As the Canadian economy moves into recession, pray for Jake. For he is married to Jenny. And she’s outta control. In the small tableau of their life are contained the broad themes of our coming demise.
“A few months ago I was able to finally convince Jenny to sell our condo and rent. After months on the market (and minimal showings) we finally got an offer on it this week,” Jake, 40, says. So much for that hot market in Calgary. “The problem now is that my wife is starting to get cold feet again about renting and feels that with the condo selling it’s a perfect time to buy a place with more size to fit our family (2 40yr-old adults, 2 young kids and her Mom who helps us look after the kids while we work).
“I keep telling her we need to save at least 20% before we buy again which she seemed to understand for awhile until our realtor who sold our place sent us the latest CMHC market report.”
“I’ve tried to battle this one as best I could, Garth, but its getting harder. Last night we argued and debated for 3 hours and its causing our marriage a lot of stress. I’m simply not smart enough nor have the financial background to give answers that paint a clear picture to her on what we should do next. I know if you could talk to us it would help her understand a wise plan for our future. I want us to buy again but just want to make sure we do it right. After selling this condo and clearing our debts we will have about 60k and another 32k sitting in a savings account.”
I asked Jake last night what kind of house Jen wants. A $450,000 one, he said.
Can they buy it? Of course they can. With closing costs and 10% down, it’s less than fifty grand. A five-year fixed mortgage with a 30-year am will cost just under $2,000 a month, CMHC levy included. Add property insurance, taxes and a few repairs, and that comes to about $2,500 a month. Still more than renting the same house, but Jake gets to keep Jenny – at least until she wants a $700,000 place.
However, getting real estate ain’t the issue. Between voracious bankers and rapacious realtors, virtually anyone can score a house these days, down payment or not. It’s the consequences of this decision which this couple should be worried about.
First, they have a net worth of $92,000. Using fifty of it to buy, leaves a scant $42,000 at the same time they’re taking on $416,137 in debt. If a job is lost, well, in highly technical terms, and as we define it in the wealth management business, they’re screwed.
Second, this is the cheapest this house will ever be to carry. By renewal time in 2017 a five-year mortgage could well be 7%, and 30-year amortizations gone. The monthly will double.
Third, as rates rise, affordability falls. A house bought for $450,000 when five-year money was 4% will be worth less than when rates return to normal – unless, of course, wages and salaries have doubled at the same time. The chances of that are equal to me buying a Prius.
Fourth, the near-certainty that residential real estate in Calgary (along with most other places) is about to become even more illiquid. Jake, baby, consider that it took months to sell an inexpensive condo at a time when oil prices have crested $100 and every Calgary realtor worth her spurs is spreading horniness. What happens in two years when the economy slags? And you have no equity left?
Fifth, can you eat drywall? Then what’s the retirement plan? At age 40 having a house you barely own (but are 100% responsible for) and liquid assets of $40,000, is a fail. Guaranteed, that property will suck off every extra dollar in renos and improvements. If not, then the kids will soak off the family cash flow. How will you possibly accumulate the million bucks you and lusty Jen will need to finance the last 30 years of your life?
Sixth, the kids. You’ve nothing saved for their education, which I’d think would mean more to a mother than a new kitchen. In 15 years they’ll need at least a hundred grand between them over four years – which happens in your late fifties. Parenthood has its price. Pony up.
Seventh, I’ve already mentioned the economy. Don’t let Alberta’s faux bravado blind you to what’s happening. The country’s manufacturing base is crumbling and demand for commodities will be tepid with Europe smouldering, the US consolidating and China cooling. Household debt is obese and in a country where 65% of the economy’s dependent on consumer spending, this is toxic. Worse, there are too many people like your wife. Financial death by MLS.
Sure, Jake, I’ll talk to her. Send me an email. We’ll set it up. Gratis.
But you’ve already made your bed. Middle-aged, two dependents, little cash, no strategy, dumb expectations and wall-to-wall stress. If you’re arguing for three hours about something you can’t afford to risk, maybe Jen’s beyond my help.
Most people are. Outta control. Confusing stuff for security. Debt for wealth. Want for need.
So, make her aroused for you, pal, not Mr. Sub-Zero.
Perhaps I can assist with that.