Vancouver Island Financial Advisor – “I have met with a number of clients recently who are in over their head and underwater on their properties.”

“I have met with a number of clients recently who are in over their head and underwater on their properties… One common characteristic is their mind frames around finances are not reflective of our current economical environment and hold onto past advice that is no longer serving them!
For one client, even though they put 20% down a few years ago and made accelerated payments, they are looking to sell to use the equity to pay off credit card debt that has accrued… we crunched the numbers and after their massive IRD penalty $35K and $30K+HST Realtor fees mixed with a good 10% drop in Victoria Real estate they walk away with no equity to pay off any cards… Even if they had curtailed spending further and put additional money on their mortgage up until now they would have to sell their home to access it and that currently isn’t feasible.
Some common misconceptions are that your home is a form of savings… this is incorrect! It is either an investment or a shelter but not a form of savings… To be considered savings, it would need to be guaranteed and fully accessable.
Island Advisor at, 16 Jun 2012 12:52am. [hat-tip Told-you-so.]

41 responses to “Vancouver Island Financial Advisor – “I have met with a number of clients recently who are in over their head and underwater on their properties.”

  1. All true, except for the last paragraph. Your home is neither savings nor investment. Investments generate income. Only a second property purchased for rental income is truly an in “investment”. And even then, if you bought with the intent of flipping, it’s not an investment, it’s speculation. Your primary residence is SHELTER. Period.

    • “Your primary residence is SHELTER. Period.”

      I disagree; that some are unwilling to suspend disbelief that even the most fundamental of needs still have prices, and paying more for them reduces ability to purchase other things, is part of the reason we’re in this mess.

      • Agree w/Jesse.

      • I’ve never had to “suspend disbelief”, as I’ve never had a problem believing that fundamental needs have prices. How else would we value them? But you are using that house for shelter. In other words, you are consuming it. Shelter is a consumer good. It’s only an investment when you provide that consumer good to someone else and charge him for it.

      • ” It’s only an investment when you provide that consumer good to someone else and charge him for it’

        Really? I can always be my own landlord and book the difference.

      • NaughtyBoy! Transfer Pricing!

        Next you’ll be telling us you’ve done the DoubleIrish or DutchSandwich through a Lichtenstein intermediary.

        I tried the DutchSandwich once, Dr. J – but I don’t think our host would appreciate my elaborating on that theme…

      • Nemesis, we’re all just COGS in a machine

    • I disagree – investments generate returns. Buying a house when it is reasonably priced is one of the best investments you can make. You save on monthly costs, and appreciation can add up to significant amounts over time. Talk to anyone who’s owned their home for 30 years or more and ask them if it was a good investment.

      • If you’re buying it anticipating price appreciation, you’re not making an investment, you’re speculating. And there’s nothing wrong with that. You’ve gotta live somewhere right? So why not buy when you feel prices are low, and cross your fingers and hope for a price increase? But let’s call it what it is. First and foremost you’re paying for a place to live, and secondly you’re speculating on future price increases. “Investment” should not enter the conversation.

      • With respect, Michael, during typical 30 year periods, housing simply keeps up with inflation.
        It may thus act as a savings device for those who benefit from the forced discipline, but it is not a good investment.
        The crucial thing is that the last 30 years are not representative of typical times, and the next 30 years are almost definitely not going to look like the last, especially where housing valuations are concerned.

      • PS: You do make the point about buying a house when it is “reasonably priced”, so I agree with you on that point. Also, to buy when it results in “saving on monthly costs” (not the case now by any means).

      • Imagine a simple example – you buy a home with 10% down and your monthly costs are the same as renting that home. This sounds crazy in today’s Vancouver market, but it was true 10 years ago – and in most of the US, buying is actually cheaper than renting right now.

        If that home only appreciates with inflation (long term average inflation in Canada is 3.26%) your rate of return on that down payment is 32.6%! Tax free!

      • In your example, your rate of return only equals inflation, and is therefore zero. Granted, that’s better than a savings account. But neither the home nor the savings account are investments since neither generates a real return (at least in your scenario). But if your mortgage & associated costs equal rent, you still end up falling behind once you consider upkeep. Houses are money pits.

        Having said that, I wish I’d have bought ten years ago. But I’m relieved I did not buy within the past 5 years. I will buy when things correct 25% or so (here in Ottawa, I expect about 25% correction – Van were are not.). But I’ll buy for the same reason I would buy a new car. Because I need it, want it, or both. I do not expect to make a real return from it over the course of my life. I expect to get much use and enjoyment out of it; enough to make it worth the cost. My income will come from elsewhere.

      • You are forgetting leverage. You only put down 10%, so any gain on the home will translate to a 10x gain on your investment.

      • That’s assuming you can flip the home in a short amount of time. Which would be speculating. If you hang onto a house for 20 or 30 years, you’ve paid the other 90% as well, plus interest.

      • That’s not right. The other 90% (plus interest) is paid for with money you would have spent on rent.

      • “your monthly costs are the same as renting that home.”

        This does sound crazy today, esp. if it includes property tax and maintenance/replacement costs (what’s the expected life span of a modern house?)

  2. “Some common misconceptions are that your home is a form of savings… this is incorrect! ”

    No it’s correct. If you pay off debt you are partaking in a “form of savings”. Perhaps not a good form, but a form nonetheless.

    “It is either an investment or a shelter but not a form of savings… To be considered savings, it would need to be guaranteed and fully accessable”

    Perish the thought a “home” could be both an investment AND a shelter… at the same time. And perish the thought that “saving” can be both a noun AND a verb… at the same time.

    • A form of savings need not be fully “accessable” (sic) to be considered savings. Lots of savings plans at higher interest rates require locking in for lengthy periods of time, meaning that the money is not fully accessible until the term is up. Savings plans are not always guaranteed either – my parents used to put their savings in the Teacher’s Co-op when I was a kid, and one financial hiccup (which took down the co-op) cost them at least 25% of their savings (they originally lost everything, but insurance recuperated the rest). It’s nice if a savings account doesn’t require money locked in for a fixed term, and fortunately most savings plans are insured fully these days (though that’s only as good as the economy, let’s not kid ourselves) – but a savings plan need have neither of these attributes to be a savings plan. By this financial advisor’s definition, the only way something could be considered savings is money under the mattress. Real estate as an investment right now? I sure hope that’s not the advice he’s giving people.

      • There are lots of items that could be considered “savings” that have volatility. Take a supposedly stable government bond. It provides a method of storing wealth but its price can vary substantially until its maturity.

        My quibble is that the concept of “savings” is not specific enough to warrant any meaningful insight. As I’m inferring by the post this fellow thinks that putting money into a house isn’t savings. Well sorry it is; it’s just not liquid or guaranteed, which is a separate issue. If he meant to say that a house is not always a liquid asset I agree.

    • When homes stop being money pits (i.e. when they become maintenance free and the municipalities stop rendering taxes against their total value), I’ll start calling them an investment. Until then, they are a consumer good. An important one, and often a very rewarding and satifying one (I love my house!) but a consumer good nonetheless.

      • A house, the structure, is a capital asset and consumed over many years. You can discuss semantics between investment and consumption but, if I buy a house today, I’m investing in it the same way I would a new barn for my prize egg-laying chickens. The only difference is I’m my own landlord.

        This is a fundamental tenet of how the US has since reacted to its financial crisis — prices fell until their earnings aligned with levels where investors can generate a reasonable risk-adjusted income. Owners, who compete with investors in the same market space, may be willing to overpay but as of now they don’t have to. They buy, in effect rent to themselves, and keep the 8% (or whatever) net yield for themselves by lifetime savings in rents. Owner-occupiers need to understand who eventually sets the marginal price — it isn’t those who are consuming houses, it’s those who are investing in them.

      • Do you really have prized egg-laying chickens. Lucky bastard. I raised chickens as a kid. Back then I couldn’t wait to move to “the city” (i.e. Winnipeg – I know I know, I was just a dumb kid.) How I’d love nothing more than to live out in the country and have my own bantams and guinea fowl again.

      • Aren’t you allowed to have a few chickens in your backyard? At least in Vancouver, less sure about the suburbs, but maybe that explains the price difference?

      • I forget how many walking birds are allowed, but I can assure you it’s not much more than sustenance farming. A few residents of Vancouver will be shocked to learn you can’t kill them for meat.

      • I think we’re allowed here in Ottawa, but the condo complex I’m living at wouldn’t like it much. PLUS, what’s the point of having chickens if you can’t have a rooster. I miss hearing the rooster crowing at 4:00 a.m. in the summer. Something tells me my neighbours do not miss it, if indeed they’ve ever heard such a thing.

      • “I miss hearing the rooster crowing at 4:00 a.m”

        The duller roosters go off at 2am and 3am as well. They don’t last long.

  3. “Real estate as an investment right now? I sure hope that’s not the advice he’s giving people”.

    Real estate is never a good investment when you simply look at the bottom line. The interest rate you make to your lender is huge and lengthy and there are much better investment vehicles for the pure investor.
    Fact is, most renters on this board are speculators who only look at the financial benefit of a home purchase. I suggest they continue to rent and make their investment elsewhere.

    • The impression I get is most bears on this board own or have owned and wouldn’t object to owning in the future if the cost wasn’t so extremely out of wack with fundamentals. Personally I rent but can see myself buying in the next couple of years once the prices have fallen significantly. And if prices don’t go down I’ll continue to rent because I don’t want to saddle my family with the worry and stress of buying into a speculative bubble.

    • I’m pretty sure that to be called a speculator, you must have some skin in the game. Since I avoided the housing market throughout the bubble, I’m afraid I don’t qualify.

  4. I think the big question is when the pendulum swings the other way and eventually settles where we’ll be at. At the moment I can’t see ownership ever, ever, ever being cheaper than renting. If the difference was maybe a couple hundred bucks fair enough, but I’m talking a grand or more difference to own versus rent the same property. I don’t know what my landlord paid for my place, but I could never own it for the $1,100/mo I pay now. So when RE prices correct to whatever they correct to how will we view home ownership? What factors will make it “worth” buying? If RE isn’t going to appreciate like it did in the past then why will people buy? I’m not saying they shouldn’t, I’m just wondering about the cultural shift that may occur.

    For us, we won’t look at buying till the kids fly the coop. We didn’t do the condo to townhouse to SFH step-up during the boom, so we’re priced out now for who knows how long, considering we’d need three or four bedrooms to accommodate young children. To me it’s just not worth paying all the extra costs involved in ownership when our space needs are greatest (more square footage), our day-to-day costs are highest, and our incomes are at their lowest because of parental leave. Just to house two extra bodies when we could rent a big place for now and then buy something considerably smaller and cheaper when our needs our less doesn’t make sense. I don’t want to be like those Boomers we all know who are in a huge house with kids in their 30s. I don’t want to pay rent when I’m retired though. I’d like a paid-for condo where the maintenance is taken care of for me through the strata fees. It won’t be an investment, at that point I just want security. I don’t want to be the 90-year-old lady on the front page of the Vancouver Sun being evicted from her apartment for “renovations” by the land owner and then he turns around and rents it out for three times more and she can’t find a place she can afford. That’s why I would buy, security for myself in my golden years that I won’t get kicked out, because lifting boxes when you’re that old just isn’t cool.

    • Lifting boxes at any age isn’t cool, hire a moving company.
      I plan on living in my kids basement when I’m old an grey, screw ’em !

  5. Financial Post article — Mortgage changes ‘may be too late’: Moody’s

    • They are too late, but necessary nonetheless. Even if the horses have all run away, it’s still not a bad idea to close the barn door. Keeps the flies out.

  6. Carioca Canuck

    So we have a $35K IRD penalty…….plus years of accumulated interest payments to the “banksters” that funded this mess…….plus the lost opportunity cost of the down payment and paper equity…….plus the lost capital involved in the down payment, and then the lost paper equity, now, finally……..the real estate agents egregious $30K of commissions for getting out (definitely UNEARNED by any stretch of the imagination) plus the fact that it is the buyer who always pays the commissions both ways, so another $20-30K lost getting into the place on day one.

    Why is this person paying a financial adviser when all he had to do was use an online calcualtor and read a few blogs ???

    To top it off……all for money lost for shelter that you might spent 8-10 hours day actually inside. It is enough tto pay about 6-7 years of our rent. ROTFLMAO…….!!

    Is it any wonder that the “banksters”, real estate con artists (REALTOR – TM) and everyone else involved in the “REIC” constantly lie, cheat, and steal when this kind of money is involved ?

  7. OK. finally after the very superficial discussion around the merits of buying or renting we are at the point of starting talking the bottom line (like the Financial Advisor from the headline should have?). Where is a reliable and correctly build online calcualtor for the Greater Vancouver could be found? It would fix all the talks right away…
    There is supposed to be an official online calcualtor on the gov of Canada web-site but it is very conveniently broken for the long, long time efficinetly allowing so called advisors trick the people into the buying:
    “We are currently in the process of updating this calculator. We apologize for any inconvenience this may cause.” – with the links to the greatly skewed calculators on the vested interests web-sites.

    • Try this one, it’s one of the better ones I’ve seen because it includes the possibility of waiting a few years for price drops as a viable alternative, instead of the “buy now or rent now” false choice.

      Personally I use a very simple investor spreadsheet highlighted here:

      • Thanks for these links Jesse. I tried doing my own calculations once, but don’t really know enough about real estate to figure these things out, and certainly don’t trust a mortgage broker or banker to give me honest or intelligent advice. Do you know of any calculators or spreadsheets that give a breakdown over the entire life of the mortgage, comparing to rent? The simple calculations I made myself determined that for me a 25 year mortgage would be equivalent to about 37 years of rent (assuming an average mortgage rate of 8% (from the last 25 years) and annual rent increase of 3.5%), but these were very rudimentary calculations.

      • Jean the issue is factoring in time cost of money into the calculations. The quickest measure IMO is to look at current investor yield as a proxy for a house’s relative valuation. Vancouver is close to the bone when it comes to mortgage rates and prices; any hiccup, or “unexpected” assessment and an investor is almost certainly in the red. Since houses aren’t heavily in the hand of landlords I look at condos; when condos return to prices where cash investors can make a decent risk-adjusted return chances are houses won’t be too far behind. As a quick guess I would look for 7% in higher-quality areas. (That’s what REITs in the US are getting right now.)

        Some buildings have long term capital plans; from that we can estimate outlays over time. I’ve been somewhat surprised at how substantial these outlays can be, which is why even more complicated buy-vs-rent calculators can miss some things down the road. It’s almost better to lump in these expenditures and just increase the required yield.

        Anyways enough blabbing. Short answer is I don’t have a lifetime calculator in mind, I just look at current returns.

  8. jesse, the prospective buyer usually has no idea where to find the local property tax rates and other municial charges – like the garbage+water in Richmond have increased a lot recently. The current numbers are usually hard to find, but they schould not be overlooked, in Richmond they could be close to 4-5 K combined per a year.

    • If a prospective buyer cannot find out the encumbrances associated with a property I cannot help them. I would think a simple request for disclosure of municipal fees would suffice.

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