The Financially Resilient Owner – “Don’t mean to sound like a dick but a couple hundred grand won’t change my lifestyle much at this point.”

“We just completed a 110K reno on our home in Abbotsford.
Kitchen, Family room and 1/2 bath.
It was major. The knocking out walls kind.
I didn’t do it to increase the value of the home.
I did it because we bought the house in 1991 and it needed it.
We like the location and don’t have any plans to sell it. Ever.
Our kids will probably end up with it.
The house has been paid for for 9 years and we paid cash for the reno.
Not every homeowner is a debt slave living beyond their means.
Some people here know me. I’m no bull.
I fully expect a hard crash around these parts.”

“I mean no disrespect, but if you fully expect a hard crash (which I do as well) why not sell now, rent, and buy a similar house in 7 or 8 years when they are 50% off?
Since your home is paid off it seems like an easy way to make several hundred thousand dollars.”

“My kids are living in the house and going to UFV.
I’m working outside of the country now and am almost never there.
Did the reno. mostly so it will be ready when I finish this contract and come home.
I have a house in Panama and Tulsa for work. I’ll be buying another one in Denver soon.
It’s not worth the hassle for me right now to sell in Abby and have to find a place for the kids plus move all my junk. I also don’t want to lose the location. It’s irreplacable. Last house on a dead end street with a park behind me.
Don’t mean to sound like a dick but a couple hundred grand won’t change my lifestyle much at this point.”

[Above exchange at VCI 11 Sep 2012 at 2:14pm to 4:39pm]

One way to decide on the wisdom of ownership is purely via fundamental analysis, calculating the true value of a property based on factors such as rental yield, and purchasing when the property is in a range of fair value. This is the analysis and argument we most often discuss on this site, largely because it pertains to the vast majority of market participants.
The above exchange, however, well illustrates another concept that we have discussed here regularly through the bubble, one that is central to the whole idea of whether some individuals should buy/own or rent: If an individual can afford to see the price of their home drop by 50%, or even more, and tolerate the effect that such a drop would have on their future financial health, then they might as well own. Put another way: If the inconvenience to you of your home dropping to less than half of it’s market price is less than the inconvenience to you of renting, you might as well own, even in a very overinflated market!
‘metalhead’ is an example of such an individual. His net-worth and overall financial circumstances allows him to tolerate the idea of his Abbotsford property dropping by “a couple hundred grand”.
But how many Vancouver homeowners can say the equivalent? The majority have most of their net-worth in their homes, and many leveraged ‘players’ have much more than their net-worth in their homes. For most a drop in market value in the region of 50% would severely alter their circumstances and prospects.
– vreaa

45 responses to “The Financially Resilient Owner – “Don’t mean to sound like a dick but a couple hundred grand won’t change my lifestyle much at this point.”

  1. Here’s an anecdote from the flip-side to Mr. Metalhead: A coworker of mine who is moving into a new rental told me the story of her new landlord (landlady really). The landlady and her family immigrated from China ~7 years ago as investor class immigrants and piled a lot of their money into a house. They also started a restaurant and proceeded to lose most of their nest egg (the restaurant business being arguably one of the most Darwinian of ventures imaginable; selling used houses in a falling market is probably up there too, but I digress). Fast forward to today, the family has virtually no savings, the house is mortgaged to the hilt and everyone in the family is working, including the elderly mother-in-law working at a $10/hr job after not having had to work at all for the past 40 years. They’re also cheating on their taxes by not declaring the rental income (cash only). I’ll leave it to you gentle readers to formulate your own opinions as to the take home message, but suffice it so say it doesn’t seem like it will end well.

    • Sorry, just to clarify, the rental is one of two suites the family has set up in the basement the aforementioned heavily mortgaged house.

    • Is it “normal” in Chinese culture to divulge all of a family’s personal financial information (including tax evasion) to a complete stranger renting out a room in their basement?

      • Having grown up with a lot of Asian friends: there’s at least a sizeable fraction of the Asian population that likes to brag about their high financial status. It’s because the culture is so conformist that the brand names you own and the fact that you can afford them define a lot of your individuality. The one-up-manship I’ve seen between Chinese parents over their kids grades, then universities, then professional programs, then earnings, then grandchildren and accompanying house count is sickening. There’s a reason why a lot of Canadian born ethnically Chinese kids are proud to call themselves “bananas.”

      • Ok, but that’s not what’s happening in the above anecdote.

    • “elderly mother-in-law working at a $10/hr job after not having had to work at all for the past 40 years”.

      Assuming she retired at the age of 50, then she would be at least 90 years old today. You tell me who would hire a 90 years old woman in Vancouver for $10 an hour?

      • In some previous generations women it was somewhat common that women didn’t work after marriage or their first pregnancy.

      • Don’t know how I got two “women” in that sentence.
        Clearly it’s only big enough for one.

      • If she worked until she got married at age 20, then she could be 60 now.

      • not banana yet

        “she worked until she got married”? “In some previous generations women it was somewhat common that women didn’t work after marriage or their first pregnancy.”

        in 70’s China??? whatever!!

    • This must be a lie as we all know and repeatedly told that Chinese investor class immigrants are all wealthy beyond dreams and never have to work. They afford to lose millions like we use a $20 or $50 bill and they just keep getting more from their child slave labor factories in China. This tale of investor immigrants family running out of money, having mortgage on house, and have to work $10/hr job must be blastamy and heresy!

      • You’ve missed the point…the real quetion here is, would this family detail their worsening financial situation to a stranger renting in the basement? Stretches credibility.

      • It depends upon how stressed they are and how much alcohol they’ve had to drink. All it takes is one of the family having a beer or two, and the story will flow.

    • They came over wealthy and lost their money is the story as I understand it, so I assumed they were well off enough back in the day that she didn’t have to work.
      My co-worker and her husband are Canadian PRs with advanced degrees (i.e. nice, smart, hard working people without much money) who are originally from China if that helps address the “why would they tell a complete stranger” question.

  2. Owner who will never sell don’t affect the market as they don’t participate. What I find interesting is that RE is so all pervasive in BC that even someone like Metalhead, who has no partcular personal interest in what happens, has deeply held opinions and posts on a RE-focussed blog.

  3. One thing that doesn’t come up much in the sell and rent argument, is the fact that houses are not fungible. It’s great to say, “sell, take your profit and rent a similar house for less”, but in reality, it’s not very easy to find a rental house of the same calibre in the same neighbourhood with all the same amenities and with a decent landord who will take a long term lease.

    • That may be true for houses, but what about condos? It’s condo prices that are among the most frothy. For every unit you see, there are like 20-40 identical units above and below (of course there’s a difference in height too)

    • dancinpete and gokou3 -> Good points, agree with both of you.
      It’s a lot easier to make sense of the condo price:rent ratio than that for SFHs. This has to do with the hard-to-calculate imagined future build potential/densification on SFH lot.

  4. This guy’s either VERY conservative or financially not very astute. Borrowing against the house and investing it in higher yielding assets is the play right now — Even Mark Zuckerberg mortgaged his recently purchased house. Likewise, paying cash for renos only makes sense if you’re getting the tax evasion discount.

  5. Another thing to consider is that metalhead has been mortgage free for 9 years, which means that in recent years his annual accommodation cost has quite likely been lower than the annual cost to rent an equivalent house. He’s just dumped in an additional $110K, which obviously changes the equation, however he paid for the reno with cash, which means no ongoing interest charges. Even with historically low interest rates, mortgage interest is one of the biggest culprits when it comes to the elevated cost of owning versus renting. If you aren’t paying any interest, the comparison is quite different.

    He also bought his place 20 years ago, so when it comes to the bubble, it’s been strictly a paper event for him. Some might say he’s crazy not to cash out and realize the equity in the house that’s been delivered by the inflated market. But think about it: you’ve been an owner for 20 years, you like being an owner, you like your place. The idea of going back to being a renter, and dealing with the vicissitudes that can sometimes entail, doesn’t really appeal. Assuming he’s preparing at least somewhat reasonably for retirement, he can stay put. A crash, like the price escalation of the past decade, will be just a paper event for him – assuming his career isn’t dependent on real estate.

    There’s also the issue of practicality. Everyone can’t sell. A society can’t go from 70% ownership to 0% ownership. Who would the buyers be? And we’d quickly outstrip available rental stock. I’m assuming a fallback in ownership rates of even a few percentage points would indicate a heavily depressed real estate market, and steeply declining prices, which would quickly get to the point of many American cities where owning is no longer more expensive than renting, and thus the argument for selling, or not buying, would cease to exist. Market equilibrium, or something like that.

  6. My parents are in a similar situation. But they want to reno in the near future. They purchased in 98′, in Richmond for 280k. At the time the market was dead and they were vultures which came in with the lowball offer. Their 89′ built 3200 sq/ft home on a 5400 sq/ft lot was originally listed for 344k. This type of home peaked at about 850k. It’s likely worth about 800k cuz homes like this hasn’t dropped too much “yet”.
    So they love their home. They don’t want to move out of this quite cul de sac. They don’t see their home dropping to even the 300’s. I really think this home could be worth about 450-500k when it bottoms out. It’s a nice house. You can’t live in a rental home for life. That’s the difference between owning and renting. But, you need to buy low that way you’re mortgage free to make it worth it to own. It may cost a few e tea dollars to own, but it’s a lot more freedom. Just buy low, and it’s all good!

    • Do your parents have enough saved to stay in thier home? So many people assume that with a paid off home that they can stay in their home in thier retirement with little or no nest egg, but that is a huge struggle.

    • What do you mean you can’t live in a rental home for life? Does no one understand the time value of money?

    • “You can’t live in a rental home for life. That’s the difference between owning and renting.”

      What the hell are you talking about? If I die tomorrow, I would have lived my entire 38 years (whole life) in rentals. And if house prices here don’t revert ever, when I die at 100, I will have lived 100 years in rentals, too.

      • If you like your home, why do you need to sell?is life about being happy or having a big pile of cash? And why do posters here think everyone have no money except for what they own in their home? Good luck, not everyone is as broke as you think.

    • My parents have a paid off home and approx. $300,000 in retirement savings. My dad who’s 67 had a stroke so he’s essentially retired. Even with $300,000 + it’s gonna be a tight budget to make that money last 20 years or so. They’re hoping for $1000 a month from thier RRSP’s on top of approx $1800 a month in OAS and CPP. I’ve run the numbers and its not pretty.
      That will probably mean no travel to see relatives, maybe no car in the future, cable may have to go etc….

      I’ve never seen that many seniors out there say, “I own my home so I’m the happiest person there is”, what I do see is alot of cranky seniors who COMPLAIN about the cost of EVERYTHING. If you knew how much it cost to run a home, shouldnt you have saved money for those costs in retirement?

      Its easy to think that owning a home is FANTASTIC when your retired, but its a bitch when just maintaining a roof over your head eats a big chunk of your lowly income.

      • Tragic story, but sadly your parents are probably the lucky ones. Many people who bought in the last 5-10 years will probably retire with a massive debt owing on the house and NO savings.

      • “what I do see is alot of cranky seniors who COMPLAIN about the cost of EVERYTHING”
        sometimes I think this blog is full of seniors

  7. Something everyone is leaving out of the discussion is the tenuousness of renting. A friend rented an apartment for many years. Never planned to leave. The bldg sold to a guy with an ugly reputation. Intimidation began immediately. Threats. Eviction notices posted on doors. Making rules for paying rent that couldn’t be met. Eventually, everyone left because they were scared. The talk here is of some benign, gentle, kind, understanding landlords. This guy got everyoneout, doubled the rent.

    • So just find another rental. People think moving is such a horrible thing, it’s actually not that bad and had its benefits.

      • In some cases, maybe but depends on the situation. Moving with a full house, family, kids is difficult. Add to that moving to a potentially new school catchment, new friends, organizations etc. Stage of life matters a lot on overall impact of a move.

      • “People think moving is such a horrible thing, it’s actually not that bad and had its benefits.”

        No, it doesn’t. Its a PITA, time consuming, and no one really likes to do it. I remember all the years I rented, moving every 18 months or so, it sucked. The fact that I would actually have to move is probably the #1 reason I won’t sell my house and rent.

      • Funny that nobody complains about moving when they buy a place

      • Renters Revenge

        Lots of “homeowners” in the US had to move when their bubble burst. “Homeowner” does not equal stable.

      • 4SlicesofCheese

        Why did you have to move every 18 months?

  8. There are some times when I have finished a long day of “housing analysis” and I find myself wondering if I can face the long lineups at Costco or the border to save some money. Instead I say, “F*ck it, I’m blowing my wad at Whole Paycheck.”

    There is nothing wrong with overpaying. We do it all the time for rational reasons, not least life opportunity cost (metalhead does a nasty oil/gas job as his profession from what I recall), but don’t think it’s a sound financial investment. It’s blowing capital earned as “compensation”. The problem I see now is people conflating overspending with a sound investment. I know one guy who bought in July, I asked why, and he said they could afford it even though he knew $300K was likely up in smoke. They wanted to own and life’s too short.

    Which is why I think any bursting of the bubble won’t be sweet, it will be people realizing they are ten years older.

  9. Metalhead is making at least 300-500k/yr with his oil patch job (I’m probably being very conservative). Why sell when you don’t have to?

  10. “a couple hundred grand won’t change my lifestyle much at this point”.
    “At this point”. That’s the key.
    Remember the turtle and the hare? The hare thought he could take a nap “at this point” because the turtle was so far behind. You all know the ending to the story.
    You never know whether or when the day will come when you or your family will “NEED” money.
    Windfall profits don’t wait; they come and go.

    • So true, my parents paid off their home 15+ years ago. As far as they were concerned they would be ok, $100,000 + in RRSP’s, a paid off home. my mother quit her job cause they no longer need the income etc…. Who wouldnt in fine shape with a paid off home???? Well my dad didnt put away more in RRSP’s (i guess he thought whast was the point with a paid off home?) and at 65 was told he didnt have enough to retire.
      So he worked two 2 years more of physically draining work 8-10 hours a day, cause he wanted to travel some, go back to visit relatives etc…

      What really gets me is the wasted time of no mortgage payments, what a opprotunity just totally pissed away.

  11. Maybe this is the same reasoning that Vancouver SFH are so “attractive” to overseas buyers/new investor immigrants/fleeing hot money – couple of $100K drop wouldn’t really “change their lifestyle much”. For some, buying an overpriced house is strictly a “paper event”.

  12. We’re in a similar situation to metalhead. We love our house and location, will have paid it off entirely (and way early) in a couple of years, and will be able to put all the money we currently pay in mortgage into funding an early retirement. We’ll still have property taxes and maintenance, but it’s a helluva lot less than we’d pay to rent a similar home in our neighbourhood, and these costs can be covered completely by renting out a spare room for a few months in the summer to an international student if we want to do that (we have done it and enjoyed it in the past, so it’s familiar territory). Our family is in Van, so are both our jobs, so moving to another city makes no sense. Another reason that I am not interested in renting, besides the potential issues with crappy landlords, instability and the lousy quality of a lot of rentals I’ve seen is that we have lots of pets and fish tanks, and renting isn’t feasible for us. It’s hard enough to find rentals with just kids…try telling a landlord that you also have multiple cats, two large dogs and three 100 gallon plus tanks and watch them run screaming. 🙂

    Would I buy in this market if I was in a “normal” situation? No. Does selling now and renting make sense for my family personally, given our current situation and lifestyle? No. Ergo, we’re staying put.

  13. Pingback: “My parents have a paid off home and approx. $300,000 in retirement savings. It’s gonna be a tight budget to make that money last 20 years or so.” | Vancouver Real Estate Anecdote Archive

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