Jamie’s got hungry eyes.
“I’m 36, married 2 kids just about to start school. We’re both employed in decent paying jobs and live in central Vancouver Island. We have a house worth about $340,000 we owe about $202,000 on it. I don’t need to move nor do I want to. We make minimal payments on the house and unless interest rates spike I expect to continue doing that until the mortgage is gone.”
So far, so good. Modest house. Two incomes. Low horniness rating. Gaming those mortgage rates. What else ya got?
“We’re just getting started in the process of maxing out our TFSA’s – 10k so far. I had thought of it as only a savings account until reading your blog a few months ago and realizing the error of my ways. We also have about 50k in RRSPs and misc cash probably works out to $7k. Real estate prices are starting to decrease around here but haven’t come down much yet.”
Hmm. Not so good. That’s but $60,000 in liquid investments, most of it in a taxable RRSP. Looks like the house is 70% of your net worth which (according to the hallowed Rule of 90) is about a fifth too much. Worse, that one asset is already under pressure. As Jamie points out, real estate on Vancouver Island is a slow mo train wreck.
So, you’re about forty grand behind on your TFSAs, dude. Plus you have no non-registered investments to fill with juicy dividend-payers and ETFs pumping out tax-efficient capital gains. And what about an RESP for the wrigglers? When the government’s willing to give you money, how can you not take it? Like, why aren’t you paying attention?
“What I’m really wanting is a little cabin on some land by a lake somewhere on the island. Unfortunately places like that tend to cost more than my house in the middle of town. My thought is as the boomers retire and start to run out of money recreational properties like this will be one of the things they sell off to stop from eating cat food.”
Oops. This sounds dangerous.
“Am I correct that these properties will be far less expensive in the near future or am I dreaming that I’ll ever be able to afford one of these things without doing something stupid and borrow a ton of money for a little shack in the woods?”
So this is what happens when Spring comes. Motorcycles. Convertibles. Affairs. Seed catalogues. Shacks. Testosterone. Woods. Or all of them together. Like I said, Jamie’s got a hunger.
Is it reasonable to believe the price of recreational properties will be lower in the future? You bet it is. Big time. In fact this has been a trend for the last two years, whether it’s in Whistler, the Laurentians, the Qu’Appelle Valley, Muskoka or up-island. Across Canada, cottages, hobby farms and chalets have turned illiquid as buyers simply fail to materialize. Prices have eroded seriously in many of these places (check out Whistler, from Olympic glory to today’s sorry), and it’s easy to see why.
The vast majority of shacks, cabins and other furry lovenests have been financed with equity loans taken against urban properties, or with cash. And, yeah, the majority of the owners are Boomers, whose best axe-wielding days may be behind them. Yes again, these wrinklies are already massively invested in real estate (78% own some), and are aging by the pathetic moment. Near sunset you can actually hear it.
With the need to raise retirement income, there’s no doubt the true wave of selling in cottage country has only just started. So over the next five years I fully expect prices in Blue Mountain or Big White or those dumb ski condos up the road from Trail to plunge. Any doubt of that should vanish with the current sales stats I’ve reported to you so far this week.
With the number of deals off 19% in Van and 15% in the GTA it means downward pressure is growing on those urban properties which folks used as ATMs to finance the rural retreats. Guess what happens next? Especially if you’re a Boomer with a disgusting amount of your net worth in property?
Yes, Jamie, prices crumble. The massacre in the woods will ultimately be far worse than that in town. But it’s not happening tomorrow. This year, some bargains. Next year, more of them. The spring after that, a gush.
But this is irrelevant. You’re already messing up. At your present pace you’ll be forty with about the same equity in the house (count on a price drop) and less than a hundred thousand outside of it. The kids will be eight or nine years away from fat university costs, with no reservoir of savings. Given the choices you’ve already made (start a family, dump your cash into a house, go RRSPs), how are you going to buy a cabin and trees? You have no available funds.
You do not need more real estate. You need to save and invest.
Feed the TFSAs, not the bears.