“We live in a penthouse condo purchased for $800K in 2007 which we’d have trouble selling for $600K today. Who cares? I intend to leave here in horizontal mode. This place siphoned off less than a fifth of our estate, in cash.”

“We live in a penthouse condo purchased for $800,000 in 2007 which we’d have trouble selling for $600,000 today. Who cares? I intend to leave here in horizontal mode. This place siphoned off less than a fifth of our estate, in cash. With no mortgage to pay and regular dividends flowing in, we can afford to gaze at the snowcapped coastal mountains and try to invent ways to spend money. Life is good, and we earned it by saving every spare penny during the first half century of our lives. Living below your means is the key to lasting happiness. Debt is slavery.”
David at greater fool.ca 9 Apr 2012 10:16pm

David is correct. Owners in his position should not worry about a possible housing crash.
His net-worth is $4MM, and a 50%-66% drop in his $800K condo (a paper drawdown of $400K-$533K) would only represent a drop of 10%-13% of the value of his assets, and would likely not excessively interfere with his financial wellbeing or comfort in retirement.
His leverage to RE is 0.2, meaning that if RE drops 50%, his total net-worth drops 10%.
He can afford to own a $800K property, should not worry about the RE market, and should simply get on with his life.
But, how many owners in Vancouver are in David’s position? Only a very small minority.
Many longtime owners have ratios close to 1 (meaning that their RE holdings represent most of their net-worth).
And a large number of owners in Vancouver have ratios of >1, and a good percentage have ratios far higher, 3 or 4 or 5, or even 10 or more.
Remember, a young couple buying with 5%-down and no other assets has a ratio of 20. If prices drop just 5%, they lose everything.
This ratio is crucial in estimating the effects of a bust on individuals and on the community.
In a significant housing price collapse, many will see all of their accumulated wealth completely wiped out.
– vreaa

21 responses to ““We live in a penthouse condo purchased for $800K in 2007 which we’d have trouble selling for $600K today. Who cares? I intend to leave here in horizontal mode. This place siphoned off less than a fifth of our estate, in cash.”

  1. Hey my GE stock didn’t drop to zero either. But I can’t live in it and it doesn’t give me a view of mountains 😦

    OTOH GE doesn’t make me attend strata meetings.

    • yes, of course. but does it give you pleasure? :o.
      seriously, there is a premium on ownership in vancouver. whether to pay it or not is a personal decision – so there is no right or wrong. however, there are a lot of people who just don’t realize they are paying big premiums.

  2. I want to know how someone accumulates $4M with a strategy that involves taking a 50% hit on every investment.

    • For this individual, the condo is not an investment, so the risk of a 50% hit doesn’t apply in the same way that it would regarding investments..
      For them, the benefits of owning (the inverse of the inconvenience of renting) are worth the risk of a 10% drop in net-worth.

  3. Being able and willing to “mature out” the investment solves a lot of liquidity and mark-to-market concerns, kind of like buying a weird bond with only 3 years left.
    For buyers in their 20s and 30s, liquidity/MTM might start to matter. For young buyers of one bedroom 600 sqft condos it’s probably the only thing that matters.

    • I like to think of it more that “David” traded $800,000 for a condo. Now someone has his $800,000 and he has a condo. The epitome of the consumer surplus.

  4. This begs the question… where do you get a penthouse condo in Vancouver for $600K?

  5. Renters Revenge

    I wonder if David will still be so sanguine about his loss when we hit 70% off?

    • You’re right, it’ll probably sting… but he’ll still be okay. Think of the dozens of owners for every one ‘David’ who will be devastated by a drop of 50%.

      • Renters Revenge

        I know a lot of people who will be completely devastated by flat prices. They just don’t know it.

  6. David Here. I’m in Nanaimo and lovin it. A local charity will sell my condo after I have departed this life in horizontal mode, so it’s current value is of no concern to me. On the other hand, I monitor my other investments carefully.

    • Renters Revenge

      I think the point of VERAA’s post is that your situation is far from normal and the vast, vast majority (in Vancouver environs, at least) have the value of their personal residence as a critical and central component of their financial planning. Most people CANNOT honestly say, as you can, that the current value (& trend) of their home is of no relevance to their financial health and future.

      Thanks for posting and clearing up where the $600k penthouse is located – Nanaimo makes more sense! Congratulations on your personal financial situation, and well done! Any investing advise and words of financial wisdom for those of us a few years behind you?

  7. hmm….what about the eventual repair bill? He sounds like he’s 65 and plans to live in the condo until he dies. Assume the condo is new in 07 and he has at least 20 years left, given the current condo construction quality, I wonder what the repair bill is like over the next 20 years?? Might be another $800K going into it!

  8. Paul Streppel

    On top of Asian speculation, it’s people like David, flush with Estate money, that have flooded the Vancouver housing market. Indifferent because the money was essentially free, despite the expression ‘earn’, no where does David acknowledge being on the right side of debt inflation during the years prior to 2007. Easy come, easy go.
    Good luck David, enjoy your mountain view

  9. Carioca Canuck

    Well, I’m sorta like this guy myself. except that his money is dead and illiquid whereas mine is not. Wifey and I have $500K of cash assets in foreign government bonds yielding a 10% coupon annually. No debt whatsoever, and we rent a luxury condo for about 1/2 the cost of ownership, even with today’s low rates, here in YYC.

    Why buy indeed………………………??? After all, when you spend about 6 hours a day awake in the place and 8 hours asleep you’ve got to be an idiot to buy a roof over your head.

    AT ANY PRICE

  10. Carioca Canuck, Canadian income taxes must take a large chunk out of your $50,000 a year. The difference between renting and owning is choice. Buyers have a choice of anything on the market – that they can afford – whereas renters must take what’s available and it’s unlikely that would include the finest units. If I’d rented I’d probably still be staying in a duplex near the hospital instead of in a luxury condo facing south on the top floor of one of the best buildings in Nanaimo. No way this unit would ever be for rent.

    • Over a 6 month span the amount of rentals on the market are probably pretty close to the selection of units available to purchase. The difference is rentals usually only stay on the market for a month or so while units to purchase will last a lot longer than that. There are plenty if high end rentals available (in Vancouver at least), like this one:

      http://www.vancouverluxuryrentals.com/luxury-rentals/vancouver-bc/luxury-yaletown-penthouse-with-600-sf-ft-rooftop-2697

      The benifit of renting is that you can move easily if you want, but you are also at risk of being kicked out should the owner decide to sell. Like you said, it is all about personal preference.

    • Carioca Canuck

      And my wife and I pay even more tax on our 6 figure employment incomes. But so what. Does that mean we shouldn’t work too ?

      ROFLMAO…….

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s