“I don’t know anyone who actually pays down a mortgage. As soon as the assessment indicates an increase in “equity” it is pulled out to buy toys.”

Posted on 4 January 2012 | 14 Comments

“I don’t know anyone who actually pays down a mortgage…as soon as the assessment indicates an increase in “equity” it is pulled out to buy toys.”
– T at VREAA 21 Dec 2011 1:34pm

This entry was posted in 05. Where do Buyers get the money?, 08. Overextended Buyers, 14. Social Effects of the Boom, 15. Misallocation of Resources and tagged Anecdotes, British Columbia, Bubble, Canada, Housing, Real Estate, Vancouver. Bookmark the permalink.

14 responses to ““I don’t know anyone who actually pays down a mortgage. As soon as the assessment indicates an increase in “equity” it is pulled out to buy toys.””

Renters Revenge | 4 January 2012 at 7:36 am | Reply

Yes, it all works so nicely – until it doesn’t. We are hitting the wall:
Idea Factory | 4 January 2012 at 9:27 am | Reply

Here’s what happens when the home “equity” punch bowl gets pulled away:

Huge loss in home values cratered the Bay Area economy http://www.mercurynews.com/real-estate-news/ci_19656382
space889 | 4 January 2012 at 9:36 am | Reply

hmm….yet everyone I know always said they plan, no will, pay off their mortgage before the 25 or 30 or 35 term.
- bubbly | 4 January 2012 at 11:36 am | Reply
  
  Everyone I know always says that they will sell with profit in 2, 3 or 5 years. No need to pay down the mortgage.
bullwhip29 | 4 January 2012 at 10:58 am | Reply

The timing of this post couldn’t have been better. First thing yesterday morning I got a call from a long time friend seeking some advice after discovering the assessed value of his home had actually dropped by a surprising 6.9% (and not spiked by the 15-20% he had anticipated). To be honest, there wasn’t much I could say. I wish I was making this up. Perhaps some of you might have some thoughts on this? I wonder why cases like this are never published in the weekend FP? Anyway, this is his situation in a nutshell…

(1) Bought new cookie cutter style home in questionable location in Maple Ridge, BC in spring 2009 for $509,250 (assessed at $494,000) with 10% down. First time buyers, mid to late 40’s, both are still working and earn average salaries. Husband borrowed max from RRSP for DP leaving him with low 4 figure balance in RRSP. Ditto for wife, except for the fact that her RRSP now has a zero balance and that a loan (not yet paid off) was taken out 2 yrs ago to make a portion of that RRSP contribution in the first place. The rest of the DP came from savings etc and whatever other funds they could round up. Couple has no other assets, investments, savings, TFSAs

(2) Somehow established $50,000 Heloc in 2010 with home assessed at only $506,000 (but appraised at much higher valuation not surprisingly). Couple used bulk of funds to complete “unfinished” basement while the rest went to VISA, The Brick, Best Buy and the tax man. Unfortunately, the basement was converted into the dream “man cave” complete with wet bar and jacuzzi, not a potentially revenue generating 2br suite.

(3) In Dec 2011, this couple was in the process of working their situation out (effectively kiting their debits around again) by going back to the bank and borrowing more (using a hypothetical valuation of $600,000). The banks, not surprisingly, declined their application this time around.

(4) Jan 2012… assessed value comes in at $471,000 but is likely way lower (ie. less than balance owing on mortgage) given that this was the value as of July 2011 before the second half downturn. Ouch.

(5) Reality check time:
-banks have shut the taps OFF
-couple is likely underwater on mortgage
-both have to repay “after tax” cash back to their RRSPs
-wife has to repay RRSP loan
-both husband and wife have credit cards maxed out with $50k also owing on heloc

Now what???

Anyone???
- Makaya | 4 January 2012 at 11:43 am | Reply
  
  Can they still sleep at night?
- bubbly | 4 January 2012 at 11:45 am | Reply
  
  They could:
  A) Wait and apply again later, because real estate always goes up.
  B) Put the home on the market for the spring selling season and hope for a greater fool to buy. They should start with a high asking price to generate buzz, somewhere around $41.9 million – that should do it.
  C) Burn down the house and collect insurance 🙄
  D) Or totally unrealistic: Suck it up and try to living within their means.
- chubster | 4 January 2012 at 1:53 pm | Reply
  
  well, in europe you’re getting a daily stream of what happens when the funding mechanism for living beyond your means breaks down. best is iceland. default, liquidate everything, see where you stand, reset and move forward on firm ground. it’s not the end of the world. life will go on. or, attempt what the rest of europe is doing now. a decade or more of steady, creeping economic strangulation until the apparatus holding it together finally collapses.
- yltnboomerang | 4 January 2012 at 2:00 pm | Reply
  
  They can celebrate that their taxes could go down this year…unless all properties in Maple Ridge went down equally, doh!
  
  They should liquidate.
  
  Maybe storage wars will be coming to Vancouver in a years time? Man-cave storage locker.
armourb | 4 January 2012 at 3:56 pm | Reply

Looks like they are bankrupt.
Durr | 4 January 2012 at 9:05 pm | Reply

From work place colleagues, their equity usually goes to Canucks tickets.
This season though, the appetite for tickets has seemed to gone down a lot.

Interesting barometer.
- Makaya | 4 January 2012 at 9:19 pm | Reply
  
  That’s very funny and sad at the same time…
  
  Who would have thought: Canucks hit by local real estate market?
- vreaa | 4 January 2012 at 9:34 pm | Reply
  
  Weirder things have been suggested, or have actually happened.
  
  Is there a relationship between:
  Easy money -> Franchise revenues -> Player salaries -> Results?
  Could a housing boom help a local team?
  (Moneyball aside).
  - Royce McCutcheon | 5 January 2012 at 10:14 am |
    
    I’d definitely say the housing boom has helped build the Canucks into a winner, but I’d suggest an additional consideration:
    1) Aquilinis make lots of $ from boom as developers, landlords, etc.
    2) Aquilinis own Canucks (purchased in 2004, as prices started running up).
    3) Wealthy Aquilinis able to i) spend to salary cap (not all teams can do this), ii) spend for first class player amenities and travel (sleep trainers anyone?) to make team attractive destination, and iii) make package deals that allow the Canucks to acquire talented players while simultaneously taking on additional players that earned too much for cash-strapped teams and burying these players (and their contracts) in the minors (see David Booth trade). Eating salary like that is something many NHL teams can’t do.
    
    Before even judging individual players on the team, those facts alone position the Canucks to attract/retain talent more easily than many other teams in the league and I’d argue they’ve certainly helped to build a winner.
    
    For me, as a fan of the team, the good news is that the team has already been built to be a contender for at least a couple more seasons after this one, so there should be some decent hockey worth watching even if/when the housing market tanks.