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The Next Stage of Gross Redistribution of Wealth

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March 18, 2010 – Comments (24)

Financial Armageddon has a post with a graph that show how wages follow the employment rate, and currently it indicates that wages have not decline that much for the relative weakness in employment.

I keep repeating myself here, but to me Vancouver's economy since my early adult years is a micro economy of what is now happening on a grand scale around the world.

I had enormous problems with the declining wages.  With my mother's death I had ended up with a piece of property that was in a very hard hit place and I had a choice, either sell for 40c on the dollar, or drop out of university.  That land was considered a "liquidable" asset and as such disqualified me for student loans when rules changed after my second year.  To me, forcing a $20k loss when $20k would have be a 20-40% down payment on a home is not liquidable and emotionally, how many times does one have to pay for the loss of a loved one?  The only thing that got me through that difficult period was telling myself that a university degree would lead to a much better future.  

Only I graduated into a era where wages for degrees were declining and every time I punched the numbers, I came out way, way, way ahead by never going to school and working as a waitress.  It was enormously hard to take that I had squandered all my mother had left and I was never going to get it back from the job market.  When I made the decision to go to school I had a friend who had left a job that paid $36,000 in 1978 and she had a two year technical program training.  My father was earning $50-60k.  My father's wife was earning in the mid $40k range for office work, all while I was in school.  Around 2003, 12 years after I got my first degree, I interviewed for a job that was offering in the low $30k range.  I knew of graduates working in labs for $10-12 per hour. What was the point of going to school at all?

And then the internet makes the world a global community of sorts so somehow I met a number of people graduating with similar qualifications and getting job offers in the range of double what I was finding in Vancouver.  There were a very few good jobs in Vancouver, but insane competition for them, like the one job that 24 applicants were invited to write a 3 hour test to qualify for a job interview, and a technician level job went to a Ph.D graduate.

But, when I look at Vancouver's economy, it is almost night and day the way you can cut through age demographic and see a massive difference in the distribution of wealth.  I know several people who have siblings 5-10 years older then my age cohort and they have their homes paid for, they take nice vacations every year, they upgrade their vehicles every few years and if you look 10-15 years older, there are huge numbers retiring in the late 50s and early 60s.

One friend is 7 years younger then his sister.  He always shared a vehicle with his wife, still has a significant mortgage on a home worth half of what his sister has and vacations have always been very budget, none of the annual flights to hot spots for a few weeks like his sister.  This type of wealth distribution is very common in Vancouver.  If you got into the housing market by about 1990 at the latest your home was affordable and offered huge protection against astronomical increases in the cost of housing.  And, if you got into the housing market by then, chance are that you also had a job that also protected you from wage declines and just had to contend with increases that did not keep up to the cost of living.  But, declining interest rates meant that mortgage payments declined every time the mortgage was up for renewal.  Since 1990 there was only one other period where getting into the housing market would have made a huge difference to a person's financial well being, and that was a two year period around 2000-2002.  Homes were 10-12% less then when they peaked in 1993, still expensive, but manageable. By today's housing bubble those prices seem cheap, but they would have only been barely affordable based on wages.

So, in Vancouver you had this mass movement of younger people to the suburbs to keep housing affordable, and now even those suburbs are grossly expensive.

Right now so many places in the world face the economic conditions that lead to this downward spiral of disposable income, high real estate costs, high unemployment, governments with massive debt. 

Right now there are still a lot of people in the US being supported by government income supports, and by simply not paying their mortgage.  Governments at all levels have huge budget shortfalls and there has to be another wave of layoffs to help control government spending, which will continue to put downward pressure on wages.  

Vancouver's economy was sluggish my entire adult life.  I do not see how you have a vibrant economy when so many people have such limited disposable income, and those who do tend to spend significant amounts of their disposable income in other countries on vacations.

So, those with jobs will have much better wage protection then those without jobs and the difference in wages for those trying to get jobs and those that have jobs will grow significantly, as it did in Vancouver.  And, that massive wage difference also led to huge declines in unions.  The population as a whole will accept and support unions even when they make less money then union workers do to a degree.  When the wages of union and non-union workers get too far out of line, and the opportunity to ever get such a job is non-existent, union support by the masses goes away.  This was another trend that I saw in Vancouver, a large decline in the unions and very little public support for them.

I'd say count your blessings if you have a job and a home that is affordable. 

24 Comments – Post Your Own

#1) On March 18, 2010 at 12:19 PM, dwot (41.46) wrote:

I forgot to mention the massive grandfathering of benefits and the gross decline of benefits for those who have all those other strikes against them, like 2 tiered pensions as in this article.

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#2) On March 18, 2010 at 3:52 PM, ByrneShill (73.64) wrote:

That Vancouver housing bubble is an amazing case study. There are quite many specuvestors "subsidizing" their tenants in Vancouver, yet they all seem happy to hold cash-burning "assets". We usually say that the market can stay irrational longer than you can stay solvent, but this is getting ridiculous.

Wages is Vancouver aren't that low, actually they're in the top half of Canadian urban centers. But there comes a time when the cost of living outstrips the wages by enough of an amount that it doesn't make much sense to stay there even if you factor in the proximity to your family and the warm weather. And then there was those gazilion condos that were built in the last 7 years, while the population growth is almost nil. It's like the law of supply and demand don't exist west of the rocky mountains.

As for the generationnal wage gap, we have the same thing here (our housing market isn't as nutty as yours though, so we're not as deep in the mud). I have an engineering degree, and if the 30 years old me could talk to the 16 years old me, he'd tell that young dummy not to hurt his brain and waste his time getting that degree. If I could do it all over, I'd get a class 1 drivers licence at 16, and try my damn hardest to get a job driving a bus. You know what the running gag is for engineers when they come out of school? We usually ask our first employer to be paid as well as a bus driver, the employer says "sure, of course we pay our engineers better than bus drivers", and when the employer makes an offer, we just tell them how much a bus driver makes. No engineer I know got a wage higher than bus drivers.

I work for a consulting company. My client is mostly the federal government. So I work with federal employees. Just for fun, I calculated how much a pension is worth for a technical guy retiring at 57. lo and behold: 1.638 millions. The guy makes over 100k/year (base salary of 72k+overtime), and has a pension worth millions, yet he has a little technical degree. Then comes a fully trained engineers, bilingual (which in theory is a requirement if you work for the fed govt), and he gets hired as an external consultant for about 50k a year, no pension, less vacations, etc... Over the years, I've managed to close the gap compared with older people, but I'm kind of the only one I know who did. I know of engineers with full-time jobs who need roomates to afford a 2 bedroom apartment.

Is there still anyone puzzled at the fact that adults with jobs still live with their parents?

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#3) On March 18, 2010 at 4:36 PM, jlmjlm77 (99.41) wrote:

The cost of renting evenually moves close to the cost of owning.

So if renting is much cheaper eventually rent will go up and/or the cost of owning will go down, which probably means a decline in home prices and/or inflation of rents with flat home prices.  But the bubble can get bigger before is busts.

 

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#4) On March 18, 2010 at 6:22 PM, chk999 (99.97) wrote:

dwot - are you a boomer or a gen-xer? (Cut off line, '61 is boomer, '62 is gen-xer.)

The reason I ask is a comment in Generations by Strauss and Howe. I will explain further when I can get my copy and transcrive the quote exactly.

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#5) On March 18, 2010 at 7:03 PM, peachberrytea (71.70) wrote:

hey dwot, do you have any advice for me (26 yr old, vancouverite, accountant) in terms of purchasing a home? Any insights on the housing market and when to get in?

"Is there still anyone puzzled at the fact that adults with jobs still live with their parents?"

I live with my parents.. it doesn't make financial sense move out and rent, and I don't want to be tied down with a mortgage either at this age.

In fact, I have a coworker who married at 28, she's an accountant making 65k/yr, married to an engineer making about the same. Add it together and it's a pretty decent income figure. They rented out for one year when they got married, then they said it didn't make any sense and they went back to live the parents. Go figure.

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#6) On March 18, 2010 at 9:31 PM, dwot (41.46) wrote:

chk999, I guess by that definition I made the boomers by a month.  If I had a perfect execution of getting my act together I might beaten the wealth distribution line, but unlike most teenagers, when I finished high school I was scrambling to figure out how to pay July rent in about 10 days and because my father had split, I had my younger sister with me.  He sent support for her that just covered the living expenses for her, but not any of the extras, like moving costs twice in the couple years we lived together.  The first time my brother got us evicted, he got in so much trouble, and the second time we were evicted because the lady wanted the place for her daughter and husband to live in.  The place had been right across the street from the high school, vacancies were extremely low and there was no public bus to the school.  It was so hard to find a place and we ended up about 3-4 miles from the school.

It is interesting to me that as a teenager I had more concern for my sister's schooling then my father ever had for mine.

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#7) On March 18, 2010 at 9:31 PM, dwot (41.46) wrote:

chk999, I guess by that definition I made the boomers by a month.  If I had a perfect execution of getting my act together I might beaten the wealth distribution line, but unlike most teenagers, when I finished high school I was scrambling to figure out how to pay July rent in about 10 days and because my father had split, I had my younger sister with me.  He sent support for her that just covered the living expenses for her, but not any of the extras, like moving costs twice in the couple years we lived together.  The first time my brother got us evicted, he got in so much trouble, and the second time we were evicted because the lady wanted the place for her daughter and husband to live in.  The place had been right across the street from the high school, vacancies were extremely low and there was no public bus to the school.  It was so hard to find a place and we ended up about 3-4 miles from the school.

It is interesting to me that as a teenager I had more concern for my sister's schooling then my father ever had for mine.

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#8) On March 18, 2010 at 9:54 PM, dwot (41.46) wrote:

peachberry, save your money.  Vancouver is full of young adults living with their parents.  By the time you pay the high costs of renting, saving is really hard, so I don't blame your friends for moving back with the parents.  It is the best plan to get financially ahead.

I honestly believe the Vancouver housing market is partly being held up because of the Olympics.  People remember Expo and homes went up like crazy after Expo.  Homes were very affordable when we had Expo, actually, they probably were on the low side because there had been a housing bubble around 1980-81 that had really turned out badly for young people who bought during it, so in 86 Vancouver's housing market was at an affordability low.  Right now homes are extremely bubbled.  I think people who have been waiting for this boom in housing prices after the Olympics are going to be disappointed.   So, I think speculation has been holding the market up and I would tend to think the market should start to correct now.  

The 80-81 bubble bottomed in 86 and the 93-94 bubble bottomed aroudn 2001.  Vancouver's prices peaked around 2008, went down and have creeped up again.   I am thinking the market will do a combination of declining and moving sideways and the bottom will be somewhere 4 to 10 years out.  

It is hard to say how much they will come down.  If rates go up there will be a sharp decline, but if they stay low I would tend to think the bottom would be 4-5 times household income.

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#9) On March 18, 2010 at 10:04 PM, dwot (41.46) wrote:

Byrneshill, I tend to think a lot of those renting for below the cost of ownership bought the houses much cheaper so they aren't really paying extra to have renters, but if they sold now they'd be making a bundle.  One place I know of being rented out was bought at about half the price being asked for similar properties.

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#10) On March 19, 2010 at 2:46 AM, 292972826 wrote:

Interesting, you could see the trend even more accentuated in the wealth ratio between the lower 95% and top 5% of the population, while one decline during the last 10 year, the top 5% increases.

 The top 1% of the american population has 40% of the wealth of the country this year and trend is accelerating.... 

 More interesting is the statistic and trend about it, below the link..

 We are moving toward a plutocracy if we are not already into it...

http://sociology.ucsc.edu/whorulesamerica/power/wealth.html 

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#11) On March 19, 2010 at 9:11 AM, Gemini846 (50.38) wrote:

slycal: That's because Poor people keep doing things that make them more poor.

You can't 100% blame them, but nobody tells people these days that the ROI on a college degree in 90% of fields is negative. Think about it.

Your average non Medical/Law student that finds employment from a private 4 year college carries with them 40-60k in debt. If that degree took 4 years (most take more) then they gave up 4 years of work. Even at 25k per year that's 100k at premium compounding years, so they get set back 150k on average in their first 4 years of adult life.

There are 4 major risk factors to starting a business, the most critical is $$. If young adults had $100k and no debt to put into a business at the end of 4 years. This would make them producers rather than consumers. Job creators rather than people filling a chair.

Of course they don't teach you that in school. Since people don't have the money or know-how to start businesses when they are 30 and loose thier jobs, they cry to the government for extended benefits. Call it cruel, but when people are hungry they can figure some things out. (Or maybe that spirit is dead in America too).  I promise you if I lost my job tomorrow, I'd be a lot more motivated without a couple thousand of govt cheese comming in.

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#12) On March 19, 2010 at 9:29 AM, russiangambit (29.13) wrote:

> You can't 100% blame them, but nobody tells people these days that the ROI on a college degree in 90% of fields is negative. Think about it.

It makes me ever so grateful that college education in Russia is free . And in the US my employer paid for it. There is no way I would've paid 50K for 2 year MBA. MBAs these day are a dime a dozen.

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#13) On March 19, 2010 at 9:41 AM, starbucks4ever (97.51) wrote:

#11,

What kind of business can one start with 100k? It's utterly ridiculous. With this amount of starting capital you can only rent an office for a year so that authorities don't shut you down, and hire a bookkeeper to prepare your paperwork. And even that will last for just 1 year, so by the end of the year your business will need to generate $1M revenue and $100k profit so that you can rent the office for another year and keep the bookkeeper employed. And that before the cost of licences, permits, legal fees, equipment, etc. A realistic amount of necessary starting capital is $1M, and even then you have a good 70% chance to end up with $0 as a reward for your time and effort. 

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#14) On March 19, 2010 at 10:07 AM, miteycasey (30.40) wrote:

> You can't 100% blame them, but nobody tells people these days that the ROI on a college degree in 90% of fields is negative. Think about it.

No kidding.

It kills me to see a teacher, social worker, etc. with a starting salary of 30k starting out 60k in debt.

Kids are told to go to college and get a degree, we'll have a job waiting for you....hogwash.

 

 

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#15) On March 19, 2010 at 10:22 AM, outoffocus (22.76) wrote:

#11,

What kind of business can one start with 100k? It's utterly ridiculous. With this amount of starting capital you can only rent an office for a year so that authorities don't shut you down, and hire a bookkeeper to prepare your paperwork. And even that will last for just 1 year, so by the end of the year your business will need to generate $1M revenue and $100k profit so that you can rent the office for another year and keep the bookkeeper employed. And that before the cost of licences, permits, legal fees, equipment, etc. A realistic amount of necessary starting capital is $1M, and even then you have a good 70% chance to end up with $0 as a reward for your time and effort.

Are you kidding me? Most businesses start with way less that $100k.  And who says you have to rent some class A space out in the middle of downtown Manhattan?  Many business start in a home or an apartment. Maybe this is why Americans don't want to start businesses.  They all think that we have to start out looking like Walmart or Goldman Sachs, but most people forget (or don't know) how these businesses really started. Most big businesses today started small. The entreprenuer had some money saved, a dream, and some support from family and friends.  The over time the business grew to what is now, (Ebay and Microsoft come to mind).

Actually now is probably one of the best times to start a business.  With the turmoil going on in the Commercial RE market, there are tons of retail space just sitting vacant.  It should be no problem to rent office or retail space at a huge discount.

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#16) On March 19, 2010 at 10:51 AM, starbucks4ever (97.51) wrote:

#15,

You are contradicting yourself. So is your hypothetical businessman starting a company in his apartment, or is he renting retail space after all, even if it's at a "huge discount"? I have nothing against running a business from an apartment. That will be a smart thing to do if you can get away with it. But unfortunately you will have bureaucrats to keep at bay and they will not let you run your business from an apartment for their own bureaucratic reasons, unless you are going to be a freelancer typing your .doc files in your bedroom which they cannot possibly regulate. But speaking of real businesses, I don't see you operating a restaurant in your house backyard or starting a movie theater in the spare bedroom of your 3-bedroom apartment on the 13th floor of a high-rise. Not because that would be a bad business decision, mind you, or because it would hurt your ambitions, but because your visitors will never get to your movie theater past the building doorman.

 

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#17) On March 19, 2010 at 10:52 AM, 292972826 wrote:

#11,

 >>hat's because Poor people keep doing things that make them more poor.

I m not pointing at the poor , 95% of the population include poor and middle class. If you call the middle class "poor", I think it is over exaggerating.

 >>You can't 100% blame them, but nobody tells people these days that the ROI on a college degree in 90% of fields is negative. Think about it.

Another reason to believe that we are already in a plutocracy. The middle class struggle financially to obtain a good education. In a democracy, education should be free.

 

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#18) On March 19, 2010 at 11:28 AM, russiangambit (29.13) wrote:

#15 -  there are only few businesses you can start  with 100K - 1) consulting 2) reselling 3) doing your own intellectual work such as writing books, coding software, providing online serivces or education.

And not surprising we have plenty of that. For a real business though the amount of investment required is mind-boggling. You have to put all your wealth on the line knowing that your chance of failure is 90%. I am surprised we have so many small businesses anyway.

If I was in a situation were I had to start a business within a month I would a) set up consulting company and attempt to sell my IT skills or b) move to an emergining country were I could as a foreigner would be allowed to set up a business or be a co-partner with an local, the costs there are so much lower and so USDs woiuld go much further.  In my paticualr case I would move to Russia, of course. Most of my cousins have their own businesses, my own sister has 3 ventures going at the time. I am a loser in the family , still working for da man -((. I don't really think US is as business friendly as it puports to be, the costs here are very high.

Paradoxically, the lack of social net forces people to take risks, but on the other hand with social net it is much easier to start a small business because at least you are guaranteed a meal and a shelter if the business goes bust. Is there a happy meidum?

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#19) On March 19, 2010 at 11:50 AM, starbucks4ever (97.51) wrote:

#18,

The best business idea will be to sell books, online courses, and seminars about starting a small business. Very little expenses are needed, the courts will always take your side because it's the poorest members of the society that you'll be preying upon, and you won't be facing any real risk. Sure, you will be facing competition (there is the "Rich Dad" Kiyosaki, for one), but business landscape is always changing and there is always a way to sell another book or seminar. 

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#20) On March 19, 2010 at 2:27 PM, ByrneShill (73.64) wrote:

@peachberrytea: I'll double, or maybe triple-agree with dwot. The best advice one could give you if you're looking to buy in vancouver is: DON'T. Staying with mom and dad is cheap or free, depending on how you arrange things with them. Renting is much cheaper than buying right now, so if for some reasons you'd prefer not living with your parents, renting is the way to go. Another alternative would be to move out of BC. You can get an accountant job paying 65k$ (or close to that) anywhere in the country, and you'll pay half the price (or less) for the same condo/house. Buying in Vancouver right now is nothing short of a financial suicide, unless you're very wealthy, in which case it's just a bad decision.

On the other hand, if I was married with a houshold income of 130k$, I wouldn't even think about living with my (or her) parents. When you're in a steady couple it's fun to be just the 2 of you for a while, at least before little humans appears (wtf do they come from anyway?) and your whole lifestyle has to change. JMHO.

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#21) On March 19, 2010 at 4:15 PM, peachberrytea (71.70) wrote:

@dwot: hey, thanks - that was extremely helpful. I've been telling myself I need to go to events that this association or that puts up to "educate" young people looking to buy, but really.. you don't know how much you can take at face value for one, and I don't think I could tell if they knew what they were talking about

Would you mind if I asked why a house should cost 4-5x household income at the bottom? Is that an "average" from other housing bottoms? Would there be anything here in Vancouver that might make Vancouver deviate from that average (e.g. our housing has always been more expensive compared to everywhere else.. for reasons I'm not completely sure about)

@ByrneShill: hey, yeah, I think I agree and know where you're coming from. I should think about the house more of as a financial investment, instead of just thinking about it like groceries - just something you need and go buy. Taking from that investment analogy though.. doing dd is tough for somthing like this though.. the dd, it's all macro housing market, and you put some multiple of your net worth into one investment, and if that wasn't enough you use leverage (mortgage) to do it.. sounds kinda crazy.

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#22) On March 19, 2010 at 6:16 PM, dwot (41.46) wrote:

Peachberrytea,

If rates remain low even thought 4-5 times household income is expensive, people can still do it so I think a combination of people refusing to sell for less, urban policy that restricts builders, and appearance of affordability because mortgage payments are affordable will prevent homes from going lower.  All bets are off on that if rates go up because then the fact that it is not affordable becomes apparent in the monthly payment.  Unless you have one heck of a down payment buying at 4-5 times household income is extremely risky.  Any bumps in the household finances put you at risk to lose your home.

Vancouver's anti urban sprawl philosophy limit the rate lots get released and cause builders to have to jump through more hoops to get building permits.  Demographia's stuff is showing when builders have access to building lots prices tend to remain affordable.  It is one extra piece to the puzzle.

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#23) On March 19, 2010 at 7:02 PM, alexxlea (65.49) wrote:

We got to the point where people can do useless jobs and get paid an income because very few people in "developed" nations do anything useful.

 

I mean really, I'd rather be a pauper in the states then middle-class in Somalia.

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#24) On March 25, 2010 at 9:46 AM, miteycasey (30.40) wrote:

You can start a landscaping busines with two hands and a $50 lawn mower from the flea market.

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