“I have a relative that used a HELOC on her parents’ home to purchase a Coquitlam home in 2010.”

“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

Summary:
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.
– vreaa

37 responses to ““I have a relative that used a HELOC on her parents’ home to purchase a Coquitlam home in 2010.”

  1. Renters Revenge

    I have no data, but based on what I see and hear, there seems to be a whole lot of exactly this going on.

  2. Commenter Sabrina V.
    over at Canadian Mortgage Trends thinks this practice of using HELOCS against one home to leverage the purchase of another is perfectly normal and acceptable, and that restricting said practice, along with eliminating insurance on homes over $1 M, will have very negative consequences for Joe and Jane Average. The part relevant to this post is in the third section, but I decided to keep the whole thread together for context.

    She says:

    …has anyone thought about what this will do to the value on homes over $1M? If you have to come up with 20% to purchase a decent home then we’re in for big trouble in the housing market. I think this is going to cause a huge drop in values!

    (…)

    A detached home which has been renovated (not requiring any renovations) with a decent sized lot and in a good neighbourhood will cost you $1M. Heck, a renovated semi-detatched on a main street in a great neighbourhood will cost you $1M. Teardown bungalows in Willowdale and Leaside are $1M. This is not “high standards”. This is reality.

    (…)

    I work for a lender and I see it a lot of the time where the downpayment is not there on homes over $1M. Often borrowers like to keep their money freed up for other types of investments. Many like to buy investment properties as well and utilize the equity in their principal residence for the downpayment on those rentals.

    (Italics my own)

  3. The parents could always sell, but they won’t.

    • I’ve tried to get then to sell cuz their reaching that age. But they won’t listen. The reasons are,

      1) great asset that is likely to gain more value
      2) where the hell are we going to move after
      3) I don’t want to clear out the garage

      Numbers 1 & 2 are reasons why most don’t want to sell. Look, nobody likes to move. And if you have children, it’s also difficult. Owning real estate can be very emotional at times. You make a decision to buy because you are comfortable in doing so. When the market correct slightly, many believe that the market will stay flat. Bubbles only happen because a bulk of the population has already bought and the ones left (%30) are the ones that can’t afford it and the others are the bears (aka us).

      It’s easy to say, let’s sell and rent. But what if the market goes back up? That is what people fear. The best scenario for a family, don’t buy in the first place. Especially at these prices. I’m glad I’m part of the 30%, are you?

      • Yup, I would say a decent portion of the 70% are not realizing the full gains from their investment and probably won’t for a long time if ever. And obviously there is a chunk of that 70% that are toast.

    • 4SlicesofCheese

      Don’t tell Rennie that. He is counting on the boomers to sell and buy his condos.

  4. The worst scenario that happens is when the parent loaning the money to the offspring wants it back. I have a friend right now who is in serious financial trouble because his mother-in-law is demanding to be repaid. The down payment she loaned to them (they thought it was more of a gift) is basically all the equity they have so, if they are even able to sell the house for what they paid for it, they’ll be screwed. It has also ruined the relationship between the siblings. I can imagine this playing out more frequently if house prices take a significant hit.

    • Raging Ranter’s golden rule for living a long, prosperous and harmonious life:

      NEVER accept money from in-laws. The strings attached are invariably just long enough to hang yourself with.

  5. Ralph Cramdown

    OK, here’s an anecdote, triggered by Van East Guy’s reason #3 above:

    Recently, relatives realized they were no longer able to care for themselves in a bungalow. It was getting “too much.” It had been for quite some time before their realization, but I digress. What followed was me spending two months decluttering, selling, packing and moving them. They’d lived in the place for five decades and were children of the depression. Secret basement hoarders, where all appears normal on the ground floor.

    Anyway, my MIL tells a West Van friend my tale of woe, and that friend vows to clean out, sell and rent for a year “to see how she likes renting, maybe buy a condo after that if she doesn’t,” just to avoid burdening the kids with cleaning out the house when she’s not able. The kicker is, HER basement’s full of the kids’ stuff, and they all say they don’t want any of it. Me, I wonder if this burden relief thing isn’t just a pretext given market conditions…

  6. So after a little more reflection last night and thinking over the dramatic moves by Mr Flaherty and the related regulations I came to an interesting conclusion. I will tell you what it is.

    Most of us do expect the US to enter a recession sometime after the elections this fall. The likelihood is that it will be acknowledged sometime in early 2013. Naturally we should anticipate another leg down for US real estate coming at that time and perhaps even finally see a bottom forming by the time the recession is over.

    What I thought was interesting though is that these dramatic moves in our country are capable of serious repercussions up here. So serious that the possibility exists we will also enter a period of quite sluggish growth. The trickle through effect of a housing deflation here may take 6 to 12 months to really make a first impact but if prices drop rapidly we will have done something very unusual.

    We will have timed a Canadian slowdown (and possible recession) to match one that happens South of the border and so we may therefore also expect to recover on the same time frame. Our joint economies do not usually align quite so well so I kind of wonder how it may all play out.

    Time will tell I suppose.

    • What I find interesting — and somewhat concerning — is that what happens in Vancouver has relatively little impact on the “blunt instrument” decisions the government makes. The rest of the country is experiencing continued strength — or at least refusing to retrench — and Vancouver is so far weak in comparison, though some cities are starting to tip. The moves imposed by the DoF will take a disproportionate toll on Vancouver when, all else equal, it deserves milder treatment.

      If Vancouver craters hard and proverbial blood falls on the streets, it’s been posited that Vancouver was out of whack anyways and therefore deserves what it gets. That has been the message for the past couple of years out of Ottawa so we should expect Vancouver — which is starting to correct — to factor close to nothing in decisions made for the greater good of the rest of the country.

      • This is somewhat like the reverse of what happened in 2008-2009, when Vancouver got a bailout liquidity injection (through very low interest rates) that it sorely did not need; also the result of the “blunt instrument” policy (international, never mind national).

      • Politically, there is simply no way for the federal government to start making different rules for different provinces/cities. It’s a non-starter.
        That federal policy instruments are blunt is a given. The bluntness is inherent in the instrument itself, not borne of any particular decision. this decision was motivated primarily by the need to limit the growth of CMHC exposure to a market downturn. It was necessary, regardless of whatever unequal effect it has on the different cities.

        In 1988-89, Ontario was booming and inflationary, while in the West, agriculture and the oil patch were languishing. Everyone in the three prairie provinces was screaming at John Crow to adopt a policy of regionally-sensitive interest rates. In reality, this would have required a whole plethora of strict regulations on inter-provincial commerce and financial transactions, to ensure borrowers and lenders weren’t arbitraging between lower rate areas and higher rate areas, thus negating the policy. Such restrictions would have inflicted enormous economic damage.

        As long as the CMHC is federal, it will be a “blunt instrument”. The only option is for each province to have its own CMHC. With all due respect, I do not relish such a scenario.

      • Ralph Cramdown

        There’s nothing stopping CMHC from enacting a policy of refusing to ensure properties valued at more than 125% of the median value in a given postal code or census metropolitan area, or $x, whichever is lower. The US has put similar caps in place, now repealed I believe.

        Some would cry micromanagement and social engineering, but let ’em. It’s technically and even politically feasible. But of course, setting different limits for different regions is just a variation of “it’s different here” ne c’est pas?

      • But look at how those regional variants have backfired politically in the past, Ralph. For example, the EI benefits offered in the Maritimes, transfer payments to Quebec, energy policy impacts in Alberta, Western Economic Development policy versus Eastern subsidies on manufactured goods etc etc. I think we learned that everytime an attempt is made at balancing regional differences then someone will have a beef he got cheated elsewhere. It seems it is better to let provinces hash it out amongst themselves and determine their regional needs out of transfer payments and that cuts the noise at the Federal level. Even housing could have been dealt with regionally (or locally) but nobody wanted to step up to the plate and make a difference. Don’t you think the number of condo towers in Toronto could have been curtailed by the city for example or that Vancouver City Council might have come up with creative ideas to soften the price growth in its own backyard? The lack of initiative everywhere means that we all get the same rule across the country. Especially when it is tax dollars funding the program.

      • “There’s nothing stopping CMHC from enacting a policy of refusing to ensure properties valued at more than 125% of the median value ”

        IIRC the act governing CMHC explicitly forbids regional differences, rather areas not requiring CMHC services are designed to in effect be subsidizing those who are in need. That clause, now, seems a bit backwards!

  7. The parents have collateral, and the kids have a derivative. They should both expect margin calls. Depend on an asset- keep it free and clear of encumbrances. Depend on a home- don’t wave it around like a big wad of cash.

    I never do business with family and friends, a personal rule. Give freely what you can. Invest in them with vacation money or with liability protection.

    This may have posted twice. Our internet appears waterlogged. cheers.

    • And the crying towels…..oh, oh…and keep some time open for the knashing of teeth and wringing of hands and well,….there will probably be wailing at 6:00. Man… the schedule is going to be really busy for all the fools who just learned that they really were foolish after all.

      Buying at the top. Hmmmm. What did they think was going to happen? That maybe Unicorns would crap candy droppings or something?

    • I nearly peed reading that article. Can’t… decide… if… satire…

  8. OMG. The internet is amazing. There is actually a site devoted to Unicorn poop. Who new, eh?

    http://www.geekologie.com/2012/01/finally-a-decent-unicorn-sht-cookie-reci.php

  9. Interesting observation of the day.

    I drove by the SoLo presale office on the corner of Wellington and Lougheed today. Long line up of people waiting to get in, around 100 would be a fair guess.

    This was Building 1 of 4 being previewed. Its actually quite a neat development, anchored by Whole Foods, new commercial space, Modo car co-op, and new community amenity space.

    That being said, slightly surprising to see the line up. Wonder what the turn out will be once it comes up for sale.

    • It’s a nice development with good amenities on site and a walking distance to Brentwood mall, save on goods, winners, restaurants, etc, Brentwood is a great location. This area should hold its value over other communities.

      • These pretzels are making me thirsty

        It would be an interesting conversation regarding the areas in lower mainland with the most and the least RE price correction.
        Probably not entirely related to the “sought after” versus the “not sought after” areas.
        For e.g., metro Van would probably have a much bigger correction than, lets say, Whalley or Newton in Surrey.

      • As a rule, the most expensive homes lose the most value. Housing deflations can be hardest on the wealthy both in percentage terms and in absolute losses per property. You can even see this is action as the new changes in regulations are limiting by the percentage of debt to income anyone can carry but also by an absolute amount that is CMHC insurable. Just these two changes will take most of the steam out of the price growth on the West side and we will finally see who is really doing the buying once the spec element is removed.

        So it seems the government did hear the complaints so many registered here. And everybody was bugged that one or two postal codes were so extreme in pricing they were skewing national numbers. Take them out of the mix, stop insuring homes for foreigners and the 1% and restrict working people from getting in too deep…voila!….most of the problem looks fixed (on the surface anyway). We will see soon enough.

      • Ralph Cramdown

        I think the some of the biggest % corrections are in far-suburban townhouse developments next to developable greenfields. Come a crash, the land to build more is cheap, the labour to build more is cheap, and people conclude they’d really rather live closer to the core now that they can afford it anyway. Bought by the marginal buyer in the first place, these places end up having above average foreclosure rates.

        Next comes the neighbourhoods touted as up-and-coming: Small lots with attached housing in areas originally settled by the lower class, badly renovated over the years, and adjacent to more minuses than plusses.

      • South Surrrey, incl. Morgan Creek and environs. Should drop like a stone. Horrendous commute, no Skytrain, lots of box stores, traffic fumes, 32nd is turning into a truck route… no soul at all. Bland vanilla. And everyone would rather live in White Rock (or Crescent Beach) anyhow.

      • Brentwood maybe convenient but its cramped. We’ll see how well those condos hold-up. I was amazed how many people want to live right next to the Lougheed Hwy and the Skytrain. Will people become more aware of their surroundings once their home is no longer a lottery ticket?

  10. RE: Being aware of surroundings.

    This I think is actually a very interesting comment regarding how Vancouverities view density.

    The argument can be made that neighbourhoods like Brentwood are the future of Vancouver because the sheer amount of density packed into such a small area with both a connection to the highway and Skytrain. For many this would be considered a huge plus.

    The amenities in Brentwood are great, you have Browns, Joes, Cactus Club, Tim Hortons, Save-On, Safeway, and dozens of other stores close by at the mall. Just down Wellington you have Cosco, and the Keg. You also have a Steve Nash, Golds, and few other fitness spots.

    This is all possible because of the density being packed into such a small area. Its possible for someone to work in one of the commercial offices in Brentwood, shop local, and live in one of the towers. This is as green as it gets and beats the idea of commuting out from say Maple Ridge, where you have a nice house and backyard, but at what cost?

    As far as “sustainable” goes, I think neighbourhoods like Brentwood and Metrotown have the right idea. Build self sufficient, dense (cramped for some?) neighbourhood that are very well amenitized and offer little reason to leave.

    • rule britannia

      sounds like shanghai

      say no to density, canada

      demand that SFH – YOU DESERVE IT – grab your future by the throat, mortgage it to the hilt, and BE AN UP AND COMING GO GETTER

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