The debt trap

There’s an interesting article in yesterdays New York Times about American debt, complete with interactive features and debt calculators to compare your debt load to others:  Given a shovel, Americans Dig Deeper into Debt.

Years of spending more than they earn have left a record number of Americans like Ms. McLeod standing at the financial precipice. They have amassed a mountain of debt that grows ever bigger because of high interest rates and fees.

While the circumstances surrounding these downfalls vary, one element is identical: the lucrative lending practices of America’s merchants of debt have led millions of Americans — young and old, native and immigrant, affluent and poor — to the brink. More and more, Americans can identify with miners of old: in debt to the company store with little chance of paying up.

It is not just individuals but the entire economy that is now suffering. Practices that produced record profits for many banks have shaken the nation’s financial system to its foundation. As a growing number of Americans default, banks are recording hundreds of billions in losses, devastating their shareholders.

There’s a meme in the local media that Canadians are more financially conservative than Americans, and while that may certainly be true I wonder about Vancouverites specifically – With our negative savings rate, relatively low incomes and high housing costs are the residents of this city really that different from some of the more extreme US cases?

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Woody
Woody
12 years ago

No I don't have an assignment at Woodwards, I wish I did as they're worth quite a bit more then they were purchased for.

Like I said earlier wait 5yrs and then report back.

trauma scene cleanup
12 years ago

it used to be that you could make mistakes when you were young but it wasn't so extremely destructive. Now with companies begging you to take their credit cards, a young person can literally rack up hundreds of thousands of dollars in debt… It's wrong and something should be put in place to not allow it… Middle aged plus people that rack up that kind of dept, tough you should have thought about it before you maxed out all your cards…

Drachen
Drachen
12 years ago

Time, Krrish, whoever

Do you really think that the W is part of Gastown and not the DTES? I suppose that explains a lot about you. If you thought there was a profit to be had in green skies you'd believe the sky was green too.

blueskies
blueskies
12 years ago

time:

"W" an intellectual RE roadkill property

"be bold or move to the suburbs"

a marketing campaign that'll

come back to haunt you

Time
Time
12 years ago

"Coal Harbour didn’t have the highest concentraion of social services, HIV, Mental Addiction" If you think Gastown has it then question is where do they come from?I think they were us before and now it's them. "and the most impoverished postal code in all of Canada." So what?Is there anybody in gastown ever wanted to move out from that place?Answer is NO! Do we have more listing in gastown than downtown or coal harbour? Answer is NO! "The Woodwards project will be the epitome of everything that’s wrong with the bubble and will easily lose as much as the worst of the California, Las Vegas or Florida bubbles" So your motive is bubble campaign why are you wasting time making stuff up?why are you hunting "W" for crack? while your previous worried were washed away without any lose?I mean to… Read more »

bdk
bdk
12 years ago

Woody. Coal Harbour didn't have the highest concentraion of social services, HIV, Mental Addiction and the most impoverished postal code in all of Canada and when Marathon Lands started selling Coal Harbour it wasn't $525 sq/ft either. Comparing the most desirable area of Vancouver with the Slum of all of Canada is not compareable and the junkies won't give a sh*t if two towers go up. Yaletown was nothing like the downtown eastside either. You must be joking around if you think $525 sq/ft is a good deal. Qube was $500 sq/ft and will be again soon as a landmark building in a nice area should be. The Woodwards project will be the epitome of everything that's wrong with the bubble and will easily lose as much as the worst of the California, Las Vegas or Florida bubbles. The residents… Read more »

blueskies
blueskies
12 years ago

woody:

do you have an assignment or unit at "W"?

Drachen
Drachen
12 years ago

jesse

"so it makes you wonder who’s briging down the number below zero?"

Another big one from what I understand is boomers withdrawing home equity to help finance their children's homes.

VancouverGuy
12 years ago

If the market pulls back 25% they won't be laughing. If downtown condos are at $650/sf right now, a 25% pull-back would leave you at $488/sf. If you had equity of 25% initially, you would lose 28% of your initial capital. Ouch. If you had more leverage, you lose more money. If you had 92% leverage, you've lost it all. Theoretically, if you only had to put down like 10%, you are almost equity negative and you could potentially walk away.

Do they require a personal guarantee on those obligations? Would they allow me to buy assignments using a special purpose vehicle? Are they sophisticated enough to know what that means (non recourse to the owner)?

Bubble Lad
Bubble Lad
12 years ago

betamax – I agree – not to mention all the funky businesses that are down there now taking advantage of the cheap rent (like my fav – Boneta's) that are going to be be forced to close because everyone's disposable income is the first thing to vanish in a recession.

If the boom had continued for another 3-5 years, the DTES might have had a chance. I think the Woodward's building is going to prove to be the high water mark for "development" down there.

The irony is that it stands a solid chance of going right back to where it started – a squat for everyone who lives in the area right now.

betamax
betamax
12 years ago

if the market pulls back 25% they are still laughing.

25% will be just the beginning, and they won't be laughing.

to assume the DTES will continue on asis [sic] indefinately is even more naive.

Agreed. The DTES will be worse later, when the long-term recession arrives, combined with higher energy costs, and both provincial and private coffers are depleted paying for past megaprojects and general over-capacity. No shades required.

Bubble Lad
Bubble Lad
12 years ago

I don't think Yaletown and Coal Harbor are fair comparisons, as these areas were basically EMPTY when they were developed. Bringing up (or down, comparing on your point of view) the DTES to their "standards" involves moving a large population of human beings who, for better or worse, call that area home.

jesse
jesse
12 years ago

"Increasing number of retired or semi retired people."

There is a possible component of offshore savings and investments not tracked through Statscan and black market proceeds. Your other points sum up the situation nicely.

Given the average mortgage debt has increased in the past decade in conjunction with a falling savings rate indicates that a significant portion of the shortfall comes from home equity withdrawals. As I mentioned earlier a recent property market entrant will likely not have a negative savings rate (save unsecured loans) so it makes you wonder who's briging down the number below zero? The retired and semi-retired don't make that much of the population yet.

Woody
Woody
12 years ago

Think it's best that people check back 5yrs after completion to see if they change their minds. Yaletown was once a dump as was Coal harbour, the first residents there all took chances and are now rewarded.

What Woodwards will bring who knows but to assume the DTES will continue on asis indefinately is even more naive.

Bubble Lad
Bubble Lad
12 years ago

I'd love to see the DTES brought back into some kind of balance, but Woodwards seems like a disaster – a little hermetically sealed world on the edge of one of the most heart-wrenching spectacles in Canada. I'm presuming people who would want to ACTUALLY live there are aware of the problems and the depressing cavalcade of human misery it presents on a daily basis. Boneta's, right down the street from Woodwards is one of my favorite restaurants, but to get there you have to dodge spent hypos, human feces, and people openly shooting up or smoking crack, trying to sell you the coat off their back (I'm not making this up). I can't imagine dealing with that on a daily basis. It would become an exhausting ordeal. Either that or the people who bought have no intention of living… Read more »

Drachen
Drachen
12 years ago

Jesse "I am trying to resolve if the -8% savings rate is a true measure of cash flow or not." I think it is. There are several factors which contribute. Increasing number of retired or semi retired people. They are living largely off of savings. Increase in home equity. If people get a HELOC or a second mortgage that drops their savings rate. For example. A house purchased in 1987 for $150k which is now evaluated at $700k only counts for $150k of savings (the amount paid against principle) and if the home owners take out $100,000 from their HELOC to get a pair of Mercedes they are considered to have dropped $100k of savings (even though some people would argue they have gained $450k in savings through the whole transaction). Increase in housing costs and the illusion of endless… Read more »

gah
gah
12 years ago

For those looking for the next bubble to invest in, what about bubbles?

http://www.cbc.ca/consumer/story/2008/07/22/f-for

bdk
bdk
12 years ago

"gee having paid on average $525psf even if the market pulls back 25% they are still laughing." Ummm, Woody this is the poorest postal code in Canada with the highest level of HIV in the developed world. It's not like any of the mental health and Addiction treatment centres will be packing up and leaving because of a two new towers. These centres are unwelcome everywhere they go (google NOT IN ANYONES BACKYARD if this isn't obvious to you. Remember VHB pointing out only 49% of Pt Grey residents could afford to buy at the poorest postal code in Canada? The Woodwards project will be such a disaster, it has all the ingredients, mentally troubled drug addicted residents, specuvestors who'd never dream of living there, Koreans who thought they were buying in Coal Harbour. It's going to be sad to… Read more »

Bubble Lad
Bubble Lad
12 years ago

Here's one from the Wayback Machine: anybody up to 'splainin' the Savings and Loan Crisis of the 1980's? Wasn't it eerily familiar, and wasn't Dubya's dad and brother also intimately involved. Extra points for good penmanship.

Woody
Woody
12 years ago

Haha no progress at Woodwards, maybe you need to open your eyes. The first tower is going to top out next week, thats why there is less movement, they have finished the first tower and have moved to the second shorter tower which just cleared the podium. The project is ahead of schedule.

I feel sorry for everyone that bought there too, gee having paid on average $525psf even if the market pulls back 25% they are still laughing.

jesse
jesse
12 years ago

"What they’re talking about (in your quoted passage) is minutiae of bookkeeping principles not something that has an effect on the end number generated."

Hi Drachen, OK I'll take your word for it. I don't disagree that paying off debt increases equity.

I still do not have closure, from a definition on Statscan's site, on whether mortgage principal is included as savings or included in PCE, as it pertains to the -8% savings rate statistic. I am trying to resolve if the -8% savings rate is a true measure of cash flow or not.

Drachen
Drachen
12 years ago

Jesse

By the way there's no need to get snippy with me. You're reading it wrong, I'm not suggesting that they don't use their own definition, merely that you're misinterpreting the definition because you probably haven't taken any bookkeeping classes. What they're talking about (in your quoted passage) is minutiae of bookkeeping principles not something that has an effect on the end number generated.

Drachen
Drachen
12 years ago

Jesse

You're messed up, I went and read it on the StatsCan page, in context your quote doesn't mean what you think it means.

They categorise each type of savings and expenditure.

One category is "Housing"

Another category is "assets and debts"

In most surveys "Housing" includes (Mortgage payment – Payment against principle).

In 1982 "Housing" included total Mortgage payment and Payment against principle was included under "assets and debts"

The end number for personal savings rate is the same it's just a matter of where the accountants recorded the numbers. Try re-reading your quoted passage with this in mind.

jesse
jesse
12 years ago

"Paying down any kind of debt is considered savings, why should a mortgage be different?"

Are you suggesting the -8% savings rate quoted by Statscan does not use their own definition of savings rate? Please. Use whatever definition you want but IF we're talking about -8% savings rate as quoted by Statscan then we need to use their definition, which includes mortgage principal as part of PCE.

The Statscan measure is all about cash flow which is why debt repayments are not considered savings. But by all means, do your own calculations.

Drachen
Drachen
12 years ago

Jesse

Oh and by the way, the only place where you can find reference to principle payments they are considered savings. From this you conclude that principle payments are not considered savings? You're beginning to sound a bit Krrishy.