“I know a young couple who bought a condo assignment (for a 400k condo in Vancouver). The condo will be finished sometime next year. They are both moving to rural Alberta for a year or two to earn a lot more money to pay off the wife’s student loans for dentist school and the mortgage. They leased another car (SUV) recently so they can drive there. They are not going to rent out the condo when it’s finished because they wanted a new place. They have also extracted all their RRSPs (with maybe help from parents) for a down payment.
In the discussion with the husband and family that followed, (as expected) they generally deflected, avoided or otherwise tried to bury their heads in the sand. If it wasn’t so sad, it would have been amusing. However, I came to observe a few things.
1) They have no idea how the market works.
When I told them that house prices may be down, and listings were up, the responses were:
“I don’t care about house prices, of course those are going down, but condos are still going up or holding their value.” Huh??
“The reason there are so many listings are that people are just seeing what they can get for their houses, they’re not trying to sell.” Uhh? Apparently it’s free to list. (Both in time and money.)
2) They have no clear idea how debt works.
The counter to “when prices correct to 50%..”, was that at that point, it would just be cheaper to “upgrade”. I was shocked. In a debt-equity relationship, when “equity” goes down, you first lose value in your equity, not in your debt. In fact, you never “lose” your debt. I used 5% down as an example, and he didn’t realize that at the end of 5 years, unless everything they both earn are paying for the mortgage, that a 50% drop would mean that they’re probably 30% underwater. They will have NO equity to “upgrade” if they can even renew their mortgage. At this point, he disregarded that and went back to his example of how if his condo was worth 200k, he could still…
3) They use select anecdotal evidence only, with no statistics or any other information to back their opinions.
Sometimes these pieces contradict themselves — I don’t see how they could not see it.
“My friend works at the RBC and approves of mortgages. There’s a lot of cash only buyers from China.” … I thought cash-only meant they didn’t need a mortgage…
And of course the standard “housing prices always go up”. Anything that shocks them, just gets deflected and any statistics are ignored and rationalized by some made-up opinion.
4) They don’t understand the relationship between “home” and “equity”.
“We don’t see this as an investment. We plan to stay there long term, at least 5 years. If you want to start a family, you will have to buy a place, you won’t be able to time it.”
Yup, the standard arguments. It’s almost like they all have the same script. Anyhow, I wasn’t cruel enough to break it to them, but they ARE using it and treating it as an investment. If not, they would not talk about using the “equity” in the condo to upgrade. At the end of the day, they do plan for their place to have “value” in it. Otherwise, what’s wrong with renting? (See next observation…)
5) Any alternative is seen as impossible.
No no no… no talking about renting. “Well, if I were to rent, I’ll have to deal w/ having to find a new place when the landlord kicks me out. That’s a hassle and represents time. And time is money.”
I really wish no one coined the “time is money” bit, it’s always misused. Time represents sweat equity (maybe) which maybe translates into money.
I was also not cruel enough to point out that the inconvenience of renting is probably a lot lower than the inconvenience of being homeless, but I kept it zipped.
I’ve shown them graphs and blog entries and videos already. I’ve done my good turn already. I don’t expect them to change their minds on the spot, I am just hoping it’ll give them something to reflect on — that doesn’t fit in their current world view. Perhaps that difference might mean being poor compared being homeless.
As has been said here before, speculative mania can turn regular people into crazies…”