Spot The Speculator #84 – “I live in Vancouver and own a condo in the heart of downtown. Bought it for $515K and only seen a slight increase in value in two years. Quite depressing. Is it a stupid idea to buy another?”

“I live in Vancouver and own a condo in the heart of downtown. Bought it for $515K and only seen a slight increase in value in two years. Quite depressing… If what you say is true about a 30% reduction, I would indeed lose almost all the equity I have which is made up of my down payment and two years of mortgage payments.
Is it a stupid idea to buy another property, maybe sub-500 sq ft for roughly $280K to rent out, with a 20% down payment and a locked in 3.29% 5-year fixed rate? With rate and market adjustments to come, if I am not borrowing 95% (though still 80% debt), am I in the same risk category? Or should I just wait until 2015 to snatch something up when prices are down?”

Sharon, as quoted by Garth Turner at 1 May 2012

Yes, it most likely is a “stupid idea” to buy another condo.
Crazy, eh?
But that’s what a bubble does, turns the citizenry into lunatics.
No profits on first condo, let’s increase our exposure!
Even the experience of the condo not rising in market price can’t erase the monomania acquired when all you hear is talk of ever rising prices.

PS (‘pre-empt scriptum’):
1. To pre-empt the inevitable one or two commenters who will say that Garth makes these anecdotes up, we say we disagree, and ask, why would he possibly do that?
2. To pre-empt those who say “yes-condos-will-go-down-but-detached-is-bullet-proof”, we politely disagree. All sectors are interdependent and will go down together; different precise paths, perhaps, but same destination in the trough.
– vreaa

88 responses to “Spot The Speculator #84 – “I live in Vancouver and own a condo in the heart of downtown. Bought it for $515K and only seen a slight increase in value in two years. Quite depressing. Is it a stupid idea to buy another?”

  1. To load up with that kind of leverage in this market (or any) is poor judgement. One might still want to look at buying into property to diversify assets from stock market uptick of late.

    • For most people in Vancouver “buying into property” means buying a home, and equates to forced non-diversification, as the majority of buyers then have all of their net-worth in RE, usually with leverage.
      Even many owners near retirement age have their entire net-worth in RE, sometimes with leverage.

      • For owners near retirement with low or no leverage it is just fine and dandy to have nearly all their net worth in their primary residence.

        I’d be very content with that.

      • I’d have to disagree; I believe that represents over-investment in RE, and that it is a remarkably dangerous position to be in. For one’s retirement health to be dependent on the value of one asset is risky enough; when that asset is arguably at the top of a very frothy cycle, even moreso.

      • If one were to sell or downsize now near retirement, where would you suggest that individual invest their money?

        You can only allocate so much to stocks near retirement and bonds are not really beating inflation. Sure, you could park in cash and hope it will be enough to survive on or hope for some wild swings in the market so that your cash suddenly increases in intrinsic value but that’s a leap of faith.

        Better to not fix what’s not broken if nearing retirement but that’s just me.

      • Bonds that trail inflation may still vastly outperform Vancouver real estate over the next five years.

        Going into retirement with all assets in one class is very risky unless you’ve got a very nice pension and the faith that it wont go bankrupt. You’re right that risk is elevated everywhere, but that’s a poor argument for putting all one’s eggs in real estate.

      • Also RE is a very illiquid asset to rely on for retirement. You can get a HELOC but then you have debt to service. Better off renting and having a million in the bank than owning a million dollar house and having nothing in the bank.

    • A stock portfolio would need to be six, maybe seven figures for the recent uptick to justify “diversifying” into Vancouver real estate. Sounds like the average Canadian.

      • On bonds, they may under perform if one buys now and the BOC raises rates.

        It is also a loss if inflation hits, which we can’t rule out.

        But bonds and RE have in common that they are fixed income assets, have the ability to generate cash flow and are extremely unlikely to fall in value to $0 unlike stocks.

        The difference is that one can enjoy their home but not a bond. So I stand by my view that if an individual in Vancouver now is nearing retirement and 80% of their assets are in their primary residence that it would be just fine.

      • Not to say they shouldn’t sell. Just that they needn’t speculate on a RE collapse and wherever they end up investing that capital.

        Should a seismic collapse of housing prices in Canada occur, there would be very limited investments that won’t be affected negatively.

      • “bonds and RE have in common that they are fixed income assets, have the ability to generate cash flow and are extremely unlikely to fall in value to $0 unlike stocks”

        It really depends upon the bond. RE has inflation adjustment built into earnings, a better comparison is a utility business, not a utility bond, IMO.

      • We said this before but so as to keep it simple, and to keep us focussed on the topic and hand:
        Our conjecture is that Vancouver RE will deflate against the loonie (cash).
        (Yes, other investments may be risky, but it is beyond the scope of this blog to determine investments better than cash. Obviously we have our own views on this topic, but that’s a whole other subject.)

      • Vreaa, are you saying that you prefer that commenters refrain from detailed discussion of non-RE investments?

      • Jeff -> No, not really.
        I suppose I’m saying that I’m not going to get into that too much myself!
        It’s a massive subject, and I don’t think we can really do it justice woven into an RE blog (do you?).
        At the same time, I do see that some people are so scared and uninformed about other investments that they stay with RE for that reason. To them, I’d say they should educate themselves.
        So I thought I’d keep it simple regarding my opinion:
        1. Cash will do a lot better than Vancouver RE in the years ahead while our bubble deflates. (So the BIG idea here is that Vancouver RE is overvalued and there will be a very big price correction; not a good place to have your financial future banked).
        2. Yes, there are strategies that will do better than cash; I’m not going to get into them, I think they’re too complex for an RE blog. For instance, I think such strategies are going to involve trading in and out of different asset classes at certain points (I believe that the values of various asset classes are going to fluctuate, a lot), and the vast majority of folks aren’t comfortable doing that. For them, point 1 may be all they need to know.

  2. Renters Revenge

    To answer Sharon…If you have less than 20% equity going into this correction you’re screwed.
    And in 2015 the last thing on your mind will be “investing” in real estate.

  3. Why are people discouraging others from buying? I want others to put as much $ into this as possible. The more people that get sucked in now the better for the ones that hold out.

    As a bear we should hope for more sales and more people borrowing..inflate this to the max…then BOOM

    • A fair point if all you’re looking for is the biggest crash on the planet.
      The folks who get sucked in late, as you know, will suffer the most.
      Besides, we’ve already had years of suckers buying, the pump is adequately primed.

    • Are you sure? Do you want more of your tax $ going in to bailing out CMHC and all those “suckers”, despite what our finance minister tells us?

  4. bailinginbc

    I have a cunning plan.

    I will buy real estate with 20% down so that when it goes down 30% I will only be 10% underwater (plus closing costs, commission and taxes)

    It is so cunning you could stick a tail on it and call it a weasel.

  5. No dear, the stupid idea was buying a $515K condo in YVR in the first place. “Insane” would be the correct description for the idea of overleveraging yourself even further.

  6. I do not recommend increasing exposure to Vancouver real estate at this time.

    • dr. j … have to say … love the way … u mold that clay
      as we watch crumblings small time (over here), there are strange parallels to watching crumblings big time (over there)
      … send the word – to beware – will be over – over here – over there – over everywhere
      and always – have a nice day 🙂

      • Mish is a financial advisor who I think just advocated shifting from gold to silver. Or something like that. This is just me, I have him on my RSS aggregator but most of his posts go unread.

        Unlike your comments, ee.

      • @dr.j. was the title “when all else fails …” that made me 1st think on parallels, noting cw’s data yesterday … mish/zh/biderman/others – i appreciate much the critical eye cast upon news, data, politicking … mish ~ straight up, zh more susceptible to o’s razor style guesswork (cue andy grove), biderman data^3 … what to do with it? what is actionable? each to decide for themselves … on your note re: mish to ag, noteworthy in that it’s not normal for him, he’s mainly value guy … btw, one more one i saw today on huff/zh – einhorn did a great one …
        economists can blah-blah all they want but they don’t manage $s … gotta read ideas of good frontrunners … ciao 🙂

  7. another phoney garth post

    • specialfx3000

      Agreed. The post itself sounds stupid.

    • 4SlicesofCheese

      My friend just sold his 1br condo near stadium, I guess worth around 350, and moved back in with his parents to save money.
      This is while he waits for his 1br condo he bought for close to 500k during per-construction completes.

      Yes, there are people doing this.

    • There are very definitely people doing this.
      Why some people think that there is any advantage to people like Garth to construct phoney anecdotes is puzzling.

    • Prove it.

  8. Garth doesn’t explain who “Sharon” is or where the quote comes from.
    I can spot these phoney posts a mile away. Always the same theme, same format.
    While you’re on his site maybe you can ask him about why he told his followers not to buy real estate, then buy his own, double his money and sell for a nice profit.
    Who are the suckers vreaa? Those that copy Garth’s actions or those that follow his words?
    Keep posting this Garth bullshit vreaa – but don’t expect all of us to swallow it.

    • Even if Sharon was fictional, we can’t discount that a segment of the market participants think that way. It would hopefully be a pointer for those who can identify themselves to Sharon.

      • “He advises that people keep their RE holdings to (90 minus age)% of net-worth”

        this is another ridiculous Garth premise.
        So at what age do you commence buying real estate? I don’t know anyone who didn’t put their life savings into their first purchase – the formula is blown out of the water with one’s entry to the market. Garth is probably the only one on the planet who fits into his bizarre formula. But I guess he’s able to meet his criteria after making 500K profit through the sale of his 3 year property investment.

        And what is Garth suggesting here? That people put their money into equities? I have enough of my retirement money in that casino already.

        Honestly vreaa, do you really buy what Garth is selling you? I have a higher opinion of your intelligence than that.

      • f1 -> “I don’t know anyone who didn’t put their life savings into their first purchase”
        Let’s guess, you live in Vancouver, right?
        Besides, it’s a completely different thing when a couple in their early 30s put down $20K on a $100K home (breaking Garth’s rule if they have no other savings, but, OK), cf a 40 something couple putting down their entire savings of $250K on a $1.5M home (hell of a risk).
        (Thus our ‘guidelines’ are different from Garth’s rule.. see elsewhere. The 20K couple could handle a price drop; the 250K could be devastated by one).

        f1 -> “And what is Garth suggesting here? That people put their money into equities?”
        See our statements elsewhere about not making any calls about any asset classes other than Vanc RE vs Cash.
        Equities are not the only alternative to Vancouver RE, don’t confuse the issue at hand.

        f1 -> “Honestly vreaa, do you really buy what Garth is selling you? I have a higher opinion of your intelligence than that.”
        Another wonderful troll performance, f1.
        Nobody is buying anything from Garth here, we’re talking about his current call on housing, and I happen to agree with that (in fact, i think he is overly conservative in his price drop estimates). This doesn’t mean we agree with him on all else. Have you the “intelligence” to see the difference?

    • For the record, formula1 is perpetuating rumour with this comment.
      I have not studied Garth’s past calls in any detail, nor do I agree with all of his current advice. What I do know is that, even now, he does not say that everybody should sell all of their real estate. He advises that people keep their RE holdings to (90 minus age)% of net-worth. That means that individuals with high net-worth can own their homes comfortably, and those with even higher net-worth can also hold investment RE.
      If you can find a link to a quote of Garth’s saying in 2009 that everybody should sell all RE that they own, while at the same time he was buying a house, then, yes, you can call him a hypocrite. But can you find such a recommendation? I think Garth was pretty much saying the same thing then that he’s saying now… one shouldn’t be over-invested in RE (which covers the vast majority of Vancouver owe-ners, as we know).

      As I described in a prior comment, I hold pretty much the same position now but frame it in a different way (quoting myself from comment on 1 May 2012):

      “It’s fine to buy a personal residence if the dropping of that property’s price by 50% (or more) would not result in significant damage to your financial future.
      In other words, somebody with total assets of $2M could perhaps afford to buy a home for $400K, because the drop in value of that home to $200K would be painful but unlikely to cause too much future pain.
      You’ll note that using these parameters we’d judge that the vast majority of Vancouver buyers are taking on too much risk: Most are worth substantially less than $2M and are buying homes worth substantially more than $400K.
      In fact, most have more than their entire net-worth in their homes, and a drop of even 25% will completely wipe out many. Even those who have ‘low ratio’ mortgages are still leveraged to the RE market.

      So, I don’t know of any bears who say that under no circumstances whatsoever should one own RE, just that, if one does, one should be able to afford the consequences of the downturn that is likely coming.”

      • Garth is selling fear and you keep coming back for second helpings. All of his posts have a decidely negative and pessimistic slant.
        Can you show me a post from Garth that advocates buying your personal residence to secure a home for your family? This is what should be motivated buyers…this is what Garth does…this is not what Garth says.

        “If you can find a link to a quote of Garth’s saying in 2009 that everybody should sell all RE that they own, while at the same time he was buying a house, then, yes, you can call him a hypocrite”.


        March 31/2009
        “This is why those who think our housing market (a) has hit bottom, (b) won’t decline nearly as much as the American one, (c) is actually bouncing back or (d) is just fine, because it’s different here, will make life-altering mistakes. Based on what’s happened here, the speed of it and the intensity of job loss and decline, it’s conceivable Canada is about to fall off a cliff”.

        June 30/2009
        “We continue to run roughly two years behind the Americans in this real estate saga. There is no escape.
        Hence, two years from now, some heartbroken people will wish they might have read these words”.

        June 29/2009
        “But if it doesn’t, the newly-mortgaged should be told where to expect Ground Zero.
        They sleep there”.

        July 30, 2009
        “And so it goes. US home prices may be sitting 20% lower than they were a year ago (which was 15% lower than the year before), and 19 million American homes may currently be vacant, but the media spin is irrefutable: Rush and buy. A new upward cycle is starting.

        Regular visitors will know my reasons for believing this will not happen. Won’t bore you with it all again. But what’s striking about today’s real estate market is the casino nature. Once again, a speculative fever has gripped society in which authority figures (muckamuck economists, the prime minister, realtors with cufflinks, Canwest) can pretty much condone, if not welcome, actions which look a lot like gambling”.

        July 29, 2009
        “Here is my message:

        There’s a rally going on with real estate at the moment, as there is on the TSX. In both instances, it’s a bear market event. This is a rare opportunity to get out, while there are enough fools around, desperate to get in”.

        etc etc.

      • formula1 ->
        Those are all quotes from Garth where he says that the housing market was set for a crash in 2009. Well, we believe that was a fair warning (still going to happen).
        Where do you see him saying nobody should own their own home?

      • BTW, Garth’s call on housing is neither here nor there regarding our own assessment of the Vancouver market.
        The market is a massive speculative mania, and it speaks for itself.

      • Garth doesn’t have to say it directly – it’s all over his messages.
        So, with my evidence do you not find it hypocritcal that Garth post these messages while buying property? Come on vreaa – your hero has clay feet

      • You’ve called him ‘hero’, not us.. and you appear to read his columns more than we do.

      • Garth consistently tells his readers to sell their home. Is this not the same message as “don’t buy” for those that don’t own?


        “This market will not just slow down, it will shudder to a halt.

        But, seriously, they want $400,000 in Kits for 560 square feet? And three of you live there?

        You want advice? Get out.

        There’s so much more room on this side of the rocks. So much less delusion.

    • “don’t expect all of us to swallow it.”

      OK, nobody is forcing you to eat your peas. Take it as a parable, a plausible fiction and anecdote not in any way insinuating prevalence, and move on.

      Does Garth still have his blog?

  9. My friend wanted to trade up from a $400k condo to a $900k house. I helped to convince her that the market was likely to go down. Disaster averted.

    Next thing you know, she’s borrowed $45k from her father and appropriated $5k from her unwilling but helpless husband to buy a presale for a $450k condo that “should be available for move-in by August.” (It’s a bit bigger and nicer, but it’s North Vancouver instead of Downtown.)

    They’re trying to sell their downtown condo into a weakening market. The “price” has declined 5% in the last two months, but now they’ve doubled their exposure. A few months ago it would have taken more than a 50% decline to wipe out their equity (their entire net worth, of course) but today it would take just a little more than a 20% drop.

    Remember, she agreed that prices were likely to decline. Her justifications for going ahead with the condo aren’t in any way rational, and amount simply to the “because I want it” logic of a four year old. She dismiss any opinions that didn’t support the outcome she desired, even going so far as to threaten her marriage.

    I don’t see why Garth would have had to make this up. It’s happening.

    • hits home … mom, too, was abducted by the vanREaliens … the deprogramming has been challenging … and fascinating

      • Woohoo! My folks sold their place in Victoria too!!! They’ve been stalwarts to the “paying someone elses mortgage” and other rent bad, own good arguments until now. It took them 2 years to unload the place they’ve owned 3 years after pre-purchasing; guess what, I’m no longer being preached to because they’ve now realized first hand that real estate doesn’t always go up.

        I don’t know how much they lost and I don’t want to rub it in by asking but the funny thing now is they keep sending me listings of places I should look at with the caveat like “thjs is a great place for you, but it needs to drop 50%”. I’m so proud…

      • @chemguy. don’t recall if you were present at the time of the conv … ag very sagely offered ‘must seek the little logic hook that will turn them’ … for mom, this was debt load – she, never an addict and in fact always an ardent abhorrent … she, proposing they buy cash into the insanity! … crisis averted … now the long haul … convincing aging parents that the time for a decent (not optimal) re-entry may be very far off … passing your latest years in the non-ownership state, very abhorrent … onerous for one’s optimism to be opposed on every avenue … well, that’s life in a bubble

    • What I’ve heard of, and concerns me, is people buying a detached property but keeping their previous property and renting it out. I don’t know the rationale behind these moves — I am not one to pass judgement — but on the surface it looks a bit off.

      Either these families have decided that the cash flows from their previous properties are adequate, perhaps “adequate” means cash flow neutral, and they can use some tax treatments or something to get decent returns (however they measure them), or they had trouble selling and are biding their time for when “conditions improve”.

      Either way, talking to property managers who have been in the business for decades, we can be near certain that a fraction of these “accidental landlords” will get burned by the nature of property management with all its warts, risks, and unfair distribution of pain. Most will not get burned through “unexpected” cash flow impairments, but the most are not the ones who will be setting market prices.

      Watching the property management business for a few years, and through my direct exposure to it in its various forms, I think the biggest thing to hit home to property investors is how uneven cash flow impairments can be. I use the analogy of a reverse lottery where most people win a little but a select few lose a lot. Most property managers diversify their holdings to ensure that acute cases are spread and their average returns are acceptable. For smaller-time landlords there is no diversification, they will live and die by the roll of the dice. It’s a difficult point to elucidate and one I rarely see discussed in the MSM, but it’s one of the primary means by which the market will correct.

      If you track 100 amateur landlords, each with one property, and check back with them in a couple of years, my bet is 5-10 of them will hate being landlords more than a root canal. They will want, or need, to get out and will sell, either by choice or by necessity. These are the ones who will set the market price, not the vast majority of ones who (I bet) are unaware of the inherent risks upon which their supposed gains are built.

      Something to think about.

      • Renters Revenge

        I rent from an amateur/accidental landlord. I honestly feel bad for them, they really do not have a clue about much of anything – and I have no idea why they are so willing to subsidize my housing costs each and every passing month.

      • What jesse describes has happened a lot in Vancouver. Some of those in ‘Spot The Speculator’ category fit the bill precisely.
        They’ve looked fine on paper most of the time, but when this turns they’ll be going to the bottom with weight on their ankles (leverage++).
        Personally know of households owning own home and 1-3 other properties.

      • I think this is a very insightful comment. I wish we could somehow flag it as a “comment to be reread in 5 years so that we can gaze in awe at its prescience”.

        I particularly like the notion of a “reverse lottery”. I wonder if there is a correlation between amateur landlords and people with no life insurance.

      • “They’ve looked fine on paper most of the time, but when this turns they’ll be going to the bottom with weight on their ankles (leverage++).”

        Aha, not only did Vreaa study set theory under Bertrand Russell, but he is also an experienced C programmer who likes to pepper his conversations with increment and decrement operators.

  10. @VREAA, Is it possible to open polls on your site asking readers whether they think rates will rise or fall, CDN up or down, crash no crash in 24 months, if a crash would Canada initiate QE?

    I think it would be very revealing as to whether the majority (bears, from my observations but then again they are more vocal) are forecasting/hoping realistically.

    • Why, do you think that most of us who are bearish hold our opinions based on a belief that interest rates will rise?

      • I’m not suggesting that at all but it would be interesting to set up a new poll weekly for sentiment/discussion sake.

      • fun factor boostage? yay … but good poll notoriously difficult to tdesign … 1st step, what is the central question?
        sir_nem/dr.j – what is your quest? …. 🙂

      • @Chubster, et al… The Central Question?

      • sir_nem. cliche well-resisted. you are the a#1 to my cigarette.

    • Renters Revenge

      What’s the obsession with interest rates? The bubble problems are structural not cyclical.

      Mortgage Rates in U.S. for 30-Year Loans Fall to Record Low:

      Shiller: Housing Has “Chance” to Bottom But Suburban Prices May Not Recover “In Our Lifetime”:

      “A strong case can be made that the fundamental supports of the housing market– demographics, employment, creditworthiness and income–will not recover for a generation. It can even be argued that housing has lost its status as the foundation of middle class wealth, not for a generation, but for the long term.”

      • Exactly. There is fresh air below the markets.
        Once the bubble bursts, it doesn’t matter how cheaply you offer to lend people money to stuff into that ginormous gap (between prices and fundamental value), they’ll still be reluctant to pump it into the void.
        Heck, even when there is no gap left, they won’t want to borrow.
        Our bubble will likely implode without rate rises.
        Look, it’s possibly already begun.

      • Are we really now comparing most suburbia data as a representation of the entire US of A to specifically Vancouver and Canada?

        Different fiscal, monetary, tax and legal. It’s so easy to point at the US and say we are headed for the same.

      • Appearing live on CNBC’s Squawk Box, Buffett tells Becky Quick he’d buy up “a couple hundred thousand” single family homes if it were practical to do so.

    • I predict
      – credit will become more difficult to acquire for purchasing real estate within the next year.
      – monetary policy, capital flows, and exchange rates will fluctuate and I will be worse than a monkey throwing bananas at dart board at accurately forecasting them.
      – BC population growth and wage growth is going to remain subdued
      – Talk of foreign ownership restrictions will be a distant memory within the next 3 years

      I won’t predict where property prices will end up but I don’t see much in the way of upside. I have been wrong before!

    • “Buffett tells Becky Quick he’d buy up “a couple hundred thousand” single family homes if it were practical to do so”.

      some areas are fantastic buys – some not so much. It surprises me how much San Diego has dropped. If cities like SD, Baltimore, Boston, Seattle, Portland, Denver, Nashville, Charlotte, SF are on sale at a deep discount it’s a no brainer

  11. I saw this last night at greaterfool. Stunning. So stunning you can’t help wonder, as VREAA says, if Garth’s concocting this stuff purely for our enjoyment. But this *is* the sentiment that’s helped propel the beast. Yet one more person who’s seen firsthand that RE is most certainly not a one-way trip to financial paradise, yet can’t help wanting to wade in even deeper.

    You can see how she got here. Years of exposure to constantly rising BPOE bubblicious prices. A non-stop onslaught of RE industry/media lies. Too many Ozzie Jurock/Global nooners. An environment of easy up-front money and crazily lax mortgage requirements. Does she even realize she’s tossing around half-million-dollar figures? Probably not.

    I note she doesn’t even question getting out of the losing proposition she already owns. Indeed, the only issue seems to be *when* (not *if*) she acquires another.

    This is simply one more example how real estate in Raincouver has become the new religion. If you sat this person down, peeled back the layers of her reasoning, and gave her the full-on Monty Python Spanish Inquisition, you’d ultimately see there’s nothing behind it but blind, ignorant faith in some unseen power.

    I’m reminded of a couple I know. Completely different scenario, yet the same “owning is next to godliness” attitude. They’ve just put their condo on the market (a great idea though perhaps a bit late to the party considering there are now several dozen other condos already for sale in their neighbourhood). Anyway, they’re wanting to move to a nicer, pricier area where they’ve thus far been unable to find something they like that falls into their comfort zone. Yet they refuse – totally and completely – to even consider renting. I of course give them my opinion and have spent lots of time showing them there are a hell of a lot of people more knowledgeable than I who are now calling for a rather nasty pullback/correction/pop. Doesn’t matter. In the end, it always comes down to this mantra, these same ten words: “We don’t want to throw our money away on rent.”

    These are the same people who’ve “thrown away” untold gobs of money on special assessments, mortgage interest (they’re still paying it down), property taxes, repairs, and a whopping condo maintenance fee that’s now approaching $500/month. They know they could cover a good chunk of their rent by investing the proceeds of their sale, they acknowledge that valuations are likely deflating (though in their minds little more than a few percentage points), and they recognize they’re nearing retirement. Plus, they see me, one of the cheapest people they know, constantly extolling the virtues of my own sell-near-the-top-and-rent scenario. Yet they MUST buy once again. To do anything less would be so…plebeian.

    To each his own.

  12. The only thing you can do right now is buy short term bonds.
    Be patient and wait for the tide to change as it always does.

    • dwd01/blm/ne1else, r your covered bonds like maple leaf fnm bonds? yields?curious.

    • @chubster, completely different from FNM bonds. Different structure, different buyers and a different asset class altogether.

      CDN covered bond rates, simply speaking, are hovering around 2% which is up from start of the year.

      Anyone wanting to really understand the invisible hand of the markets ought to look to the bond markets.

      [Required Reading] Great article on CDN covered bonds here:

      Worth to note individual retail investors do not have much access to invest in covered bonds.

      • Apologies, wrong link above.


      • trying to understand what secures them … and should that go down?. i.e. if they’re tbtf-class like fnm’s, it’s a bit of free yield courtesy boc and friends with usual accompanying fail modes … still sounds like a variation on fnm, imo … thx for reply … your presence a bonus

      • @chubster, Covered bonds are secured first by the mortgages and should they fail, the bank who issued them steps in.

        As a added guarantee, the banks usually buys a further guarantee from Genworth or CMHC for a fee. That fee is less than what the banks save by having the extra guarantee feature to it. (the safer the bond, the cheaper the interest rate it can be sold for)

        Covered bonds have been around for centuries and is gaining popularity as new prudent banking rules (derived from Basel III) allow for banks to park some of their contingency capital into highly rated covered bonds.

      • @blm. exactly as i thought. dude(tte), you’re a sharpie that’s for sure. but i’m curious to see what you really think, without the brochure … to paraphrase an old acquaintance, and i’d imagine pretty much what everyone who rants here thinks of giant friggin mess … why did all the power to make awesome go to make crap?

      • Rephrase please….

      • @blm. i’m saying where we disagree is on likelihood of major default chain, whether from internal and/or external factors. let’s leave it at that – unresolved. however, supposing i could convince you that would happen, what action would you take/recommend?

      • The world is asking that trillion dollar question.

        It comes down to whether one believes Europe and the US will take the hard medicine of rising rates or walk the road Japan started 20 years ago – markets are saying the latter.

      • agree. they will try to walk that road but the best observers are saying it’s not going to be a very long walk … when rates rise, it won’t be policy leading markets

  13. My father is 67 and has about 50% of his net worth in his paid of home. About $300,000 in RRSP and TFSA’s and house is about $325,000. He has been working the last 2 years because his financial planner at Sun Life (where almost all his investments are) has told if he takes $1000 a month (the amount he estimate he needs) he will run out of money in approx 7 years.
    He is currently in the hospital because he had to have emergency heart emergency and also suffered a stoke due to a blood clot after the suregery (he was only a day out of the hospital when he suffered his stroke).
    Does he have enough money for his retirement? I don’t know. He probably would if he sold his home and rented, but I don’t see that happening. If he sold and downsized to condo he’d probably only get an extra 100,000 for retirement.
    But having a paid off home in retirement??? That really means nothing if you haven’t saved enough to pay for living expenses. Property taxes, water, heat, power, phone, cable, auto insurance, auto maintenance, gas, medical expenses….etc…… People forget about these expenses. They don’t disappear with a paid off home. With CPP and OAS, they get just under $2000 a month. Is this enough for my dad to enjoy his retirement, enough to pay for assisted living in the future,???? What about travel, medical insurance, assisted care?
    I don’t think people really understand the reality of retirement when you have no savings. Paid off homes don’t really mean anything when have NO savings. My parents have savings and I know its gonna be a struggle for them.
    I personally don’t see myself owing a home in the future. If I had to choose between saving and investing my money for my future (and probably my parents too) and renting or owing a home and minimal savings. I’ll rent, honestly I think my financial future depends on me renting. And funny thing is I don’t even live in over inflated Vancouver I’m from Edmonton.

  14. Phoenix Rising

    I have a great idea for insuring yourself against committing financial slavery to Van RE.

    1. Don’t pay any bills.
    2. Ignore collection notices.
    3. When they call, ASK THEM to ruin your credit.
    4. Success! Bad credit = can’t obtain mortgage = banks can’t enslave you for 35 years.

    This is protect you well from wife’s nagging you to buy an overpriced piece of sh*t.

    “Sorry hon, I’ve got bad credit. But if you really want to buy a house, let’s take the next flight to Phoenix.”

  15. Arshes is 100% correct. A paid off asset doesn’t mean squat if you can’t get your cash out and are unable to make the monthly maintenance burden. It becomes a liability.

    I recently watched a friend’s parents sell their North Shore home for about $900K. They needed to move because they are “broke” and have no source of retirement income, so they are “downsizing” to a home in the valley…for $500K. Then they are dropping about $50K into “renos” as of our last conversation. This makes NO sense at all to me. If it were me, I’d rent a nice home or condo and hold my cash in safe investments so when I needed it, I could get to it fast. If the market drops by 20% in the next year or so, they have essentially lost at least that much of their retirement funds. And that’s not counting what they’re paying in taxes, maintenance and everything else.

    If our place fell by 50% today and we sold, we’d still walk away with our entire down payment plus maybe $80K-$100K left over…essentially we’d break a bit more than even after our costs were factored in (no realtors were involved in the deal, so no bloodsucker commissions). And we bought with the plan of being here for at least 15-20 years, and our mortgage payment is much less than renting in our neighbourhood would be. And I still wonder sometimes if we were idiots to buy. Go figure.

    • Couldn’t one rent out their paid off home and use those proceeds to rent a smaller home to pocket the difference for living expense?

      Just saying…that’s what I would do if I couldn’t afford to maintain the home and market was not good to sell in.

      Or even a reverse mortgage to live off of if things were really rough.

  16. How long would it take you to accrue $900K in cash just via the rent? And don’t forget, your rental income has to cover not only your living expenses but also insurance, repairs and other costs on your rental property. That doesn’t give you much income.

    Let’s do the math. Say you rent it out for $2000 a month (about what it would go for). Taxes on the property are about $300 per month (yes, they really are). Say another $300/month budgeted for insurance, maintenance and other sundry costs. That brings your rental income down to $1400 right there. Meanwhile, you’re paying $1200 per month just for rent (actual rental average in their area). On top of that, you need to eat, pay for meds, a car or transit, maybe the odd dinner or show out. Yes, you could take out a HELOC on your rental, but that’s a pretty stupid idea, and pretty soon you’re going into debt against the house when you could have walked with the cash and been debt free. This is also assuming that the property value doesn’t take a dive, which would significantly tighten your ability to borrow against it.

    Doesn’t look so good now, does it?

    If you’re a landlord, you’re risking a lot more than selling and taking the profit. One bad tenant or a grow op can set you back tens of thousands of dollars, and there are lots of them in this city. Plus you’re STILL responsible for the leaky roof, electrical, overflowing toilet, mold or whatever else. Most people in their 70’s have neither the energy, the experience nor the savvy to handle this kind of situation. And IMO, a reverse mortgage is a fool’s game. Why would you tie up your biggest asset (in this case ONLY asset) when you can have the cash free and clear?

    • In that scenario, where a homeowner near/in retirement and without savings outside of his home equity, your asking him to cash out and live off of that equity for the rest of his life?

      No savings outside of his home = he likely does not have much experience in managing investments/cash. Dangerous shift of lifestyle to suddenly have do much liquid assets and more liabilities (rent).

      To this person, where his only ever successful investment were his mortgage payments it is a HUGE mental shift to cash out and suddenly have added liabilities in retirement.

      • Yes, precisely. This is why so few are doing it.
        And it’s a particularly cruel fact that this is probably precisely the time they should be doing just that.
        We believe that for those folks, even simply going into cash (or equivalents) and renting will end up giving them a better retirement than staying >100% in RE.

      • Sure, agreed it would be wise for one to sell and rent/downsize if they can:

        1. Handle the psychological change in mindset.

        2. If all they really had was their asset in their home without any other form of assets, pensions or savings.

        Otherwise, better to stay put in bubble, calm or storm in later stage of life than to speculate that we are in a bubble that will pop within their lifetime.

      • BLM ->Your prior comment (4 May 10:29pm) already established that they meet criteria (2).

        And, the benefit of them adapting to the change in mindset is that they won’t face poverty in retirement… Try that for psychological distress.

      • Would it be sensible for someone to downsize so that half is in cash and the other in a small condo? (meaning to sell AND buy back in this market)

        That way they are liquid yet hedge against inflation should governments aren’t able to raise raise quickly enough.

      • Yeah, our opinion is that would be a sensible move for many.

      • I don’t think a market cares how “comfortable” some people are with investing outside of their comfort zones. That people are only comfortable with owning property as a means of investment doesn’t seem likely to drive the market to elicit the returns they need, rather they are likely going to get used.

  17. “Why would you tie up your biggest asset (in this case ONLY asset) when you can have the cash free and clear”?

    the same reason why you’re so desperate to trade your cash for that asset

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