“Far too many middle- and lower-income buyers threw borrowed money at real estate, then compounded the error with expensive upgrades throughout.”

“It might surprise you to learn that rich Americans, people who could pretty easily buy any make or model they like, tend to drive inexpensive cars. A study by car pricing site TrueCar found that eight of the 10 best-selling autos in the country’s 10 wealthiest ZIP codes averaged less than $40,000.”

“The takeaway is clear: Your money should work for you, not for the salesperson. If you buy a car beyond your means and, worse, finance that pricey ride, you are throwing good money after bad.
Exactly the same thing happened during the [U.S.] housing boom. Far too many middle- and lower-income buyers threw borrowed money at real estate, then compounded the error with expensive upgrades throughout. Granite countertops, stainless-steel appliances, fancy pools and outdoor decks, usually bought with illusory home equity loans.”

‘Which Cars Do Rich People Drive? Cheap Ones’, marketriders.com, 9 Aug 2012

52 responses to ““Far too many middle- and lower-income buyers threw borrowed money at real estate, then compounded the error with expensive upgrades throughout.”

  1. pricedoutfornow

    My significant other was commenting the other day that so many people at work drive expensive cars, and couldn’t figure out why, when their salaries are just average. All of these people are homeowners. I think driving an expensive car in Vancouver has more to do with HELOCs (and perhaps other debt), than real wealth. Though I’m sure people will argue with me and say “no it’s the HAM!” (the coworkers are not HAM).

    • I have to admit that essentially the same though crosses my mind many of the times I see somebody in Vancouver in a very expensive car: “That has to be purchased on borrowed money”.

      • Or drug money.

      • It’s funny how 10, 15 years ago a Lexus, BMW or a Mercedes were considered really nice cars, now everyone’s got one, they’re not that special. Even Range Rovers are, yaaawn, SO overdone. Lambos and Ferraris are still uncommon enough to be special though. 🙂

      • Is it so implausible that some people here have actually worked hard and bought their cars outright with honest money, especially in what is claimed to be an enormous real estate bubble? Sounds like jealousy to me.

      • HAM kids are driving maserati’s, ferrari’s, and lamborghinis. They can affirm them.

    • Also, we appear to have more than our fair share of very expensive cars in Vancouver. Is there a way to attempt to measure this? Luxury auto sales per capita?

      • Luxury auto sales? No, luxury auto lease or even better rental. Expensive leases literally drive this market is my conclusion in Vancouver. You can spot the rentals, usually the young guy with or without arm band tattoo accessory, in the bright coloured sports car with the top down circling Brown’s or Cactus Club.

      • Sorry one last reply. When you spot the luxury car, listen to the gear shift and you learn infinite amounts on whether the car is rented, leased or owned.

      • Anonymous UBC Professor

        One thing that I enjoy about having profs as colleagues is that almost all of them couldn’t care less about cars.

        Look in the faculty lots at UBC/SFU/etc. You will see a lot of Honda Civics, Mazda 3s, beat up minivans, etc. The beat up cars even belong to those earning >$150k, or who have started companies, etc. It is simply because they don’t care.

        One of my favorite memories from grad school was when my PhD advisor took me for a ride in his car. The rear doors were both broken so they were held closed by bungee cords. The exhaust fumes would leak into the body of the car so we had to drive with the windows open, in the middle of winter. It was a riot. This guy’s consulting rate starts at $2000/day.

        My guess is that their reasoning is as follows. They gauge their success in life by their career accomplishments and by sending their kids to Cornell/Yale/medical school/whatever. They don’t care about toys.

      • Anonymous UBC Professor: “They gauge their success in life by their career accomplishments and by sending their kids to Cornell/Yale/medical school/whatever.”

        Or, they rape grad students after knocking them out with exhaust fumes and tying them up with bungee cords. Kidding, kidding.

      • I agree and find it puzzling. When friends from the US visit, they notice as well. Seeing a Lamborghini, Maserati, Audi R8 etc is a pretty common sight. The garage in our downtown condo is filled with BMWs, Lexus, Mercedes, Porches and other nice cars.

        I recently read that in Canada 25% of car trade-ins are not paid off. Would be interesting to see the stat for Vancouver.

      • “success in life”

        Interesting people have interesting goals & priorities (not just making $$$ or owning fancy stuff). But most people around here just aren’t that interesting.

    • Don’t blame them for finding a new lease on life.

  2. Realtors all drive expensive cars, presumably so they will look successful to their clients. And there is a disproportionate number of realtors in Vancouver. Then there’s drug money, HAM, and everybody else who’s adopted the city’s collective fixation on beating the Jones’s.

    If people think RE in this market represents a “good investment”, it’s no wonder they make dumb financial choices in other aspects of their lives, too.

    • KarmaChameleon

      Many realtors lease their expensive cars and consider it a business expense. Look for a lot of luxury cars in the lease return market shortly! Maybe they’ll end up frugally cycling around instead. Apparently commuter cycling is making a big comeback in bankrupt Greece.

    • Salesmen and other flim-flam artists often shroud themselves with expensive, highly visible status symbols. People are much more likely to trust their money to people who are perceived as not needing it (“He’s so rich, he doesn’t need to steal my money” cough, Madoff, Corzine, John Law, et. al., cough). The sage is for the belly, not for the eye.

  3. I feel the same way about the condo. All gussied up with stainless steel appliances, granite, ceramic sink bowls, etc. It distracts the buyer from the smart investment…land.

  4. …”threw borrowed money at real estate”…

    Well. There’s borrowed… and there’s ‘borrowed’. TeeHee!

    “The former banker had been working as a handyman since 2006, when Interpol issued a warrant for his arrest.”

    [CBC] – China banker returns from Vancouver to face charges


    • OK, that’s too funny that is legal counsel is Alex Ning. Alex Ning is a notary public in Richmond that keeps getting in trouble from the law society for practicing as a lawer!

  5. no debt, no stress

    Last weekend I was at a very nice wedding in Vancouver and over heard a very telling conversation. I was waiting in line at the bar and a couple of guys were talking about what everyone in Vancouver talks about, real estate. I strained my neck and listened the best I could.

    Guy A – ” How are things? Do you still have all of your properties”
    Guy B – “Nope, we only have two left, and are going to get rid of those as well”
    Guy A – ” Really, why?”
    Guy B – ” Well basically when Flaherty and Carney talk about people being over leveraged and taking on too much debt they are talking about people just like me. We thought about it and realized that if we lost a tenant or my business slowed down at all we would be completely screwed. So we are trying to sell our last two properties. Its not worth the risk”

    I thought to myself, what only 2 left?, how the hell many did you have? and good luck with getting out of those ones.

    Just thought it was a interesting anecdote that at least some people are taking the warnings by F and C and reducing their exposure to real estate, but it also shows the extent of speculation in the Vancouver market in the last few years.

  6. Of course… not everyone is borrowing [or, ‘borrowing’]…

    [FT] – Foreign buyers flock to Miami

    “Residential sales are up nearly 24 per cent for the first half of the year following a record 2011 sales season. Christopher Booker reports on how one of the hardest hit US housing markets has been reignited by foreign cash buyers (4m 0sec) [60% TransactionVolume = Offshore; 90% Transactions = Cash]


  7. You know this is a good post, because it just re-affirms what I think and already know.

    As a doctor, I see many different types of patients. I work in a not-so wealther suburb but a lot of folks drive nice cars. Case in point: a nurse with a BMW X5. A teacher with a Mercedes C class. And of course the mainland Chinese (in Richmond and Vancouver and elsewhere) with their huge BMWs and Mercedes, and what not.

    The thing is though, when I first started working in 2008, I rewarded myself and bought a nice mid-level BMW, paid off within 2 months of course. I would never sink myself into debt for that. But I know that many probably do. They see the car payments and that’s all they see–if they can afford it, they buy it.

    I was once talking to one of my friends from the US who happens to be Jewish. And we kid each other about religion because he embodies all the Jewish stereotypes. SO I ask him what the success to Jewish wealth is. And he tells me that it’s because they 1) save a good percentage of their income every month, 2) delayed gratification, 3) never ever buy expensive cars/expensive upgrades, etc unless they can do so with cash and have lots of reserve left over. A car is a car. It gets you from point A to point B. And even though he, as a cardiologist, makes a ton of money, he just drives his old beat up 95 Civic until he has enough to buy a nicer car with cash.

    I’ve taken his advice to heart. I bike to work everyday now, about 20 miles round trip, and rarely drive my luxury car. One of my other colleagues, older guy 70 years old, a doc who had a house in West Van until he traded down, also has traded in his Porsche for a bike. The wealthiest know when to spend and when not to spend. When you have all the money you need, buying material possessions does not make you any happier. The Jews are right, and that’s why they are so successful.

    • Of course there are the putzes who own several Ferraris, all paid-for of course, because they like driving them. A fair reward I say, given how many lives they’ve saved.

      • Yes, there is a difference though between buying what you CAN affrod, but taking on more debt for appearance sakes/keeping up with the Jones’.
        I can afford a Mercedes SLK (monthly payment wise). But with my mortgage and the fact that I’m just starting out… I’d be stupid to waste my money all for show.

      • I don’t see how taking on more debt is necessarily “stupid”. People forgo future wealth for current consumption; if their future incomes allow it that’s their call. If they fall short due to some unforeseen circumstances that’s their problem. Point is, I know how most people do it: they don’t bother saving, and most will get by just fine. If Vancouver hits a rough patch it won’t matter, it will be the 10% who get stuck who will set the market.

      • I think borrowing money (loads of it) to finance a depreciating asset is a bad business decision any way you look at it. Sure you get the admirers but to me it’s not worth it. I don’t need to prove my worth to anyone. I’d rather take that money I’m using to pay off my car, and invest it, and watch it grow to a good amount, then sink it into to a depreciating asset like a car to satisfy my cravings.

      • “I think borrowing money (loads of it) to finance a depreciating asset is a bad business decision any way you look at it.”

        Actually this is done all the time — “borrowing” takes many forms and is best abstracted as “financing”. If I decide to build a computer monitor fab in Taiwan I will spend billions in capital expenditure but the equipment will be depreciated over a few years. What matters is the earnings return on the capital outlay; if the return is decent it will be possible to finance the investment even if the depreciation schedule is measured in years or months.

        In the case of cars, and perhaps condos, we’re more into the realm of luxury and ego but the principle still applies. A leaser or lender will finance the purchase based on earnings (income) and won’t care about utility. That is, whether we like it or not, a big component of the economy.

      • >I think borrowing money (loads of it) to finance a depreciating
        >asset is a bad business decision any way you look at it. Sure
        >you get the admirers but to me it’s not worth it.

        Maybe you’re borrowing the money to buy a car to “get girls” and a condo to “keep them”.

        Should a wife be considered a depreciating asset?

      • Ralph Cramdown

        “Should a wife be considered a depreciating asset?”

        Everybody dies eventually. The key questions are: What’s the current cap rate? What are the future earnings projections?

  8. Having just come back from OC, I can tell you that luxury cars abound – many people driving BMW, Merecedes, Lexus and lots of Porsches. But I also saw lots of Prius, Corolla too. But I also noticed some major companies there too – Google, Oracle etc. Brian – you pretty much hit the nail on the head. Many people in Vancouver driving for show – I am surprised how many luxury cars I see there. Also with gas prices so high there, I am surprised you don’t see more compact, and or hybrids.

  9. It appears the government is planning another round of immigrant flooding into BC. http://www.theglobeandmail.com/news/national/canada-must-attract-foreign-students-to-fuel-innovation-drive-economy-report/article4480232/

    Next they open a public comment dialog so the public has a fair say—select the majority in favor of the proposal for the records—done deal.

    The government is getting desperate and will continue to propose senseless policies until they are physically voted out.

  10. This is definitely part of the bubble trend. During our time in California, just prior to the bubble pop there, the number of extremely expensive vehicles on the interstate was stunning. And, on top of that, the expensive cars were often tricked-out with all manner of gaudy bling, further driving up the “investment” made by the owners (or the bank).

    This was, of course, in the heyday of ninja loans and refi. So, we all know now where that money was coming from.

  11. It might be the right time to start a new profession in the GVRD…. repo-man … can’t make the lease payments?? be careful where you park.

    and on a side note.. about 3 years back I posted in here that my girlfriends’ friend’s son bought his “dream truck” (and I got an ass chewing from the younger generation about how a “new truck” and dreams…etc) however he had to give it back 6 month ago… couldn’t make the payments… so much for the dream and the difference between affording a dream and owning a dream.

  12. You know, I will admit that among the low credit frenzy we got ourselves a pretty nice SUV, a Mitsubishi Outlander. We financed it over five years at 0%. We expect to drive it for 12 or 13 years. We love our car, it’s exactly what we wanted. But if interest rates were at their historic norms we would’ve probably got a Ford Escape – not the car we wanted, probably would’ve lasted only eight years. I thought the domestics were cheaper for sure, but they also look cheaper, the finishing inside isn’t as nice. I’m not here to have a debate about domestic v. foreign. We test drove, visited the auto shows, we visited the Mitsu dealership about six times before we finally pulled the trigger. But I’ll admit we did it when we did, about six months earlier than we planned, because we saw the 72 mo 0% financing and thought a deal like that wouldn’t be around long. Wrong! They came up with 84 mo financing after that. No, I wouldn’t have got the 84 mo.

    • Sometimes 0% is a trap. If you have a nice down payment and use standard bank financing for the rest to make a cash purchase you can usually get a factory cash discount. Once you calculate the APR rate with the cash discount it’s usually far better NOT to take 0%. It’s counter intuitive but the numbers don’t lie.

  13. Lots of good deals on nice cars down south.

  14. 99 percent of the “low end” BMW and Mercedes’ on the road are leased. Its all about image in Vancouver. People stare at me when I drive through kits with my crappy vw golf but im debt free at 26 and i bet they aren’t!

    • Come off it, there are lots of cars in kits that aren’t luxury models. If they’re staring it’s probably because of how you’re driving it.

      • The bulls are losing credibility by the day. In their dogged defence of Vancouver’s RE market and the culture of superficiality that feeds it, they’ve been reduced to speculating about bears’ driving habits.

      • I dont think you realize what i mean by crappy. my bumper is currently held on with good ole duct tape, and im a great driver so it cant be that! Im guessing your one of those people who leases a bmw or mercedes just for image when they cant afford it…

  15. Luxury cars in Australia are 3x the price of luxury cars in Canada.

    I admit to buying myself a $280,000 Jaguar XKR convertible last year. Fairly unique in Australia. Only 15- 20 XKR imported each year.


    So why? Because I could!

    I paid cash after paying all my taxes. No finance or debt. I have 3 cars. No debt on any of them

    Would buying another property or condo in your example make me any happier? No.

    I drove 1100km in it last weekend. Loved it.

    Plenty of rich people in cemetries who went there as miserable SOB.

    Ive seen too many examples over the years of parents scrimping and saving every $, die, and their kids live the high life and waste it.

    Sometimes you need to enjoy life a bit. Have some fun, some laughs. Why the hell do you work once you get past the basics. Its to enjoy some of lifes luxuries.

    If you made it, enjoy it.

    But on the other hand – large numbers of people do finance cars they cant afford. Only in a credit crunch do you really find out who were playing and who was pretending.

  16. But this thread is really about too much debt. People not working and saving and saying I want it now. Im not prepared to wait.

    One of the problems at the moment is that with interest rates where they are, money is practically worthless. Woe betide those maxed out on credit when money must attract a return.

    VREAA you maybe interested in this article. I dont know how much Canadian banks borrow offshore but Australian banks. But the warning is out. Get yourselves in order.


    Three months ago the possibility of a European break-up was real but an outside chance. Last week a survey by Bank of America Merrill Lynch of international institutions showed that a European crisis was now the outcome considered most likely by a majority.

    All Australians need to understand that if the institutional majority is right – and out of a European crisis there is a break-up of the euro – then there will be a banking crisis in Australia.

    But one by one, banks in Australia are starting to implement parts of their emergency plans. The European banks are major players in the global wholesale lending market and they are significant funders of about 40 per cent of Australia bank loans. Those European banks are going to incur substantial losses on a euro split and will no longer be able fund Australian banks.

  17. Ralph Cramdown

    Cheap as I am, I set a goal of averaging $1k/year in depreciation on the primary vehicle (in Ontario), and I’m on track, in a nice ride.

    The car market really led the way for the real estate market in emphasizing monthly payments over total cost.

    Vancouver IS nuts from an automotive standpoint. Visiting from Toronto, I feel like I’ve come from a declining rustbelt city to a centre of prosperity, even though I know that, economically, that isn’t true at all.

    My favourite falsehood about financed home improvements is realtors’ oft quoted stats about “return on investment.” They’ll say something like “renovating a kitchen or bathroom provides one of the highest returns on investment at 90%, but when you look at what they mean, it’s that you’ll get 90% of your money back if you sell, and where I come from, that’s a -10% return on investment.

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