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.”


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

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

  1. What kind of shit management consultants make a dual after tax income of $2600 per month? Is that a typo? Were their services rendered to Nortel or perhaps JDS Uniphase?

  2. 435K on a secured line of credit?

    Wow, Capital Direct really is Money Mart for homeowners. No wonder so many people are praying Carney doesn’t touch the BOC’s rate…

  3. Yeah, note we used the ‘RE_ATM’ tag for this post.
    This couple have been prudent enough to save almost $1M on the side. Those savings would probably have been higher if they didn’t have the house gaining value as it has (in other words, they very likely spent more and saved less because they knew that they were accumulating wealth in the value of their house). That effect also results in more of their net-worth being in their RE than in more normal periods.

  4. Why do these people spend more than they earn? It is really simple – you cannot spend what you don’t have. What do they think is magically going to happen, the great gazoo is going to sweep in and pay off their debt?

    The boomers continue fleecing our country. These are the types that will be first in line crying for govt handouts when the market collapses.

  5. Nearing retirement, living off of a line of credit, spending more then they earn, using the house as an ATM…

    I believe this is known as A Very Bad Idea.

  6. Ralph Kramden

    Sell now. Get out. You will have less stress and actually have money. Once again, at retailer, watched woman come up short on a 6 dollar can of cleaning something. The guy next in line slipped her a buck, like a real mensch, slyly. Nice thing to see.
    An alarm bell should be ringing.
    Many folks live on their HELOC and plastic.
    God Help Them.

  7. but what a problem to have. if they sell, get rid of all their debts they would still be in better positions than most renters.

    • Balderdash. You are assuming that renters don’t put the money they save on not paying a mortgage / not paying for house upkeep into investments. Just because we’re renting doesn’t mean we’re stupid.

  8. These people are financially illiterate and have a massive cash flow problem.

  9. Note the financial advisor didn’t suggest renting. It appears there’s more stigma than ever associated with being a renter, which makes sense given that practically every renter who could manage it has bought instead. Those who are left renting at this point either find home ownership still out of reach in spite of current lax lending standards, or have chosen it deliberately. I wonder what proportion of renters are in each category?

    Have the “quality” of renters gone down significantly? (“quality” by a landlord’s definition of tenant desirability) Do people think we’re on welfare because we rent? 🙂

    I often tell people that we rent, and surprisingly have not gotten gasps of horror, clutching of their children away from me, or looks of pity, but I still feel the need to explain it as a deliberate choice. Wish I were as brave as you, TPFKAA 🙂 I think of it as trying to make others see that renting can be a viable, stable lifestyle choice, undertaken by normal families.

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