Spot The Speculators #95 – “Each had a house with a mortgage. Then they bought a new residence and used a line of credit to add a rental apartment to the new house. Their $1.5-million of debt is 12 times their gross employment income.”

“A couple we’ll call Tiff (49) and Sandy (45) turned their long-time friendship into a union when they bought a house in British Columbia and combined their fortunes in 2008. The relationship came with a lot of baggage, however. Each had a house with a mortgage. Then they bought a new residence and used a line of credit to add a rental apartment to the new house. Their $1.5-million of debt is 12 times their gross employment income.
Revenue from the income properties barely covers their total costs — mortgage and line-of-credit interest, taxes, utilities, insurance and maintenance. Add in falling prices in the sliding B.C. housing market and the couple is subsidizing losing investments.
They save only $100 a month for RRSPs and $25 a month in an RESP for a Sandy’s nine-year old child from a former marriage. At mid-life, the couple, each of whom works for a large publishing company, has just $31,000 of RRSPs and almost no cash.”

They started with 25% conventional down payments, but now find themselves with about 10% equity in the rental units as a result of falling property prices and debt-financed buyouts of former partners. Their return after paying all interest costs, utilities, insurance and taxes is negligible. Unless they can raise rents drastically or realize future capital gains, the investments are flops.

A financial crisis triggered, perhaps, by unemployment, illness or accident would require them to add debt, for they have just $2,000 in cash. If interest rates rise by 1% or 2%, they would be forced to refinance, but they already have 30-year amortizations. To pay more interest, they would have to face deregistration of some or all of their $31,000 of RRSPs, heavy taxes on payouts or, in the worst case, bankruptcy.

Family Finance asked Adrian Mastracci, a portfolio manager and financial planner at KCM Wealth Management Inc. in Vancouver, to work with the couple. He is candid in describing the issues.
“The couple’s problems are far too much debt, especially for properties that are poor investments, and an excessive concentration in real estate, for each unit is within just blocks of the others,” he says.

Real estate has produced substantial gains for homeowners in parts of B.C., but the boom is waning. When interest rates rise, prices could fall further, for most people buy what they can afford and, with higher borrowing costs, they will afford less.

– from ‘Bad real estate investments leave couple with $1.5-million in debt’, Andrew Allentuck, Financial Post, 11 Jan 2013 [hat-tip JoeQ]

Summary of finances for this couple:
Assets $2M [$1.862M in RE at current market prices; $137K other]
Debt $1.542M [3 mortgages, 1 LOC, CCs, Car loan]
Net worth $456K [Assets minus Debt]
Ratio of RE holdings to Net worth: 4.1 to 1
Put another way, more than 400% of their net worth is in RE.
(I find this figure as shocking as the debt to income ratio of 12)
If/when the market price of their RE holdings drop 25% they would be wiped out.

What, me, a speculator?
Just innocent locals doing what innocent locals do, right? Building wealth with RE.
How many more out there are in similar situations?
– vreaa

39 responses to “Spot The Speculators #95 – “Each had a house with a mortgage. Then they bought a new residence and used a line of credit to add a rental apartment to the new house. Their $1.5-million of debt is 12 times their gross employment income.”

  1. Judging by local price/rent and price/income ratios, I would say there are more than just a few with similarly precarious finances. Imprudent is the word that comes to mind.

  2. A key, in my view, is they had to financially separate from previous relationships, and that for whatever reason are not selling their previous properties.

    One of the most pointed ‘spot the speculator’ yet.

  3. pricedoutfornow

    “How many more out there are in similar situations?”
    I would guess lots! Here in BC, it doesn’t seem to be unusual to have mortgage debts approaching $1 million, or more, and nobody bats an eye. This is not just in the lower mainland, I know people in the Okanagan who have multiple properties, and multiple debts which combined, add up to almost $1 million. And I know how much these people make-if they are lucky their annual total household income is just over $100,000. In some situations, the employment income is around $50k per year and yet the mortgage debt is still huge. WTF have the banks done to us in this province to allow us to take such huge debts?? I talk to my cousins in the US and these days it is NOT common to see such large mortgage debts, unless of course you have a huge salary to go with it ($250k plus). You should NOT have a mortgage debt approaching $1 million and employment income of only $120k per year.
    This is going to be bad, common sense tells me so.

    • Yes it will be very bad.

      After this is over Ottawa will sell BC to the Americans for three cents on the dollar and bid the province good riddance. Like how the Russians gave up Alaska for a cool 7 million back in 1867 which amounted to the incredible price of 2 cents per acre (how affordable!!).

      I am kidding of course. Ottawa will do no such thing.

      What I do forsee however is that the current bubble will damage the BC economy and again result in US interests snapping up the remaining valuable resources and interests just as they did in the early Eighties.

      For those of you who do not know this bit of history you had better take a closer look at what happened. As the economy cooled and housing went bust, most of our mills went into shut down, unemployment skyrocketed in the resource sectors, plywood went begging for buyers, land leases and timber rights along with mining interests came on the block for just pennies on the buck and as the recession deepened some very strong US companies came in to save our sorry arses.

      The provincial Government which was deep in debt and in no position to say “go to hell’ gave it all away just to appease the outcry from the panicked electorate and in a matter of just a few years our major mining and forestry firms were firmly in the hands of foreign companies.

      Like I often say……. We fought a war with the US in those times. Not a shot was fired but they kicked the shit out of us anyway and we lost control of a big piece of the province. This current bubble is all about energy, resources, control of valuable assets and money. Lots of money. This bubble is meant to squash the province until it says uncle and gives up what remains. Anyone who doubts that is a fool.

      Here it comes again.

  4. Bank of Canada hinting at raising interest rates in the fourth quarter. And things aren’t as good as they’d thought….

    • Thanks for the link.
      I think this is more of the same, actually: they are hoping that threats of an increased rate will cause moderation of borrowing (and, ideally, a reversal of the trend to more and more debt. — good luck with that, it hasn’t worked thus far.)
      But to actually start raising rates in this milieu is going to be deadly. Small rises will put many into crisis, as we already know from various analyses.
      Personally, I’d be moderately surprised by an actual rate increase.
      But note how different this is from 2008-2009… RE sales and prices are weakening, and the BOC is talking about rate increases.
      As we’ve said many times before, the Vancouver RE market is perfectly capable of crashing without rate increases (but if they occur, they’d certainly speed things to the downside).

      • Interest rate increases from the BOC would push realtors over the edge.
        Probably start a realtor riot.

      • Aldus Huxtable

        Loon, I asked this of friends recently. When did a real estate agent become a realtor? What deals with agents have been historically beneficial for everyone but the agent? People are skeptical of agents of all sorts but not realtors, interesting title change over time.

      • Agree that rate rises would suck for debtors. That can happen without the BoC touching rates.

      • “Uncle Ben’s…. The Right Choice.”… Think of it as a parable, ED… [albeit I would have substituted “only” for “right” as regards any cheeky critique of the likelihood of the BOC pursuing an independent monetary policy].

      • Carioca Canuck

        I agree with you.

        The central bank will never rise rates unless our bonds start to get hit. ……..but………and it’s a big but………

        If everyone’s bonds start to get hit (which eventually will happen when the worldwide bond market bubble pops and turns bearish) all the central banks around the world will be in the same boat, so why bother raise rates, as there will be no competitive reason to do so ?

        Ergo……we all become like Japan……ZIRP for breakfast, ZIRP for lunch and ZIRP for dinner. An endless diet of ZIRP………and a skinny starving economy as a result.

      • @Aldus

        When started redirecting to that is officially when re agents became realtors en masse.

    • Hm, interesting. I think the U.S. is thinking it’s time too. Maybe they are coordinating.

  5. No way these two will follow the advice to sell. Their assets are worth 1.5 mil after all. It’s like heroin, paper equity. Ugly situation just getting uglier by the day. What a shame.

  6. if they are 45/49, and combined their .. ~snort~… ‘resources’ in 2008, when they were 40/44, it’s likely they are on the 2nd ‘marriage’

    Marriage failure rates:
    50%, first
    67%, second
    74%, third

    good luck, they will need it.

  7. theboywhocriedthebubble

    This example is very untypical of the usual scenarios presented in the retirement readiness section. Its a funny coincidence that they chose to highlight these peoples situation during the recent uptick in Hubble Bubble. Too bad so sad. I have no sympathy for these types. Let them find out the hard way.

    • By the way, when I read the exact same article it today’s local rag (Victoria Times-Colonist), the title had been changed from:

      “Bad real estate investments leave couple with $1.5-million in debt”


      “Couple must regroup to shed $1.5M in debt”

      A-HA-HA-HA-HA-HA!!!! Regroup…..yup, that should take it….

      I assume they had to remove the reference to “bad real estate investments” to get it published in the Victoria edition!!!!


  8. Fiscal Tiff and Sandy Hook, who writes these ‘case studies’?

    • Naked Official #9000

      Loyal cadre!

      For your enjoyment

      • “We wuz just in the wrong place at the wrong time.”

        [NoteToNekkid: My nihilists are badder than yours. NoteToEd: That’s why, in the end, Nem opted to quit hunting nihilists after a VeryGoodRun. “Whoever fights monsters should see to it that in the process he does not become a monster. And if you gaze long enough into an abyss, the abyss will gaze back into you.” – Friedrich Nietzsche]

  9. Imagine going to a bank and saying “I have $500K. Lend me another $1,500K because I want to invest in ‘x’ ” (where x = any asset class other than RE). You’d get laughed out of the building.
    RE has a special relationship with leverage.

    • Yes, R/E has a special relationship with modern slavery.

    • This isn’t true. If you want to invest in government bonds, available leverage is very high (96% LTV). Ditto with commodities. And 70% LTV for respectable equities.

    • Ralph -> Okay, fair comment, it’s not right for me to say that RE is the only way that an investor can get leverage to an asset class.
      Perhaps it’d be better to rather express the same point by saying that RE is the only easy way that relatively investment-naive citizens can get highly leveraged to an asset, without really being aware of what they are really doing.
      (One could counter-argue that many of the synthetic instruments that now trade like stocks/ETFs, with two or three times leverage, are now easily available… I’d still argue that most of those who trade such things are more aware of what they are doing than the ‘x’% of Canadians who are homeowners with significant sized mortgages).

    • I’ve never tried it, but I think if you handed them 1,500k in gold bullion to hold in their vault, they would loan you 1,500k in cash. It’s hard to come up with another commonly used immobile asset, but I think they do exist. People with mobile homes not on a solid foundation cannot get funding for anything based on the property. It’s not housing that’s special. It’s that it can’t disappear. Also the customer being naive only makes it better for the vendor, not worse. Or so the vendor thinks.

  10. Real Estate Tsunami

    Thanks Nem for this priceless quote. Now I have to find a way to relate it to RE. Monsters=Realtors. Abyss=Crash.
    Any suggestions.

  11. Off topic, but just came across a “discretionary seller” piece in the MSM, full of bubblespeak. The message: you’re a fool to wait for lower prices, because sellers are holding firm.

  12. The Poster Formerly Known As Anonymous

    Hey – anyone know what Rusty, Eyesthebye and other bulls from the past are saying nowadays? Would love to have a chat now and another in Spring when the listings go exponential 🙂

    • Many bulls appear to have disappeared from the internet forums.
      We’d anticipate that they’ll be back if the market bounces. If it grinds down or plunges, if the bears are proven correct, I’d don’t expect to see any considered posts from those individuals. Most appear to have been ‘fair weather’ bulls; happy to post while they had the wind at their backs. Which is interesting, if you think about it.. the bears have been expressing their opinions with the wind in their face for years now. Very different animals.

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