Spot The Speculators #99 – ‘Canada Don’t Let Your Retirees Grow Up To Be Real Estate Cowboys’ – Alberta Couple Late 50’s; Net-worth $196K; RE Holdings $1,850K

“Alberta couple, Edward, 58, and Sue, 56, earn gross income of $247,200 per year from working in two great jobs — his in transportation management, hers in health care. Yet they are almost broke.
The problem is they are shelling out $47,514 per year just in interest charges on liabilities that amount to 6.7 times their annual pre-tax income. Their assets add up to $1.85-million, leaving them with a net worth of only $150,000 as the end of their careers comes into view.
The problem will get worse if not fixed, because they are not making a dent in the principal they owe. When interest rates rise, their debts will become ever more costly to carry. Unless they act, they will not be able to retire as planned. They may not even be able to avoid eventual insolvency. “Should we be selling off investments, some at a loss?” Edward asks. “We are working hard to keep our heads above water, but we feel that it is a losing battle. Our goal is to quit when I am 64. Question is: Can we do it with our heads above water?”
The numbers don’t look good: Their debt is about nine times their equity and their investment income is negative.”

– from ‘High-income couple has to deal with some real estate headaches’, Andrew Allentuck, Financial Post, 11 Feb 2013 [hat-tip kansai]

Breakdown of their assets and debt:

Assets (market value where applicable):
House: $950K
BC ‘income-generating’ property #1: $540K
BC ‘income-generating’ property #2: $240K
Arizona Condo: $120K
Total assets: $1.85M

Debt
House mortgage: $758K
BC property #1 mortgage: $446K
BC property #2 mortgage: $329K
Business Loan: $75K
CC Debt: $32.7K
Car loan: $13.2K
Total debt: $1.654M

Net-worth: $196K
RE holdings: $1,850K
Ratio of net-worth to RE: 1:9.4

By sensible estimates, one should hold no more than (90 minus your age)% of your net-worth in RE.
By that measure, this couple should have 33% or less of their net-worth in properties; the actual number for them is 944% (yes, not a typo – nine hundred and forty four percent).
If RE blinks, these guys are underwater. In fact, given the current market, they very likely are already underwater in that they’d probably have to drop prices by at least 10% to liquidate their holdings.
If prices drop by 30% or 40% or 50%, or even more, their retirement plans will be completely destroyed.
This is a more extreme example, but the fact remains that a very substantial percentage of Canadian ‘boomers’ are overdependent on the health of the RE market for their future financial health. And, like the couple in this example, they will likely be advised, or forced to the conclusion, that they have to lighten up their RE holdings.
– vreaa

70 responses to “Spot The Speculators #99 – ‘Canada Don’t Let Your Retirees Grow Up To Be Real Estate Cowboys’ – Alberta Couple Late 50’s; Net-worth $196K; RE Holdings $1,850K

  1. Jaw. Drop.
    I suggest they buy one more property, in Richmond.

  2. pricedoutfornow

    I think a lot of boomers will be in big trouble. When I was in my old hometown in the Okanagan about 5 years ago, my friend’s dad was telling me that “everyone wants to live here!” and he was busy piling up on real estate-between his wife and him, they own 3-4 houses (she’s a care-aide, he’s a unionized truck driver). These days, things don’t look so sunny. My friend tells me their monthly mortgage payment on the house they live in is $2500/month and it’s worth less than what they paid for it (they bought at the peak, I believe values are down about 25% there). He is 55 years old, should be looking at retirement. Instead, they have a 40 year mortgage (yup, they got one of those as well), and they have to rent out their basement for $1000 a month to meet the mortgage payment. Unfortunately I know several people in the area in this type of situation. I’m starting to think it may be a slow train wreck we see-people who will deplete all their savings just trying to keep their heads about water-but eventually the debt will get them. Sad, really. Or maybe not. Greed, more like it.

    • I don’t think anyone should have been allowed a 40-year mortgage, but especially people in their 50s should not be allowed 40-year mortgages. This means they will be paying off their mortgage into their 90s. Are they going to keep working into their 90s? What are people thinking when they sign up for debt that lasts until their 90s? Your body starts to give out well before you make it to 90 and it becomes very hard to work up until you’re in your 90s. I think people should aspire to be debt free well before their 90th birthday!

      • Nobody who took on a 40 year mortgage seriously thought they’d be paying it off over 40 years.. they all thought that the property would, of course, continue to surge in price, and they could then sell it and retire, or buy a property outright with the proceeds (math doesn’t work but so what) or whatever. But none – not one – imagined themselves making payments 40 years from taking on the mortgage. The 40 year mortgage was simply a financing tool, to make holding RE that much cheaper, while owners profited from hoped-for price growth.

      • Ralph Cramdown

        Realistically, it means that there will still be a mortgage balance to pay out when they or their estate disposes of the property, and I don’t think there’s anything wrong with that in certain situations. I’ve got no problem with 40 year mortgages, as long as they’re not government guaranteed. Pricedoutfornow’s examples would probably have found another stupid plan if this one hadn’t been available. Alpaca farm?

      • I heard Walmart’s always hiring greeters.

      • “Nobody who took on a 40 year mortgage seriously thought”

        VREAA, you could have ended it there.

      • But Ralph if you’re going to have the estate pay out, why not just have the couple rent in the first place?

      • Ralph Cramdown

        Renting might be a better idea for a lot of people. But I’m in favour of personal choice in finance*, as long as there’s full disclosure and the taxpayer isn’t on the hook. The government hasn’t outlawed 40s and 35s, it has just said that CMHC won’t insure them, and that banks (whose depositors are backed by CDIC) can’t hold them unless there’s 20% equity.

        * Generally speaking. I think payday loan outfits are a plague and should at least be more closely regulated, but I’m ambivalent on a ban.

      • It’s a sad commentary that no one here actually suggest that people get 40yr mortgage for low payment flexibility but expects to pay it off in 15, 20, or 25 years.

  3. The 40 year mortgage was also an estate planning tool. One can take the 40 year mortgage at age 65 (at the time 40 year mortgage still allowed and one was still working at 65) along with mortgage life insuarnce. With the average luck (average life expectancy), one’s kids (or one’s spouse) would be able to have the property paid off by the life insurance proceed. One will have to take a chance (in case one is living to 105 and still have money to carry the mortgage to the end), but the odd would be on one’s side.

    • Life insurance at 65 may get expensive, if you can get it at all.

    • Bullshit. The Mortgage Life insurance you refer to resets with the mortgage term, NOT amortization. Unless he signs for a crazy mortgage term of 20 years or more (read above 10% interest rate), then his “estate planning” will have 0 value in 5 years. Let’s face it, people taking 40yr mortgages were so caught up in the “up or out” RE game, they were signing the papers without even reading…

  4. Most people outside of North America work to live. Most Americans and Canadians live to work. These people took it to the next level – they live to support their investments. And there are millions more like this, proud to be homeowners.

  5. The way the mortgage life insuarnce work was like a group life insurance (at least that was the case 10-15 years ago). Everyone pays the same premium based on the insured value. Don’t go outside for this insurance, but with the bank you have your mortgage and sign up this mortgage life insurance when completing your mortgage with the same banking institution.

  6. And they say Canadian banks have been conservative…

  7. There is no chance that their net worth is above $0 right now… Just selling their properties will wipe out a third of their net worth in realtor fees!!! Additionally, they propbably over valued their properties by at least 10-20% since that is what people naturally do.

    So, to summarize, I’d estimate that their true liquidated net worth right now is about -$250K.

  8. I have an uncle who is in his late 60s. He’s “retired” but still working his butt off as a nurse, taking on overtime, working over 40 hours a week, etc. He got my parents to go to an investment seminar with him. This seminar asks you to put down some money (25K) minimum into a fund with these CFPs managing the fund, and they return 5% annually for life. Now, you need to live an additional 20 years (until almost 90 for my uncle) to “break even” and even after that, there is huge losses in terms of opportunity cost, and you can’t take the money out without a huge penalty, etc. He thinks this is a good investment because your money is guaranteed.

    I didn’t know why my uncle is still working so hard during retirement and looking at these types of scams until my parents told me he bought a condo in the lower mainland at the peak and probably is fearing the market. He only has some cash in his RRSPs; doesn’t want to invest in the “risky” stock market, yet cashed out his RRSPs on a money losing property. My uncle is not a verry bright man when it comes to finances. He is more like sheep who just gets herded along. But this is what the runup in RE in this city has done. THe vast majority of the population is like my uncle, like sheep to be herded along, following the masses. Then their retirement savings gets decimated by bad financial decisions such as buying overpriced properties. My parents tell me he is very stressed with his retirement now, because he doesn’t want to sell his condo and take a huge loss. But if he doesn’t he has very little choice but to keep working.

    • A life annuity paying 5% “guaranteed,” hmm? I figured the rate would be lower than that…
      But it isn’t, it’s higher. I plugged in a 68 year old male to http://www.rbcinsurance.com/annuities/payout-annuity-calculator.html
      with a guarantee of only one year (i.e. if you die more than a year after purchasing the annuity, your estate gets bupkis) and they’re paying 7%.

      I think as a general rule, any investment “opportunity” that involves herding a large number of people into a room and giving them the pitch is usually a bad one.

      • What are the odds a male at that age lives even 10 more years?

        The bank will probably make a lot of money even at that rate – especially since they have a lot of up-front money to invest at a return that will make up a lot of the payout.

      • Ralph Cramdown

        http://www.lifeinsurancecanada.com/life-expectancy-calculator
        He’s got a 50/50 chance of living to 84.
        Annuities are a competitive business, if you shop around. You trade a lump sum for a guaranteed income, just the opposite of life insurance. They’re good for someone like the original example who isn’t good with money. It’s a crummy time to buy one, though, since they’re priced based on the likely market return of safe investments, which is low right now, Life insurers are hurting because of all the business they wrote when rates were higher.

  9. 4SlicesofCheese

    Wait, the second property is already underwater? Or did they HELOC?

  10. These guys are underwater already……….they probably had a lot of equity a long time ago, but then they started to party like it was 1999 with their “friendly” real estate agent and “voila”.

  11. Forgot to add, what amazes me is that how can a couple with almost a quarter million income pretax be broke at theri ages ? Seriously ?

  12. $250,000.00 annual income and this is where they are now! How foolish

    • This is why I say it is seldom how much you make that determines your wealth. If you make only 60K a year starting at age 25, you can still be a millionaire by retirement if you invest properly and don’t splurge. Or, you can also make 6 or 7 figures and be bankrupt if you waste it all on stupid things like luxury cars, multiple properties you don’t need, etc.

      • True, but the wise people in the government and the BoC will do everything in their power to make your saved millions worth as little as possible.

      • Ralph Cramdown

        How can you simultaneously believe that the system is operated for the benefit of the rich, and that if you get rich, the system will grind you down?

      • How does bubbly’s comment suggest that the system is “operated for the benefit of the rich”?

      • Ralph, was your comment directed at me?
        I was simply referring to inflation and debt-“stimulus” – both things that governments love to do (even when they claim to be fighting against it)

        But, yeah, I have never said that “the system is operated for the benefit of the rich”. I don’t have the rich vs poor mentality that lefties and communists have. Perhaps you are confusing me with someone else…
        However, I do believe that the system is skewed to benefit some people over others, like debtors over savers, non-producers vs producers (to a degree) and yes, also some that are rich and powerful, but they are not “the rich”, because “the rich” is actually a very broad group of people.

      • Ralph Cramdown

        It doesn’t, but I haven’t met anyone who believes that the Bank of Canada are evil schemers but doesn’t believe that the fix is in for the rich. My apologies if you’re the first, bubbly.

      • BoC policy obviously benefits certain groups, especially people who get any new money first and/or are well connected. The largest benefactors tend to be very rich, but that is very far from saying that BoC policy benefits anyone who has a few millions on savings account.
        Like I said, thinking in terms of rich vs poor is a symptom of a certain mindset and it seems that you socialize with people who think like this.

      • Ralph Cramdown

        I seem to be in the minority in thinking that the BoC is doing a good job, given their tools available, which are only two: Setting short term interest rates and the bully pulpit. I suspect that, were Carney to speak freely, he’d say that he would have preferred Finance to have conducted better fiscal policy, e.g.
        – not cutting the GST when times were good
        – reining in the housing bubble earlier with targeted policy
        – embarking on infrastructure projects when unemployment was high
        He’s not going to raise rates when unemployment is 7% and core inflation is 2%, even though he knows too much of his cheap money is going into residential real estate, nor should he. If savers would rather buy 10 year government bonds paying 2% than the alternatives, that’s their choice. Me, I demand more from my money. BCE (the classic “widows and orphans” stock) is paying 5.1% with favourable tax treatment, just as an example. Savers are punishing themselves.

      • Savers are not punishing themselves. You are speculating and that’s fine, but the fact is that the Canadian currency is losing value over time and BoC is the cause. (The way it’s being done is simple fraud, if you or I do it, but “sophisticated monetary policy” if government/BoC does it)
        You are right that people may (attempt to) protect their savings by investing in stocks or gold or whatever (I have investments too), but the point is that savers are forced to put their money into relatively risky assets, because of unsound monetary system.

      • Ralph Cramdown

        If it weren’t for inflation, many savers would be content to keep their savings in a coffee can under the bed. That would be bad for the economy. As well, a stated policy of 0% would run a serious risk of slipping into deflation, where people delay purchases, causing unemployment, more deflation… a deflationary spiral. Central banks are rightly scared of this, because none of their policies work when the velocity of money falls close to zero. Bankers have learned a thing or two over the past two centuries. Much of it is forgotten in booms and relearned in busts, but some of it sticks. The financial system is much more stable than it was 100 years ago, and the vast progress in our wealth and standard of living in the 20th century suggests that we’re doing something right.

      • “If it weren’t for inflation, many savers would be content to keep their savings in a coffee can under the bed.”

        Disagree. People invest to obtain a real return on their investment — regardless of the rate of inflation.

      • Ralph, I will be nice and say that we have to agree to disagree…

      • Ralph Cramdown

        OK bubbly.

        While we’re disagreeing, my family is going to keep saving, though. $11,000 a year into accounts on which all income will be tax free for life. A bunch into a tax deferral account that allows us to defer tax as long as we want until we’re at least 71, and if I’m in a lower bracket when I withdraw, save. $2,500 into the squirt’s education fund, which the government tops up by $500. And outside all those, the dividends and capital gains I earn on my savings are taxed much more favourably than my employment income. To my mind, it’s the paycheque to paycheque people who DON’T save who are being punished, as their higher average tax rate pays for my lower one.
        Sincerely,
        A. Saver

      • I can agree with that approach, Ralph.
        Just one note: Even “tax-free” or tax-deferred savings are taxed – through inflation. Tha’t not just a metaphor…

      • Ralph Cramdown

        Sure, if you’re in cash or bonds. If you’re in equities that keep up with inflation, there’s no tax. If you’re in equities with leveraged balance sheets and pricing power, the tax is negative, as their debt is inflated slowly away. I don’t believe we’re going to see an outbreak of serious, >3% sustained inflation, but I always think about what that would do to my portfolio.

    • I know. As I think about where my young family is with trying to responsibly save on a basically average household income for our area, and see people who have gotten to such high income levels flushing it down the toilet like this, I want to reach through the computer screen and strangle them.
      No doubt they also have children who are expecting some inheritance from their successful, high earning parents with all these real estate holdings.

  13. “How painful will the re-pricing be? I think the public already knows that it will be really terrible. A poll I saw the other day indicated that 25% of people on the verge of retirement think they are in such bad financial shape that they will have to work until age 80. Now, the average life expectancy is 78. People’s financial circumstances are so bad that they think they will be working two years after they are dead!”

    who said that?

  14. “income generating property.” Herein lies the problem….we just forgot to work and make money the “old fashioned way.” Instead, we became greedy. For Vancouver – a city without a proportionate number of well paying corporate jobs – real estate speculation became a meaningful substitute for employment.

    • I don’t think there’s too many things more old fashioned than rental property. Just see Matthew 21 for a story about problem tenants. But buying property that doesn’t generously cash flow, on anticipation of capital gains is a different kettle of fish.

      The people who end up best are those who earn through their labour, accumulate a surplus, and earn from that surplus as well. It isn’t rocket science, and there’s heaps of information about it — even free information on the net. But there’s also plenty of parasites who want to “help” others invest, for a slice. That too is timeless.

    • All property that’s rented or owner-occupied for utility generates income, sometimes it just happens to be negative. Nothing wrong with renting out land, I for one disagree the ROI right now is decent.

  15. Epic boomer fail. $247,000 gross per year and they “barely survive.” A waste of two “good jobs” probably 8 gen-y could do better with. Think if they can’t deal with their own personal financial issues then how effective can they possibly be at these jobs.

  16. They should use their income to buy gold bars, get helocs to buy more gold. When they have enough gold to retire on they should declare bankrupcy and move to another country with their gold.

  17. Leaving Vancouver.
    we bought in 2003 for $315,000.
    We just sold for $939,000.
    Came out of court ordered property sale today with new property at $270,000.
    Just $1500. over the nearest sealed offer. Wipes sweet of brow.
    Bank took $90,000.+ loss on deal…
    We pocket $450,000 after costs…
    Vancouver 6,000. sq.ft. lot and property tax of $20,000+ a year and growing.

    The house and property we bought in Mission has a lot that is 45,000 sq. ft. and $3,000 a year tax issue.
    It has a creek on both sides, faces the sun, and is mostly flat land. Fruit trees, and a really lovely 90 year old salt box house on it. inside needs work. Not a big deal as the house is sound and as well all the ceder shakes on the out side are actually in good shape… and even has a full poured concrete basement you can stand up in. And two wells… on a shallow weep well from the creek, and a 400 ft deep well.

    By the way I and the wife must really thank “Vancouver Price Drop” for bringing this property to my attention. We are both in our 50’s and this is a great place to retire.
    It was one of your examples.
    At 8624 Gaglardi st. in Mission. The little blue house.
    I also like a property with great Grandfather clauses…..

    Does that leave us with a good profit position??????… older and smarter… and cash richer.

    Everyone here… Please and thank you for the sage comments and advise given here over time.
    No matter what happens to property in vancouver, if it goes up or down…
    My wife and I are safe now…

    Silver

    • That’s the way to do it, Silver. Congratulations.

    • Learn to can. It’s easy and you’ll enjoy it.

      Actually, you’ll give canned goods away to everyone for Christmas, then everyone you meet, but still, rewarding.

      • I have my years crop canned already, 37 cases,… my fave is canned chicken,… and that is part of the reason for the move.
        2000 sq foot roof gardens in down town vancouver are a lot of work…and apparently added about $400,000+ in taxable improvements to my “Crown” owned property as that was the only major change I made to my “Crown” owned property since 2005.
        Best though from my point of view was sticking the bank for $90 G…
        … and it was assessed at $391,700 in 2013 tax records… this lie to, is priceless
        So stuff that BC Assessments… .
        This time I have a “Court Document” “Proving as Fact” the “value of the property” from the Court.
        For me that’s priceless…
        ,… and now I am much richer than I was.
        And I don’t care if the price goes down… I still have $450G+ that I did not have in…
        COLD HARD CASH.
        Silver

  18. Immigrant buyers please save us!!!

    If fertility rates continue at their current pace, Myers predicts “a dropoff in taxpayers, more people selling homes, fewer people buying homes.”
    http://www.usatoday.com/story/news/nation/2013/02/12/us-births-decline/1880231/

  19. “U.S. Homeowners Are Repeating Their Mistakes

    By Brendan Greeley on February 14, 2013

    If there’s one thing Americans should have learned from the recession, it’s the importance of diversifying risk. Middle-class households had too much of their net worth tied up in their homes and were too exposed to stocks through 401(k)s and other investments…

    …In a 2012 paper for the National Bureau of Economic Research, economist Edward Wolff concluded that from 2007 to 2010, the median American household lost 47 percent of its wealth. Average wealth—a number that includes the richest Americans—declined only 18 percent. Houses make up a smaller share of the wealth of a rich family. The wealthy also benefit from better financial advice, Weller says…

    …Since 1983, for the richest 20 percent of U.S. households, the principal residence as a share of net worth has been around 30 percent. For the next 60 percent—most of us—housing has risen from 62 percent to 67 percent of total wealth.”

    businessweek.com/articles/2013-02-14/u-dot-s-dot-homeowners-are-repeating-their-mistakes#r=rss

  20. The most honest mortgage broker I’ve seen:

    “This is the year we’ll see Vancouver pop”

  21. Real Estate Tsunami

    VREAA,
    Is this post worth highlighting?
    Ad posted in Richmond News Feb 15.

    10111 Sidaway Road, Richmond
    4 Acre Estate Property, located in area of multi million dollar masons and is adjacent to Mylora Golf Course.
    The property was under construction in 2011 but construction was stopped.
    House plans currently include a permit to build a 16,000 square foot house, but buyer can change the plans and build on the Engineer approved foundation that is on site.
    Value of foundation is in excess of $300,000 and the assessed value of the property is $2,300,000.
    Asking firm price of $1,888,888 for quick sale.
    Call 604-805-460.
    https://wm.shaw.ca/service/home/~/?id=12600&part=2&auth=co&disp=a

  22. None left. It appears to be a foreclosure on a build gone wrong.
    Building permit:
    10 541773 000 00 EQ One Family Dwelling Equivalent Issued 9/15/10 10111 Sidaway Rd
    Applicant: Pioneer Consultants Ltd
    Owner: Shufen Deng
    Contact: Amrit Maharaj
    Shufen Deng 180 Degree Construction Ltd 1256 1 / 0 2
    V6W 1C3

  23. Good luck trying to sell the BC properties anytime in the next few years! This should be a lesson to everyone not to live your life taking out loans on absolutely EVERYTHING. It’s really sad because I bet they work their butts off!

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