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 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.

11 responses to “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.”

  1. It’s certainly been said before… but this cannot end well. 😦

  2. 4SlicesofCheese

    It is scary to think about my generation and how we will fund our retirements.
    My dad literally came here on a boat with nothing. He is close to retirement and has a decent pension, paid off house worth 1 million, hundreds of thousands of investments and rrsp’s, 3 kids through post secondary education, he even already took care of his and my moms grave land. All this with about 45-50k income a year. Which has not grown much since I was a kid.
    So he is pretty well off, but why? Because his housing costs did not take up 60-70% of his income.

    If his house lost half of its value he would still be in very good position. Will we be able to say the same about my generation when we come to retire, or will we have our retirement all in one asset, real estate.
    Let anyone try to achieve what he did today. I look at my prospects and I would be lucky to have what he has when he retires.

    • Ornamental Tepee Usury

      that’s why i just go skiing as much as possible.

      there is no future

      no future
      no future
      for you! (spot the song)

      • 4SlicesofCheese

        Or rent in Vancouver and invest and buy elsewhere like I have been doing 🙂

      • God save the queen
        We mean it man
        And there is no future
        In England’s dreaming

        No future, no future,
        No future for you
        No future, no future,
        No future for me

        No future, no future,
        No future for you
        No future, no future
        For you

  3. Scary when they “expect” to sell the development for $3MM+. That’s a mighty big risk, spec building an expensive new home that you hope people actually want.

    Also if they’re doing a HELOC, the rules don’t change on that until mid-April. That will curtail some of the capital available for this specific type of play. It will be interesting to see low non-amortizing LOC rates behave after the switchover.

  4. From The Equedia Weekly Letter,

    I believe US real estate, while not at its complete bottom, is starting to look like a good investment. Even with dismal housing numbers recently released, the prospects for long-term growth are in place.

    Given a long term time frame investment of 5 years plus, slowly dabbling with smart investments in the sector now will return great rewards. The housing market will not bring the US back to economic equilibrium now, but prices should once again rise along with inflation.

    The Canadian markets, on the other hand, has topped in my opinion and I expect a continued overall decline over the next 5 years as interest rates increase and over leveraged mortgage owners come under water with higher payments.

    CMHC will tell you that we’re going to see growth this year and the next, but they are their own worst enemy. They’ll tell you the housing market is fine and dandy because they don’t want you to panic. As I have said before, there is conformity amongst fear in everything we do. If buyers panic, housing prices drop dramatically and we end up with have a major housing crisis.

    While the CMHC has much stricter “internal” guidelines for its lending practices than Fannie Mae or Freddie Mac, Canada’s largest mortgage insurer has still pushed its limits by encouraging mortgages that are well beyond the means of a borrower – especially as interest rates rise in the coming years.

    The CMHC is the only major financial institution in Canada not regulated by OSFI (Office of the Superintendent of Financial Institutions.) Furthermore, like any insurer, the more mortgages they back, the more money they make. There are just too many borrowers that have overleveraged themselves just to buy a dismal 750sq ft apartment for half a million dollars. Income growth is nowhere near the growth of property values, forcing new families and first time home buyers out of the market. This simply cannot go on.

    While the CMHC says everything is okay, their actions are saying otherwise. As of last week, the maximum amortization period for a government-insured mortgage will be lowered from 35 to 30 years. The debt-to-income ratio of Canadian households have surpassed that of the U.S. for the first time in 12 years, climbing to over 146%.
    Canada is now at the top of the 20 OECD nations in terms of debt-to-financial assets.

    While Canada may not experience a catastrophic pullback like the US, a strong pullback is nonetheless inevitable. If you’re a Canadian, be careful. Interest rates will rise and housing prices will go down from here.

  5. When the bubble pops, there will be much argument about where the blame lies: with banks and the RE industry, with the government, with foolish buyers and speculators.
    The answer is all the above. You will hear stories about people like this who are now “homeless” in old age. How could the world be so heartless? the articles will imply. Just remember that many are doing it to themselves.

  6. Ornamental Tepee Usury

    yes but they know nothing!

    choice without context is no choice at all!

    before you walk into the loan office, the bank should be handing out copies of “the irrational madness of crowds” or whatever that book is.

    i recommend “the mass psychology of fascism” by Wilhelm Reich, but that’s just me.

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