“I have a relative that purchased a Coquitlam home in 2010. She and her husband took a heloc on her parents home. Parents home bought for $520K and now worth $925K. There was about $300K mortgage on the home. Well, not anymore. They borrowed $130K for the Coquitlam home. Purchase price %60K, put down $80K, and $40K went to reno’s and other home costs. They bought in pressure times. Paid $40k over asking too. They’re left with massive debt and put risk to the parents as well. The loc they borrowed, they have only paid interest on it. So that loan is still the same at $130k. So basically, the home was purchased with 100% financing. The home is worth about the same as the price they paid in 2010.”
– Van east guy at VREAA 22 Jun 2012
Vancouver home: Market Value $925K; Debt (Mortgage + HELOC) $430K
Coquitlam home: Market Value $650K; Mortgage $560K
Total Market Value: $1.575M
Total Debt: $990K
Classic intergenerational wealth destruction scenario.
An extended family goes from holding fairly safe equity in one home, to leveraged RE speculators.
The parents had the incredible good fortune of holding a home through a housing boom that had increased the home’s market value by $405K. They had the option to realize that $405K after-tax gain but did not take it. One can only surmise how that windfall may have altered their future financial health and their retirement plans. Instead, they decided to leverage the paper gain into more RE.
A 40% drop in housing prices will completely wipe out all the equity this extended family has in RE. And this is by no means an extreme example.