The problem with wealth locked up in housing

Barbara Yaffe has a column in the Vancouver Sun where she points out some of the problems with ‘paper riches‘.

A recent study reveals Vancouverites have the highest net worth in Canada as a result of their pricey homes; so why do so many of us feel like we’re in the poor house?

It’s probably because, with median incomes below the national average, Vancouver residents are grappling with monster mortgages, as well as the highest consumer debt loads in the country.

And while it’s great building home equity, this does little to improve financial positioning until a place is sold and a profit realized.

Read the full article in the Vancouver Sun.

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chilled
Member
chilled

This article states that the average Canadians net worth is over $400K? I find that hard to believe, can anyone elaborate on who was “studied” in this study? After decades of work in a well paying job I am barely there and many of the people I know are worse off financially. I do know statistics are like torture, beaten long enough you get what you want.

jesse
Member

Not sure what Barbara Yaffe’s on about. Sounds personal.

Many Franks
Member

Home prices pick up speed, but fall in Vancouver, Victoria:

The sky is not falling. Neither are Canadian home prices.

…except…

Prices slipped for the 12 consecutive month in Vancouver, down 2 per cent, and fifth month in a row in Victoria, down 4 per cent.

[…]

“While it is true that existing home sales strengthened in July in the two largest metropolitan areas in Canada, namely [Toronto] and Vancouver, the recent rise in mortgage rates have, according to our calculations, decreased affordability to its lowest level since the beginning of the last recession,” Mr. Pinsonneault said.

“We therefore expect sales to cool over the coming months, with monthly change in home prices remaining subdued. However, we expect year-over-year home price inflation to increase starting August due to base effects.”

China Bust
Guest
China Bust

From VancouverFillpersInTrouble:
2601-1188 W Pender Street

Stylish & sophisticated living at the Sapphire, located in Vancouver’s premier Coal Harbour neighborhood. This 2 bedroom plus den suite, sized at 1010 sf, enjoys beautiful NW corner unit! Stunning North Shore mountains & water views from the 26th floor in Coal Harbour! Gourmet open kitchen w/ granite countertops and Bosch S/S appliances. Building has concierge, sauna, gym & media room. Steps away from coffee shops, restaurants and shopping centre! Easy walk to Stanley Park and Robson Street.

The final sale price was $59k less than the asking price.

Purchase Price: $933,238
GST: $46,662
Asking Price: $849,900
Sold Price: $790,000
Property Transfer Tax: $17,665
Real Estate Commission: $31,150
Loss: ($181,780) ($238,715)
http://vancouverflippersintrouble.wordpress.com/

Rent$385
Guest
Rent$385

The study has “average net worth is $550,554”. The key there is Average (which is not median).

Also, I think I agree with Yaffe to some extent. My sister, who has an above average net worth (and jobs/incomes to match) has a sizable mortgage and a cash flow problem. Despite being very wealthy by even vancouver standards, she struggles to find cash to pay for house maintenance, summer camp for the kids, etc. (I keep telling her to cash out, but instead I think she’s going to buy a brand new build in the ~2 mil range. At least it will have an income producing suite!)

cris
Guest
cris

Hard to imagine 2 million dollar home has a basement suite. To satisfy ingrained tendency to own slaves?

WS
Guest
WS

@ chilled
In my experience 95% of the public doesn’t know the definition of “net worth” (especially the “net” part). And anytime I hear an “average” quoted it is a signal to go read the sports page.
Averages are as useful as a eunuch in a whore house

Melba
Guest
Melba

“Hard to imagine 2 million dollar home has a basement suite. To satisfy ingrained tendency to own slaves?”

What? Have you been to Dunbar lately? Almost every house has at least one suite. Try finding a place to park at night, and that’s in front of many places that have 3 car garages.

Anonymous1
Guest
Anonymous1

Two points:

1) many people have a net worth of $400,000. Just buying a house 10 years ago and then just holding on to it while spending the rest of your money would put you in this club. Not hard to believe. It would go down substantially if there was a significant housing correction.

2) OSFI has helped out the banks. A little publicized story with a big impact. Banks will have access. To a lot more cash out of thin air. Read in globe and mail.

Anonymous1
Guest
Anonymous1

Problem with price to rent ratios and basement suites arguments.

Caucasians view real estate as a place for a single generation. Indians view it as a multi generational place to live.

A new build can be lived in here for 75 years or so. The home will be paid off in 25. So the next generation gets to live free. That is where the advantage is. That is how the family name gets ahead.

Also, after 25 years, the basement suite income is used solely to pah property taxes and utilities.

Living free for the next 50 years. I have friends in their early thirties who are inheriting paid off homes. They are focusing on businesses and investments now…regular jobs though they have.

Just a different way of thinking.

Pdub
Guest
Pdub

That net worth in this study is based upon the “market value” of the property. It is a pretty big, and risky, assumption to value a relatively illiquid asset purely upon an assessed market value. Correct me if I am wrong but dont most companies value their property assets based on purchase price? Why should homeowners be different.

YVR
Guest
YVR

Re Net worth $400K.

Yes it is an average per household. Between me and Jimmy Pattison our average is $3 Billion. Not bad. I feel pretty good about that.

Canada is around the same average net worth as the US with double the average housing prices. Things will look a lot different in a couple of years (except for me and Jimmy – we have very little percentage wise of our net worth in real estate).

YVR
Guest
YVR

Anon 1- “A new build can be lived in here for 75 years or so.”

LOL a new build in Surrey will be lucky to make it past 25 years without becoming a tare down. OSB is one step up from cardboard and does not handle Vancouver weather. I guess you will find out the hard way.

jesse
Member

“The home will be paid off in 25. So the next generation gets to live free”

I used to naively believe this argument until it was explained to me what “capital” is. Application of different economic “world views” does not excuse overpaying.

The apt Buffettism is, “price is what you pay; value is what you get”.

A1
Guest
A1

YVR: value is in the land. Land paid off forever in 25 years!

YVR
Guest
YVR

Anon1: “many people have a net worth of $400,000. Just buying a house 10 years ago and then just holding on to it while spending the rest of your money would put you in this club.”

Yup and in 1999 the average investor holding Pets.com stock (or any other tech bubble stock)for a year or so put you in that club. How did things work out when everyone sold their stocks to realize the gains?

YVR
Guest
YVR

A1: “value is in the land. Land paid off forever in 25 years!”

Yes but the capital put towards paying off the land over 25 years(which by itself with no house is only a tax expense and produces no income) could realize more income by being invested in almost anything else including a risk free government bond or GIC.

Anonymous1
Guest
Anonymous1
I appreciate differing opinions…but that is all they are…opinions. A friend of mine in his mid thirties buy a detached home every time he has a kid. He has his primary residence and 3 other houses now. He says that is what he is going to give his kids when they turn 30. The houses are on large lots so they will be subdividable in the future. The land will be worth more than enough to buy a single detached home on a smaller lot in 30 years time he says. These were actual sales that affect the market. If he is doing this then there are others. He is living his life and not saving up for his retirement. He says gov will take care of that. He is taking care of his kids to give them an advantage… Read more »
YVR
Guest
YVR

A1: “value is in the land. Land paid off forever in 25 years!”

Never assume land value will be maintained even at bargain prices (which it is not in Surrey). In 2009 this 3350 sqft lot land sold for $28,000 which seemed like a good deal at the time. It was worth over 80K in the past. With no income 4 years later the owner is taking a 80% plus hair cut with asking price of 5K. Surrey won’t fair much better.

http://www.trulia.com/property/3119163766-5079-25th-St-Detroit-MI-48208

Melba
Guest
Melba

“A friend of mine in his mid thirties buy a detached home every time he has a kid…..”

This would be such an awesome story if it was even remotely feasible. Time to put the cap back on the glue tube buddy.

Best place on meth
Member
Best place on meth

“What if there was a home purchase plan for newborns 25 years ago?”

Please don’t give the government any more stupid ideas.

Best place on meth
Member
Best place on meth

CDN 5 year bond at a fresh 2 year high of 1.90%

It’s a new paradigm.

cheechin'
Guest
cheechin'

@Anonymous1

The ‘new build’ particle board houses will be not be standing in 75 years.

YVR
Guest
YVR
Anon1: “A friend of mine in his mid thirties buy a detached home every time he has a kid. He has his primary residence and 3 other houses now. He says that is what he is going to give his kids when they turn 30.” Or he could take the $160K invested(40K per house down payment plus closing costs)and the $8000 per month negative cash flow (4 x $2000 negative cash flow per house)and invest it making a conservative 5% per year and in 30 years he would have over $7 million to give his kids. Four Surrey houses in 30 years will be lucky to be worth $2 million and over that 30 years you will have to maintain them and collect rent. On 4 houses that is almost a full time job so you can add in another… Read more »
Anonymous1
Guest
Anonymous1

I don’t like comparing Canadian dollars to land. Our dollar could crash to 50 cents us overnight. But land will still be there.

For those of you thinking that land prices would fall as well , that may also happen. BUT, you have to remember that wealth is relative. You will still be considered wealthy as long as you have more than 90% of your neighbors.

People will always need land. The need for dollars fluctuates as can be seen by interest rates.

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