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Experience is my teacher



January 31, 2009 – Comments (8)

We all have different experiences to which our outlook comes from and my economic outlook comes from living in Vancouver which, in my view, was a mini example of what happens when you have housing bubbles.

Vancouver's housing prices were close to tripling from 1986 to 1993.  There had been another harmful bubble in 1980/81 and certainly housing was exceptionally cheap in 1986 as there had been a fear of buying.  Quite a few had been hurt by the 80/81 bubble.  Vancouver has been Canada's most expensive city since the 93 bubble, and I'd say housing has been about 20% more expensive then say Toronto ever since.

What we saw in Vancouver was a huge division of wealth and lifestyle as a result of the housing bubble.  People that I know that managed to own their homes prior to that bubble have had good lifestyles.  They have managed vacations, to provide for their families, save for retirement, keep in reasonably new vehicles and enjoy many of the toys that are out there.

In Vancouver the cost of housing took lifestyle away from all generations since, and I see this playing out in a much bigger scale as there were many more housing bubbles in many more places.  To my household that housing bubble meant there was $10-20k per year less to spend elsewhere for the entire 14 years I was a home owner.

I was taught that wages go up and your mortgage becomes more manageable.  That wasn't true in my household.  Our household wages were almost flat the whole time.  Indeed, 1991 was our year for highest household income until I left Vancouver and took a job up north.  Wages weren't completely flat, well, they were up and down.  An up year was completely unreliable that it would be good again the following year.  But never did they match the peak until I left Vancouver.

This is what my experience taught me and unfortunately, I think it will be the new reality for many in the younger generations.  Who knows, they might luck out and eventually see an inflation that makes debt loads manageable and in balance with lifestyle, but it may also be what I saw, price inflation with flat wages.  Early we saved for retirement.  Our last five years of homeownership we stopped saving for retirement, opting to try and pay down debt instead.

I think the economy is going to be rough for a while because of the number of people that will be lacking in disposible income because of household debt.  I think if you take the increase in the amount of money going to mortgage servicing and consider that it is not available to stimulate the economy, well, this is going to be a major slug to the economy for years.

8 Comments – Post Your Own

#1) On January 31, 2009 at 2:51 PM, dwot (28.81) wrote:

Here's a nice economic summary in graphs.

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#2) On January 31, 2009 at 3:04 PM, Tastylunch (28.51) wrote:

Makes me very glad I don't have any mortgages.

excellent post Dwot, thanks for sharing.

Always liked Vancouver quite a lot the times I've visited, hopefully things will improve there for people of all income backets.

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#3) On January 31, 2009 at 3:28 PM, SteveTheInvestor (< 20) wrote:

I don't think Vancouver is alone in the real estate bubble, though they do seem to be riding the high end of it.  I think places like California, Arizona and Florida are in similar straits. 

 The whole real estate market seemed euphoric to the extreme.  The biggest mistake was people buying what banks said they could afford when they should have used common sense instead.  Second on the list is viewing a house as an investment instead of a place to live.  

Our household income is barely into six figures, so we aren't suffering.  Seventeen years ago, we bought a comfortable 1200 sq. ft house and paid $78,000 for it.  (It's just about paid for....yay!)  Over those years, I've watched acquaintances buy homes 2 and 3 times larger for 5 and 6 times the cost.  Why would someone do that?  Now they're stuck with a huge mortage and a home nobody wants to buy.  

 Watching this fiasco unfold is depressing, no doubt, but I believe many people brought it on themselves by buying more house than they could afford and more than they needed.   It's the American way though I guess.  The downside is that we will likely have to deal with the results for at least the next decade.  

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#4) On January 31, 2009 at 6:10 PM, eldemonio (97.51) wrote:

I have also learned from experience and my own terrible decisions.  Instead of renting because I didn't want to throw money away - I bought a house and watched its value drop 30% last year - what a great flipping decision.  

The next wave of mortgage crises will result when people who can afford their homes will default on thier mortgage because it is the only way they can get out of their house - short of burning it down.  I know of a lot of people short selling or foreclosing on their homes to get out from an underwater mortgage even though they can still afford the payments.  

That is irresponsible in my opinion - I'll probably elect to burn my house to the ground. 

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#5) On January 31, 2009 at 6:19 PM, HansHauge (46.38) wrote:

LOL eldemonio - I'm willing to bet you're not the only one.

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#6) On February 01, 2009 at 12:35 AM, dwot (28.81) wrote:

Tasty, no mortgage here anymore, back to being a renter.  We pay less in rent for two places then we did for one mortgage.  Mind you, we had too much home.  I would never opt to own that much home again, but I sure did love that home.

StevenTheInvestor, I don't know the degree of housing bubbles in places in the 90s.  What happened in Vancouver which probably did not happen to the same degree elsewhere was massive immigration, which really helped to also keep wages flat.  So, housing didn't go down to affordable because the massive population increase and employers had lots of choices with hiring.  I think something like 1/3rd of all immigrants to Canada chose to settle in Vancouver.

I think wages weren't as flat as Vancouver.  I know we had a lot of teachers go to California and the starting wage was much, much better then Vancouver. 

In Vancouver 1200 sq ft houses are not common, more likely a condo, and that'll set you back $400k, still I believe.

My gosh, a $78k home bought 17 years ago not paid for yet?  We put half a million into housing over the 14 years we were home owners.  I feel kind of cheated because we paid enough that we ought to have owned a nice home outright, but that just wasn't the Vancouver market.  In Vancouver that size of a home would have run you around $200k in a multi-housing complex 17 years ago.  An actual house more like $300-400k.  One of my uncles bought an old "needs work" home in one of the cheapest neighbourhood with another couple for $250k around then.  We are talking a tear down.

eldemonio, sorry you lost so much on your home...

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#7) On February 01, 2009 at 12:27 PM, foolsMeThrice (99.08) wrote:

home ownership is a fraud and you never really own your property anyway.  If don't pay your property tax the town can take it away from you.  Also by the time the mortgage is paid off, your property tax would have inflated to new levels.  Add maintenence costs and a home should really be called a boat.

I have a friend who will finish paying off her mortgage in 5 years. Property tax is 1/2 of her payment.  Go figure.. By the time she retires it will be atleast 3/4's and her disposable income will be far less.

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#8) On February 03, 2009 at 11:46 AM, tally2007 (63.32) wrote:

This real estate market reminds me of the early '80s in New Orleans, when all of the oil and gas companies moved to Houston. All of the stores along Canal went out of business and were boarded up and you couldn't sell property in the French Quarter.

That down market lasted almost 10 years, because in 1990, I bought a shotgun double that was in disrepair for a great price. With a minimal amount of money and basic repairs, I created two rental units and lived in that house, rent free, for 11 years. 

If those people with oversized houses were allowed to take in renters, they could survive this downturn. Sometimes, one just has to buck it up and do what you have to do.

Rather than lose my house, I would certainly do something. As it turned out, I ended up selling that house in 2001 and more than doubled my investment, so it was worth being a landlord. Even now in N.O., you will not find many bargains, so ultimately, real estate seems to always go up.


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