“Beth is 31, single again and eager to chart a new financial course. Not long ago, she started a new job in the forest industry with higher pay, so her future’s looking bright.
She has a condo in Alberta that she bought at the peak of the province’s real estate boom in 2007 and that she rents out for near break-even. Last year, she bought a modest home in British Columbia.
“I have worked really hard to get where I am and my career is starting to take off,” says Beth. “I want to ensure my financial independence and make some smart moves with my money while I am still relatively footloose and fancy-free!”
She has two mortgages, lines of credit and other consumer debt that she wants to pay down.
“Should I aggressively pay down debt or put more money into my RRSPs and TFSA?” she asks. She wants to sell the Alberta condo but would likely lose money if she did so now. She’s also thinking of expanding her B.C. home and maybe – just maybe – buying a cabin or some land in the Cariboo-Chilcotin area of B.C.”
– from ‘Lots of real estate, lots of debt’, Dianne Maley, G&M, 2 Sep 2011
And from the comments below the same article:
“People seem to think debt is a bad thing. That’s old fashioned thinking and not necessarily true. A mortgage is in fact the cheapest source of capital you will ever find.” – Boom Boom Pow
“The only kind of debt worth having is for stuff that appreciates, like real estate.” – Holden McGoyne
“I don’t see the sense in selling the condo immediately. She said she will likely lose money on the sale so why not just keep renting it out and have the tenants pay down the mortgage and build up some equity?” – Katherine R.
In Canada, we have lived through a decade where taking on as much debt, buying as much RE as possible, and then doing nothing but waiting, has paid off handsomely.
Risk takers have been rewarded, the prudent have been punished.
That period has come to an end.
RE prices have stagnated or are dropping; Debt is becoming a liability rather than a tool.
We are ‘deleveraging’; a ‘virtuous’ cycle is turning ‘vicious’.
The majority of those who are sitting on overvalued properties haven’t yet gotten the news. Their hope for further easy gains clouds their judgement.
When prices begin to show substantial weakness, they will be faced with the stark reality, and will sell. That selling will be but one of the factors that causes the implosion of the speculative mania. Maybe Beth will decide to sell right now, at an aggressive low price, and maybe she’ll be lucky enough to get out; alternatively maybe she’ll end up with hordes of other sellers waiting hopefully for a second bus.
Beth, along with thousands of other apparently innocent civilians, is a RE speculator.
By the end of the bust, all speculative activity will have left the market.