — will be under a microscope.

Given his performance to date, Nick’s sudden eagerness to make things right is a bit puzzling. Perhaps he’s worried about his professional reputation. In hindsight, I wonder if the rapidly deteriorating economy in the spring of 2008, and in particular the rapidly deteriorating circumstances for real estate and construction, was causing his business to dry up, and that he saw our job as salvageable.

Shit 2

I ask TK for a revision of the structural engineering drawings, one with a new beam specification and detailed seismic upgrading information. We can’t simply revert to the original beam specification, I discover, because changes we made to the suite layout along the way mean the opening in the central supporting wall is two feet wider than indicated on the original drawings — something Nick either failed to take into account, or failed to communicate effectively to TK, and another likely reason that the installed beam sagged. We want to keep the wider opening, so we need a revised beam specification.

TK is very slow in getting to the revision. A couple of weeks go by, and we’re still waiting for what is probably 15 minutes of work for TK, and an hour for one of his assistants to modify and reprint the drawings. I begin hounding TK daily, and I suspect that at times he’s screening out my calls. I start phoning from different locations around my work place, and whenever I phone from a new number, he answers. My wife eventually loses all patience, and in a rage flies down to TK’s office, blowing in like a tornado and terrorizing TK’s dopey staff. Tellingly, they’re able to produce the revised drawings in about ten minutes. A cowed TK slinks into his office during this showdown. No questions, during this second meeting with my wife, about why we haven’t started a family.

(Revised drawings: $900)

I phone Nick with the details of the new beam, and around the end of May, his top guys start the work. Within a couple of days, the new beam is in place and the joists are tripled and attached to the side of the beam with joist hangers. The results seem better. However, when TK comes to inspect, he immediately sees something he doesn’t like. On the third joist added to each joist pair, the two cuts forming the notch extend slightly past each other where they meet — the result of cutting the notches entirely with a circular saw, rather than cutting them mostly with a circular saw and then finishing the cuts with the straight blade of a handsaw or reciprocating saw. The slight overcutting doesn’t seem that critical to me, but TK announces that before he’s willing to sign off on the work, four-foot-long plywood gussets — plywood cut to the shape of the notched end of the joists — must be attached to either side of each triple joist as an additional strengthening measure. He’ll need to do another drawing. I don’t know whether this latest pronouncement is a scam to further inflate his fees, or a legitimate requirement from a structural standpoint. Either way, we don’t have much choice but to comply if we want him to sign off.

After TK leaves, I discover something of my own that I don’t like. The joist hangers are triple-width, 2×8 joist hangers cut down in size to approximate a triple 2×6 hanger, necessary to fit the notched end of the joists. In preparation for doing more seismic upgrading work, I’ve been reading the literature from the structural connector company, and they repeatedly warn against making any manual alteration of their connectors. Each type of connector is specifically engineered for its particular purpose, with nail holes positioned in precise spots. Chopping bits off connectors, especially bits that contain nail holes, as is the case with the altered 2×8 hangers, can significantly reduce their load-bearing capacity, and is definitely bad practice.

I tell Nick about TK’s latest pronouncement. He thinks the gussets are complete overkill, but agrees there isn’t much choice but to comply with TK’s wishes. I also bring up the issue of the cut-down joist hangers and he agrees to swap them for properly sized triple 2×6 hangers.

TK produces the required drawing much more quickly this time — perhaps wanting to avoid any further encounters with my wife — and includes it in the price for the just-completed site inspection, which is covered under Nick’s contract. I phone Nick and tell him that I have the drawing and will leave a copy on the work table in the suite, which I do as soon as I get off the phone. I also remind Nick about swapping in the correctly sized joist hangers. “Don’t worry, I’ll take care of it,” he responds.

The following morning I discover another potential problem. Nick’s guys have used 1-1/2 inch long hanger nails in the ‘shear nailing’ locations on the joist hangers. 1-1/2 inch hanger nails — nails that are thicker and stronger for their given length than regular nails — are the correct fasteners to use for the nails that go straight into the beam (step 4 in the joist hanger diagram above). However, I’m almost certain that I’ve read longer nails are required for the shear nailing locations, where nails are driven in diagonally at a 45 degree angle, thus requiring greater length to properly penetrate the beam (steps 5 and 6 in the diagram). When trimming the joist ends to make room for the flush beam, Dylan had done a sloppy job, overcutting some of the joist ends by as much as an inch. There is very little wood inside the hangers on these joists. The combination of the short nail and the lack of wood allows me to reach up to a shear nailing location on one of the joists, and with almost no effort pull a hanger nail free. The nail isn’t biting into anything. It’s just there for show. At work later that day, I go to the manufacturer’s web site and confirm what I thought I’d previously read. In numerous locations in their literature they expressly state that hanger nails must not be used for shear nailing. Shear nails must be at least 3-1/2 inches long.

Sloppy trimming of joist ends

Volcano

I get home and go downstairs to check the progress. I have another one of those moments when I’m stunned by what I see. The plywood gussets have all been cut incorrectly. Instead of the sideways L-shape required to match the notched end of the joists, they’re straight strips. Several of them have been installed, with nails spaced every two inches as TK required — a crapload of nails over a four foot length — but doing absolutely zero from a structural standpoint, because they run above the notch instead of wrapping around it. The uninstalled gussets — now useless pieces of wood — are stacked on the work table, about six inches away from TK’s drawing.

The remainder of the joist hangers have also been installed — not the properly sized triple 2×6 hangers that Nick promised he’d take care of, but more triple 2×8 hangers with bits cut off.

I tear out of the basement and pound up the deck stairs to the phone above. For a fleeting moment, cresting the top step and crossing the deck, I have a strange, floating sensation, definitely out of control, but more, an almost out-of-body sensation, the sense that I’m not quite sure what’s going to happen next, that anything could happen. Thinking back, it’s perhaps not unreasonable to describe the momentary impulse as homicidal. If someone had been there to capture the instant with a camera, what would my face have looked like?

I get Nick on the phone. Six months of deficiency after deficiency, of ignorance of the building code, of ignorance of construction techniques in general, of garbage work, of repeatedly absent workers, of being manipulated, of being lied to, of worthless promises, of non-existent oversight, of having our hopes raised only to have them dashed, of moronic decisions, of babysitting incompetence, six months of rage, come pouring out like a volcano. Inside my chest a huge pressure accompanies the river of profanity I bellow down the phone. “DO YOU WANNA BE FUCKING FIRED?” Nick tries to calm me down, says he’ll come over right away. “YOU’RE GODDAMN FUCKING RIGHT YOU’LL GET OVER HERE RIGHT AWAY!” I rage on for about a minute, then slam down the phone as if trying to smash it right through the coffee table.

On the other side of the French door, in the kitchen, I see my wife’s alarmed face. Later, she tells me she’s never seen me that angry. Ever. Even though the doors and windows were closed, she tells me that the whole block heard.

I go into the backyard and take a number of deep, even breaths, feel the mild evening air flowing in and out of my lungs, slowly lowering my blood pressure. I go into the basement to await Nick’s arrival. By the time Nick shows up, about ten minutes later, I’m mostly back to normal. Through the front window I watch as he, and another guy, get out of Nick’s car. I don’t recognize the other guy, but I assume it’s one of his workers. Although it seems strange that one of his workers would still be around at this hour of the evening. As the two of them come up the walkway toward the house I can see the worker is really burly, with the body shape you get from thousands of hours spent pumping iron in a gym. I have to work hard to keep myself from laughing when I realize Nick, a deathly serious look on his face, has brought along a bodyguard.

Everything is weirdly cordial after the eruption. I shake hands when introduced to Nick’s worker. Nick makes some excuse for the screw-up with the gussets and the joist hangers and says they’ll be fixed. I then tell him about the problem with the short shear nails, and pull a couple free to demonstrate.

“Those are hanger nails,” he protests.

“Yeah, I know. But the company’s literature explicitly states you don’t use hanger nails in the diagonal nailing locations. They specify a 3-1/2 inch nail.”

Nick isn’t convinced, but tells me he’ll phone the company in the morning to verify what sort of nail should be used. Then he and his worker leave.

Shoelace 2

…it’s not the large things that send a man to the madhouse….

Nick’s mild protestation that “those are hanger nails” is what finally does him in. He’s completely sincere in that particular statement because at that moment that’s what he absolutely believes. And there are probably houses around Vancouver with the wrong sized shear nails in their joist hangers because Nick was the general contractor. Will those houses suffer structural failure? Probably not. But it doesn’t matter. I’ve finally realized that it makes absolutely no sense to be paying someone thousands of dollars to provide a service in which you have absolutely no faith. To feel that you have to double- and triple-check every decision you’re paying someone to make. To live with the constant anxiety that every additional piece of work someone does on your house could be damaging it even further.

In the morning Nick phones and tells me he’s spoken to the company and that I’m right about the shear nails. “I know,” I say. And then I tell him it’s over.

What happens the rest of the way

With the final departure of Nick, the high drama ends. Lawyers get involved, and on the advice of our lawyer, we eventually settle with Nick for an additional $5000.

(Nick’s settlement: $5000)

I keep plugging away on the seismic upgrading, and we hire a tile company to install a waterproof membrane and slate tile on the front stairs. The stairs end up looking really good, although ironically, appearance wasn’t the reason we undertook the work.

(Seismic upgrading, tool rentals and materials: $1360)

(Waterproof membrane and tiling: $4150)

Toward the end of summer, we have a bit of luck. While talking with a co-worker, my wife’s sister relates our renovation saga. The co-worker suggests getting in touch with her husband, a general contractor and custom home builder. She says her husband has spent an entire career in the industry, and is very focused on quality, and detail, to the extent that he sometimes drives his tradespeople crazy. This sounds worth following up. I check out the husband’s company web site, and I’m impressed, although I feel he may be out of our league.

Over the next month we have several meetings with Ray, and end up hiring him mid-September, 2008. His company is busy, finishing up a large project, and he won’t have a crew available until some time in the new year. But he’s willing to come in himself before then and do the work necessary to move forward with the installation of the new furnace and heating duct system, and to bring in his plumber to run the lines for the upstairs laundry. I assist with swapping in properly sized joist hangers, and with removing the incorrectly sized plywood gussets and reinstalling proper ones. One morning in early October my wife and I are standing with Ray in the basement when one of the heating technicians fires up the new furnace for the first time. The warmth wafting down from the newly installed heating registers overhead is intoxicating. Eighteen months without a furnace, and almost a year of humping bags of dirty clothes to the laundromat, have come to an end.

(New furnace and heating duct system: $15,000)

From this point forward, the renovation runs pretty smoothly. Because of last-minute add-ons to the big job they’re wrapping up, the crew doesn’t become available until the middle of March, 2009. I use the intervening time to complete all the seismic upgrading work in the suite, with the exception of attaching the plywood panels to the cripple walls, which the crew will do. In order to install pieces of seismic hardware known as a holddowns at the inside corners of the house, I rent a large rotary hammer drill to drill one-inch diameter holes fourteen inches deep in the concrete foundation walls. This job is sort of fun, but a bit stressful. After consulting with Ray, I also rip out those portions of the framing done by Dylan that are substandard — about two-thirds of it. Once the crew does start, progress is quick and the results are very good. Ray proves to be everything his wife, and his references, described: detail oriented, knowledgeable, responsible, and calm. In a word, professional. We discuss in advance various options for particular aspects of the renovation, agree on an approach, and then that’s what happens. Workers arrive at 8:00 am, work all day, and when I inspect the results at the end of the day, there’s significant progress and I don’t find anything remiss. And by this point I’ve developed a pretty good eye. I eventually stop checking if things are plumb, level, and square, because they always are.

The crew works steadily on our job for about ten weeks, and then more sporadically throughout the summer as they wait for my wife and I to do the insulation, including installing insulation in the ceiling for better soundproofing, and then later to paint the entire suite — portions of the renovation we do ourselves to try to save some money. In retrospect, the $1500 we save doing the painting, which takes five or six prime summer weekends, is a poor tradeoff.

Here’s a list of what the renovation includes, in the order that the work is done:

•    Removal of the old stucco siding and the old soffit under the eaves
•    Installation of new windows for the entire house (purchased from a company recommended by Ray, rather than the initial company we’d been dealing with)
•    Installation of a rainscreen
•    New soffit all around
•    Demolition of the rear deck superstructure, replacement of the old decking
•    Re-siding of the entire house with cedar
•    Suite framing, including plywood shear walls
•    Demolition of the upstairs bathroom
•    Replumbing of the entire house
•    Rewiring of the bottom half of the house, and installation of separate electrical panels downstairs and upstairs
•    Installation of new exterior doors for the entire house
•    Lighting throughout the suite
•    Insulating and installing vapour barrier in the suite and upstairs bathroom
•    Drywalling the suite and upstairs bathroom
•    Tile flooring in the suite, and tile flooring and shower surrounds in both bathrooms
•    Cabinet, counter, and cupboard installation in the suite kitchen and both bathrooms
•    Interior doors in the suite
•    Interior window and door trim for the entire house
•    Exterior concrete work
•    Suite appliances
•    New deck railings and stairs
•    Interior painting of the suite and upstairs bathroom
•    Exterior painting of the entire house
•    Hardwood flooring in the suite
•    Baseboards in the suite
•    Closet shelving and rods in the suite
•    Attic insulation increased to R50

Re-siding the house wasn’t part of our original plan. But once we gutted the basement we discovered that the building envelope — basically a couple of layers of building paper under the stucco — was beginning to fail and in places water was seeping through the shiplap sheathing boards. A new bathroom upstairs wasn’t part of the plan either, but we decide to include it once Ray explains that it’s much more cost effective, and less disruptive, to replumb both the downstairs and the upstairs bathrooms at the same time, rather than return to do the upstairs one at a later date. Besides which, both my wife and I really hate our old upstairs bathroom.

By our estimation, we rebuild about 50% of the house over the course of the entire renovation. We decide to leave the interior renovation of the top half of the house, with the exception of the bathroom and the windows and doors, until later. We could have moved into the rental suite for a period of time, and had Ray and his crew renovate the top half as well, but we’re physically and psychologically exhausted, and we’ve maxed out our line of credit. We need a break, and we need to restart the stream of rental income.

At the beginning of September, 2009, tenants move into the new suite, three years and one month after the previous tenants moved out of the old suite.

The final reckoning — sort of

After Ray takes over the renovation, the drama that does exist involves money, and the players are my wife, me, and our line of credit.

Ray and his crew are not cheap. The contract with Ray is straightforward. Rather than a set price, he charges the hourly rate that he pays his own workers, the invoice amount submitted by the subtrades such as the plumber and the electrician, the contractor price for materials (typically somewhat cheaper, and sometimes significantly cheaper, than the retail price), and then adds 15% of everything for his fee. This arrangement is spelled out in advance, written down on a single sheet of paper, and Ray never deviates from it for the entire duration of the renovation.

Ray’s two senior workers on the job, skilled and experienced guys, one of whom used to run his own construction company, are $65 an hour each. A more junior worker is $37.50 an hour, and a labourer $20 an hour. The senior workers also negotiate an hour of paid travel time a day, each, because they live in distant suburbs and could easily find work much closer to home. We’re not that thrilled about the travel time, and Ray understands and gives us a choice of using different workers who wouldn’t be paid travel time, but he feels that the two workers he’s recommending would have the best mix of skills for our job. So we agree. Although it’s September 2008, and the global financial crisis is in full throttle, with shocking news coming out of the US almost daily, it seems the market in Vancouver, at least for builders with good reputations, still bears a lot.

Earlier in the year, we meet and become friends with a neighbouring couple who live in their mostly renovated 1920s builder’s special about a block away. They’ve done a great job on their place, working at it on and off for the past decade, often by themselves, but during one phase, that included raising the house and pouring a new foundation, hiring a construction company. They tell us that when a construction crew is going gangbusters on your place, to expect invoices equaling about $10,000 a week. We’re shocked, but that turns out to be exactly what Ray and his crew cost us. During the initial, intense, ten-week period of work, Ray presents an invoice every two weeks, and the average amount is almost exactly $20,000. To begin with, I’m secretly horrified. I can’t believe the size of the cheques we’re writing against our home equity line of credit. I’ve never seen or written cheques this large, with this frequency, in my life. When we renewed our mortgage in October 2006, we had an outstanding balance of $193,000, and a home equity plan that allows us to borrow up to $375,000, including the mortgage balance. So initially we have up to $182,000 available to borrow for the renovation, which in 2006 seemed like a huge sum. Now, in 2008 and 2009, I’m worried it won’t be enough. And if it hadn’t been for our aggressive lump sum payments against the mortgage and the renovation costs throughout the 2006 to 2009 period, it wouldn’t have been. In fact, toward the end of the project, we had to use a smaller, personal line of credit to pay three of Ray’s invoices. By 2009, the bank probably would have given us an increased limit on our home equity line of credit, but that wasn’t something we were interested in, and the interest rates on the two lines of credit were comparable.

By the end of 2008 I’m worried enough about the economic crisis and the ultimate effect it may have on Vancouver house prices, which at this point have been crashing for six months, and credit availability based on home equity, that I seriously consider calling off the renovation, or postponing it indefinitely. We have heat, we have a laundry. Without too much additional expense and effort we could insulate the basement ourselves, and bunker down to weather the economic storm, focusing strictly on debt reduction. We wouldn’t have a rental suite generating income, just an unfinished basement beneath us, but we also wouldn’t be racking up tens of thousands of dollars of additional debt. I float the idea of putting the reno on hold with my wife. She understands the increased risk we’re now facing, but doesn’t want to lose Ray. We’ve been lucky to find him, and have already spent almost four months waiting for his crew to become available, not to mention the previous two years of grief, so letting him go now, without having the benefit of his services, would be painful.

We decide to stay the course. I do a little mental calculation that helps calm my nerves. My conservative estimate of the market value of our house before prices begin falling in 2008 is $700,000. Based on my reading of the doom blogs, a worst case scenario real estate crash in Vancouver might chop prices in half, which would leave us with a market value of $350,000 — which is almost exactly what we paid for the house in 2003, a year into the real estate boom. As long as our overall debt level doesn’t climb much beyond $350K, the possibility of falling into negative equity, and perhaps having trouble when it comes time to renew the mortgage in 2011, is pretty remote.

So, on the financial side, that was the line we drew in the sand. Very belatedly, we had a budget. Not a proper budget, with broken-down line items, and maximum expenditures for different components of the reno — we never had that — but at least a ceiling. And I think having that ceiling did put the brakes on when it came to contemplating renovating the entire house at one go. We decided to phase the renovation because of renovation exhaustion, but also because of growing financial prudence.

We didn’t keep a running total of the cost of the renovation as it was ongoing — although we should have. I had a rough idea, just by looking at the balances on the two lines of credit. But those balances were somewhat lower than the actual amount we spent because of all the lump sum payments we made along the way. I did realize at a certain point that our initial estimate of a maximum $100,000 price tag was laughably naïve. I only put together an actual accounting of all the money we spent on the renovation as a necessary companion to writing this series.

Here’s the breakdown of the costs after Ray took over, the per-episode totals, and the grand total:

Ray and crew: $161,000 (14 invoices)
TK final inspections: $525
New windows (materials only): $4800
Cabinets, counters, cupboards for kitchen and two bathrooms (materials and installation): $8445
Attic insulation: $1000
Tile (materials only): $585
Hardwood flooring (materials only): $2670
Blinds (suite only, materials and installation): $686
Suite appliances: $3000
Miscellaneous (tools, building materials, paint, hazmat analysis, mirrors, small bathroom fixtures, etc.): $3394
====================================
Episode 8 total: $232,066
Episode 7 total: $32,449
Episode 6 total: $32,572
Renovation grand total: $297,087

When I first tallied all the reno costs, I was somewhat dumbfounded by that grand total. I knew we’d gone well over $200K, had maybe spent $250K, but I certainly didn’t think we’d spent almost $300K. I’d moved a long way from that person in his 20s and 30s scrutinizing and researching every hundred-dollar purchase, grubbing around flea markets and the Sally Ann, to someone who could lose track of $50,000.

I began to worry we’d overpaid. And in a certain sense, like everyone else recently buying or renovating a house in the city with the most expensive real estate in Canada, and probably among the highest construction costs, of course we overpaid. But had we overpaid in relation to other Vancouverites? Our friends with the renovated builder’s special kindly shared their renovation numbers with us: $380K spent on renos over thirteen years, “and that doesn’t count the massive amount of sweat equity.” Other friends, less than half a block away, are just a few weeks into a complete top floor renovation, from the studs out, of their 1950s bungalow, a house about 25% larger than ours. Their estimated cost is $200K. And they’re not replacing the drainage, the basement slab, the furnace and heating ducts, the windows, or the siding — big-ticket items for us. So no, we probably didn’t overpay in Vancouver terms. But the question remains, just what are ‘Vancouver terms’?

The house looks great. We’re very happy with the results, if not the painful journey to get there. I just wish it hadn’t cost us $350K to buy, and another $300K to renovate, with another $60K to $100K we might spend renovating the upstairs kitchen and the remainder of the upstairs, depending on how ambitious we get with altering the layout. I’ll go even further, and say that it shouldn’t have cost us that much money to purchase and renovate, but that’s something I’ll discuss in an upcoming episode. Admittedly, we wouldn’t have spent as much money if we weren’t putting in a rental suite, with all the additional infrastructure required to created a completely self-contained second living unit. And even though that portion of the renovation is something of an investment, or a business undertaking, it’s an investment that’s going to take a long time to pay itself off. The $1300 a month rent we’re now charging is only an additional $700 a month on top of the $600 we used to charge, and in the process of rebuilding the suite, we had a 37-month interruption in the revenue stream. At $700 additional rent a month, it will take us 32 more months — until April 2012 — just to make back the lost revenue. If, at the outset, we’d had a more realistic idea of what the numbers were going to be, it’s perhaps not a venture we would have embarked upon.

I’d include before and after pictures of the outside of the house if I wasn’t trying to preserve a certain amount of anonymity. The anonymity has more to do with protecting the identities of the various bad actors I’ve described, than my own identity. If my identity is generally known, that’s one less degree of separation. What I can share is a before and after of the suite kitchen

Kitchen before

Kitchen after

Next episode

Part 9: “So You Want to Buy a House and Fix It Up? Ten Suggestions for Survival”

My wife and I learned a lot of things the hard way during the renovation of our house. If you’re planning to buy a house and fix it up, or if you already own a classic dump and you’re itching to start smashing out walls, here’s a list of ten suggestions that might save you some grief…

Financial details

From 2004 onward, all mortgage and LOC balances are as of 31 December of the year in question.

2003
Asking Price: $355,000
Sale Price: $355,000
Down payment: $88,750 (25%, ergo, no CMHC insurance, representing thousands of dollars of additional cost)
Mortgage (at purchase, Sep 2003): $266,250
Terms: 3 year fixed at 4.00%, 18 year amortization, bi-weekly payments
2003 Property Assessment (estimate of market value on July 1, 2002): $260,600
2004 Property Assessment (estimate of market value on July 1, 2003): $330,500
Equity based on assessment: $64,250

2004
Mortgage principal: $247,330
Terms: 3 year fixed at 4.00%, 18 year amortization, bi-weekly payments
2005 Property Assessment (estimate of market value on July 1, 2004): $420,000
Equity based on assessment: $172,670

2005
Mortgage principal: $201,829
Terms: 3 year fixed at 4.00%, 18 year amortization, bi-weekly payments
2006 Property Assessment (estimate of market value on July 1, 2005): $461,000
Equity based on assessment: $259,171

2006
Mortgage principal: $191,884
Terms: 5 year variable at Prime minus .75%, 25 year amortization, bi-weekly payments
HELOC balance: $4,291
HELOC interest rate: variable, at Prime.
2007 Property Assessment (estimate of market value on July 1, 2006): $570,000
Equity based on assessment: $373,825

2007
Mortgage principal: $183,063
Terms: 5 year variable at Prime minus .75%, 25 year amortization, bi-weekly payments
HELOC balance: $49,410
HELOC interest rate: variable, at Prime.
2008 Property Assessment (estimate of market value on July 1, 2007): $639,000
Equity based on assessment: $406,527

2008
Mortgage principal: $173,171
Terms: 5 year variable at Prime minus .75%, 25 year amortization, bi-weekly payments
HELOC balance: $61,161
HELOC interest rate: variable, at Prime.
2009 Property Assessment (estimate of market value on July 1, 2008): $672,700
Equity based on assessment: $438,368

2009
Mortgage principal: $160,929
Terms: 5 year variable at Prime minus .75%, 25 year amortization, bi-weekly payments
Second mortgage principal (HELOC converted): 184,000
Terms: 5 year variable at Prime minus .20%, 13.5 year amortization, bi-weekly payments
HELOC Visa: $18,544
HELOC Visa interest rate: variable, at Prime plus 1.00%.
Personal LOC: $5,763
Personal LOC interest rate: 2.25% (promotional rate), 4.75% starting in April 2010
2010 Property Assessment (estimate of market value on July 1, 2009): $662,700
Equity based on assessment: $293,464

2010 (to 31 July)
Mortgage principal: $153,960
Terms: 5 year variable at Prime minus .75%, 25 year amortization, bi-weekly payments
Second mortgage principal (HELOC converted): $176,565
Terms: 5 year variable at Prime minus .20%, 13.5 year amortization, bi-weekly payments
HELOC Visa: $23,319
HELOC Visa interest rate: variable, at Prime plus 1.00%.
Personal LOC: zero
Personal LOC interest rate: 2.25% (promotional rate), 4.75% starting in April 2010
My estimate of 2011 Property Assessment (estimate of market value on July 1, 2010): $723,000
(using REBGV’s July 2010 figure of +9.2% YOY for Vancouver East detached)
Total debt: $353,844
Equity based on assessment: $369,156

Spot the Speculator #10 – Albertan Example of ‘Speculation Disguised As Normal Behaviour’

From ‘Getting real: Bull run coming to an end for Canada’s housing’ by Garry Marr, Financial Post, 6 Aug 2010 -

“Erica and Jeff Manger never thought the price of their house could drop. The Alberta couple bought a condominium in the Rockies resort town of Canmore three years ago and when they decided to move in 2008 to Sylvan Lake in Alberta, where they could afford a detached home, they kept the condo as an investment. “It never occurred to us that we wouldn’t be able to sell for what we paid,” says Ms. Manger. “People were making $100,000 [on paper] a year on their condos.” Now they’d be lucky to get the $315,000 they paid for their condo, even though it may have fetched $345,000 in 2008 when they were thinking about selling it to help pay for their new home. Instead, they’re getting $1,100 a month in rent for an investment that costs them $1,800 a month to carry and isn’t going up in value.
It gets worse. They have to sell the house in Sylvan Lake because Jeff, who is a helicopter pilot, is looking for a better location for work. They paid $375,000 for the house and fixed it up. Not even counting Jeff’s labour, the couple spent another $30,000 on supplies. “We tried to sell it and put it up for $409,000. We lowered it to $385,000 when we hired a realtor, but that didn’t work,” says Ms. Manger.“We lowered it again and now we are down to $374,900,” she says about the home that has now been on the market for two months. “We’ve lost all of our downpayment, which was almost $30,000.”

Vancouver Bank Employee – “The senior executive explained that the banks have leveraged up the Canadian citizenry to unsustainable levels.”

Here a banker gives precisely the same warning that a small minority (us included) have been sounding for some time — Canadian citizens are dangerously overly indebted. The unwinding of this debt, as implied by the banker’s intent, will lead to a deflationary wave, where consumers have far less money at hand. The Canadian asset class most vulnerable to such a change is real estate, and Vancouver’s RE is the most vulnerable in the country. – vreaa

Rob, a Vancouver bank employee, wrote an e-mail to Garth Turner that was discussed at greaterfool.ca [19 July 2010]. Here’s the extracted anecdote -

“I am a certified financial planner working for an excellent Canadian bank in Vancouver. Although the mantra by branch managers to the Account Managers and bank staff is still (to quote what I heard from one of them) “park your morals at the door”, what is important is that there is acknowledgment at the top of the house that things will begin to change. I had a meeting yesterday with a senior executive out of Toronto who said some staggering things that I thought I would NEVER hear from anyone in the top echelons of the banking industry.  He explained that executives have been meeting together and advising the board of directors that what the bank has been doing for the last 5 years to generate profits cannot continue.  He explained that the banks have leveraged up the canadian citizenry to unsustainable levels. He said that going forward (here is the best part) we have a MORAL obligation to provide the right advice to Canadians regarding their spending habits, budgeting, retirement, investing and borrowing desires.  I was shocked!  This was the first time I had heard a Banker expose the truths of what is going on in Canada right now and take ownership of the fact they have been dangling the carrot and enticing the population into perpetual debt.”