“Pegeen and Michael have invested heavily in the B.C. real estate market, which poses some risks if prices fall. They have about 64% of their wealth in real estate [actually, 81%]. As a benchmark, pension funds tend to target 10% to 15%.”


“I see no problem having 81% of my wealth in real estate…”

“Midlife reflection led Michael and Pegeen to feel their lives would be fuller if they adopted two children, so they have set the process in motion. Their plan is to adopt siblings between the ages of 5 and 10 years.
The couple can afford the new additions to their family. Over the years, they have built a consultancy that pays them well even though they have plenty of time off to travel. They spend about a quarter of each working year out of the country.
“We hope this won’t change once we have kids,” Michael writes in an e-mail. When the children join them, they will have to move from their two-bedroom Vancouver condominium to a three-bedroom home. High prices in the city mean they will likely have to rent, Michael writes.
With no company pensions, they have to provide for their own retirement. They are well-fixed to do so now, but they know having children will change things. They have an investment adviser “but don’t really have a plan,” he adds.
Their major assets are a portfolio of stocks and B.C. real estate – their condo, a vacation property and a half interest in a rental property in a smaller city.
Their goals including scaling back to working half-time so they can spend more time with the children, continuing to travel abroad on business, maintaining their current lifestyle while still providing for the new additions to their family, and “retiring early at 60 with few worries and the kids’ education taken care of.” Neither one has life or disability insurance and they wonder whether they should buy some.”

“We asked Eric Davis, a financial planner, investment adviser and vice-president of TD Waterhouse Canada Inc. in Kamloops, B.C., to look at Michael and Pegeen’s situation.
“Life is pulling this family in many directions,” Mr. Davis says. … They need to give some serious thought to setting their priorities. …
If they sold their existing real estate, they would have enough money to buy a three-bedroom house in Vancouver if they chose to, Mr. Davis says. Because of the nature of their business, which takes them out of the country part of the time, “they could consider buying a cheaper property outside the expensive Vancouver market but [that is] still accessible to airports.”
Mind you, Pegeen and Michael have invested heavily in the B.C. real estate market, which poses some risks if prices fall. They also carry substantial debt in the form of a $390,000 line of credit.
“From an asset allocation standpoint, they have about 64 per cent of their wealth in real estate,” Mr. Davis says. “As a benchmark, pension funds tend to target 10 per cent to 15 per cent.”

Monthly net income: $10,000 (variable)
Assets: Non-registered portfolio $380,000; RRSPs $80,000; TFSAs $40,000; U.S. IRAs (individual retirement accounts) $160,000; condo $600,000; vacation property $500,000; share of rental property $75,000. Total: $1,835,000
Monthly disbursements: Housing expenses $630; transportation $200; groceries $800; clothing $100; line of credit $1,000; charitable $100; vacation and travel $500; personal discretionary (drinks, dining, entertainment, pet expenses, sports, hobbies, subscriptions) $1,410; dentists, drugstore $150; telecom, TV $185; RRSPs $815; TFSAs $410. Total: $6,300 cct
Liabilities: Investment line of credit $390,000

– from Mid-life couple need to set their financial priorities, The Globe and Mail, 26 Oct 2012

This ‘Financial Facelift’ is noteworthy in that it is the first that I can recall where any advisor has explicitly mentioned the possibility of Vancouver RE dropping in price.
Relatively minor point: We disagree with the math – Their net-worth is actually $1.445M (subtract their liabilities), of which $1.175M (or 81.3%, not 64%) is in RE.
That aside, look at the advice: They are in ‘midlife’ (40s?) and it is suggested that they are being unwise having ‘64%’ of their wealth in RE; the wisdom of a far lower figure is implied.
Think about it: what percentage of Vancouver homeowners in their forties have less than 64% of their net-worth in RE? Many (most?) have a far greater percentage in RE simply by virtue of the cost of their homes. We don’t know the exact numbers, of course (we’d love to know them) but we suspect it’s a very substantial portion.
As a group, Vancouverites are woefully overdependent on RE for their future financial health, “which poses some risks if prices fall”.
– vreaa

33 responses to ““Pegeen and Michael have invested heavily in the B.C. real estate market, which poses some risks if prices fall. They have about 64% of their wealth in real estate [actually, 81%]. As a benchmark, pension funds tend to target 10% to 15%.”

  1. Looks like they put careers ahead of kids now are unable to naturally conceive on their own.

    Nothing in the world is greater than having your own flesh and blood, that includes a “career”.

    • Some people can’t have kids just because the nature decided so, no other reason.

    • I’m beg to differ, my greatest potential output is not a mere biological consequence of flesh insertion.

      • “Its not a miracle, it’s a chemical reaction. No differen than when I put food my mouth and a turd comes out my ass.”

      • Bill, is that really you?
        [We have for a long time asked ourselves the question “What would Bill Hicks have to say about Vancouver and its preoccupation with housing?” Where is he now that we need him so badly?]
        Perhaps an idea for a thread.

      • i’m pretty sure when he’s talking about the guy in sunglasses, he’s talking about all our new little real estate moguls..

    • Bravo, Aldous! Arguably coy, but nevertheless a valiant attempt to disambiguate!… You meant DeVito, I mean InVitro, right?…

      [NoteToEd: Arnie was right for once, the Clinician was a TotalDoucheBag. Just teasing, Aldous – when someone feeds me the ‘straight line’, the response is virtually autonomic/natch… LightComicRelief.]

  2. Hmmm… If they decide to proceed as planned – what are the odds that Mikey&Pegeen will insist on privately educating the kiddies?… Either way, they could be in for a surprise…. [#collateral damage]

    [CBC] – Demand for Vancouver private schools outpacing spaces: Fraser Institute study says renting vacant public schools could help meet demand

    ….”Study author Jason Clemens says several factors are slowing the expansion of independent schools, including the cost of land in Metro Vancouver, fundraising and zoning laws. *One solution would be to rent out vacant public schools to independent schools to help them expand, says Clemens.”…..

    http://tinyurl.com/8pf5zdp

    [NoteToEd: So… vacant investment properties in ‘popular’ neighbourhoods lead to declining enrollment and public school closures whilst simultaneously boosting the PrivatePremium – a NouveauMilieu where the SensibleSolution… ‘obviously’, is to offload those ‘unwanted’ and unloved schools onto the Independents… who will surely put them to good use. NoteToSelf: Purveyors of PleatedTartans and BreastedBlazers are clearly going to do well out of this.]

  3. Question for class: how does their net worth change if RE prices drop 25%?

  4. “they have built a consultancy that pays them well”

    They’ve built a line of credit that pays them fantastically

  5. The amount of leverage here is reasonable, it’s the asset allocation that’s nuts. Their net worth for their age is super. Most Vancouver homeowners are forced into silly asset mix because they can’t sell a portion of their property. Here it’s much easier – get rid of the surplus property! 600/1445 = 41% would be a manageable exposure. Even in a 50% correction they’d only lose 300 which they can afford to lose.

    As with most non-parents they are clueless on family life. That’s easy to fix too.

    I wonder how much of this wealth came from work/savings versus property appreciation. Not a virtue question – question of repeatability.

    • They have 10K a month as an income so unless they inherited some money, it looks like the most of their wealth came from the RE growth? But something here does not add up.

      • 10K per month net, so they’re probably on close to 200K gross for the household – that sort of earning, with no dependents, can lead to significant savings. While RE appreciation has certainly factored int their overall worth, they appear to have 660K in non-RE investments. That is not unreasonable for a disciplined couple in their 40’s. In fact, given their lifestyle up until now, it seems a little low.

    • Good assessment, Thomas. There isn’t much of a problem here in my view, even with their significant property exposure. They are not betting the farm on it.

    • Agree, these guys are far from extreme examples.
      Yet, as Thomas implies, aren’t they gambling larger than intended?
      If RE pulled back 25%, they’d be down $300K, on paper. And how long would it take them to save that, on $10K income per month, with intended expenses?

  6. “We hope this won’t change once we have kids,”

    No, having kids has no effect on your bottom line or lifestyle. Ha ha.

  7. Middle Class white people problems, I hate these G&M financial makeovers. No one has the balls to tell these people that they can’t have it all.

    Maybe they should look at the long term value of holding a vacation property and if they go there for 1 month a year.

    “Hope” is never good for any financial strategy and the kids will change everything.

    These two want there cake and to eat it too, come to think of it I want to retire at 60 also.

    • Exterminate Everyone Over Forty

      No kidding. How many pairs of yoga pants away are we from whining that save on foods doesn’t stock fair trade, non gluten facial cream? These people are idiots in the classical sense of the word. It’s high time the economy exacted some penitence for their financial conceit.

  8. In Ottawa today, it’s all “trick” and no “treat”… and notwithstanding that, as cheerfully illustrated above, most diehard G&M readers can’t face the headlines without swaddling themselves in ToiletPaper… it is a most delicious irony that the latest legislation to emerge from our National Chamber O’Horrors (aka Parliament) – on Halloween no less – will ban the wearing of masks at “riots” or “unlawful assemblies”… It is not clear yet how the legislation will impact YVR CondoPresale events…

    [CBC] – MPs set for final votes on mask ban and vandalism bills

    http://tinyurl.com/dxqalrc

    [NoteToEd: there is absolutely no truth to the LateBreaking rumour that children wearing Harper masks this evening will run afoul of the legislation and/or have their gruel confiscated.]

    • Tx fr lnk, wl hdln

    • I get to thinking the bear argument is just too abstract for many.

      Read the main poster’s many comments. He wants to buy and is looking for validation. He’s not getting any validation from me, he’s getting abstract asset valuation metrics and me telling him he’s taking a huge risk by buying. I don’t think my method of elucidation is breaking through. Whatevs, I tried, in my own way.

      • Rusty's Ghost

        He ndz a boot 2 da hed

      • “He wants to buy and is looking for validation.”
        +1
        He’s not really interested in a discussion about the merits of buying or not buying. He wants to be able to tell himself that he’s had such a discussion.

      • he’s also lording it over the rest of us – whatever happened to the old Canadian way of NOT discussing personal finances in public?

        little does he know, some of us have a lot of experience in the food and wine business, and some of us know that in vancouver, a red seal cook (i won’t call a red seal a chef) isn’t worth squat these days, dime a dozen, unfortunately. they’ve been sold a bill of rights by all the vocational schools. on top of that, most of the ‘top’ restaurants in vancouver refuse to pay overtime – so these poor kids (because that’s what they all are, 19-25) end up working 12 hour shifts 5 days a week at $12 an hour – and that’s honestly if they’re lucky – sure, you get the hours, but you get zero benefits and no overtime – you are literally doing your employer a favor for what? a reference? that’s illegal in this country, no matter how you justify it. so sick of seeing noobs taking these jobs and rationalizing it to themselves and each other. there can be a small tip pool, as well, but it usually works out to $1.25-2 an hour.

        there’s the truth, sorry. we can’t all be executive chefs, that’s why they’re called executive chefs.

        it’d be cute if it wasn’t so wretched – i like how they’re going to have a roommate, that will be so much fun – paying $2k a month to fuck quietly.

    • 4SlicesofCheese

      He posted this hour and looks like he has had a change of heart.

  9. The “value” of their RE should also be lowered by the “settlement costs” (Realtor fees, land transfer taxes, cost of moving etc.) at which point they are even more leveraged to this asset class.

    It is like the “future value of employer pension” that the Globe cites in their articles. Until you collect every last penny from it . . . don’t expect anything. It’s kinda like counting your chickens before they are hatched (while making an omelette).

  10. Stocks and vancouver real estate?

    They’re set to lose over half of their net worth within a year, guaranteed.

  11. Get a dog. Cheaper and you can put it down when it wears out.

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