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Reader Mail: $1M House – Should I Downsize my Home?

The personal finance questions via email keep rolling in. Recently, Heather inquired about her financial situation and how would she go about reaching her goals. She is recently divorced and raising a child. While married, she worked in the family business, but now her only income is spousal and child support payments. She has a significant real estate asset – her principal residence in Vancouver.

Background

Hi, I own a home in Vancouver. It’s half paid for. It’s my future retirement fund, I’m 42, currently divorced on spousal support for five more years. I’m concerned the housing market is going to take a financial downfall soon, should I get out and buy a town home, have no mortgage and then do what with the balance of the remaining money? Can you confidentially give me your gut instinct on whether real estate is worth holding?  If I sell, I would buy a home in a different area, but the quality would not be the same, the lot half the size, the neighborhood is ok, but not upper class. I’m guaranteed 7,000 per month for the next 5 years, ( spousal) , my home is worth $1,000,000, remaining mortgage is 435,000 @ 3.48% fixed 5 year term.

Given a stable financial situation for the next five years, would you sell and downsize and have no mortgage, invest the rest in the stock market, or conversely, ride it out with the real estate for five years but then have to sell once that time is up?

I’m not working yet, studying part time at UBC, raising a child. I expect to work full time (@$50k/yr) within five years but cannot count on a predictable income amount then, it is an unknown.

Car is paid off.

I’m not currently contributing to my RRSP’S in favor of the TFSA.

I can get a nice new home for $670,000 and be mortgage free. Town homes are around $300k – $400k.

The goal is financial independence by 50.  I think I’ll need at least 40,000 a year to retire.

The new home I looked at I. A different location us 670,000. Big, new, nice. Half the size of the lot but may have an upside as a school, park and mall are being built right around there now.

Summary of Numbers

Net Income: $84k/yr

  • Spousal/Child Support: $7,000/month ($84,000/year) for the next five years.
  • Occasional help from family to balance expenses.

Expenses: $91k/yr

  • Car insurance: 1,600 year
  • Home taxes : 1,800 year
  • Cable, phone: 1,200 year
  • Utilities, 1,100 year
  • Electric, gas: 2,000 year
  • Maintenance : 2,000 year
  • Vacation: 2,000 year
  • Entertainment: 700 year
  • Gas: 4,000 year
  • Child expenses: 3,000 year
  • Home insurance: 1,600 year
  • Groceries: 10,000 year
  • Mortgage: 60,000 year (overpaying by  $18,000/yr)

Assets:

  • TFSA: $15,000
  • RRSP: $197,000

Liabilities:

  • Mortgage Balance: 435,000
  • Credit card balance: $16,000 @ 1.99% (being paid off $1,500/month with help from family)

Divorce is tough and certainly a wealth killer but good on Heather for seeking advice on how to get her financial house in order.  In her first email to me, her main question was about if she should sell her house now and lock in her equity because of the rumours of a real estate crash.  To answer that question, I don’t have the foresight or experience in real estate to call a crash, however I don’t think a real estate crash is the main issue here.

The main issue is cash flow and the 5 year time limit on spousal payments.  Right now, Heather is receiving about $84k per year (after tax) in spousal/child support but although this is more income than the average family, it is not enough for the lifestyle that she is living right now.   Housing costs are eating up 75% of her net income, which doesn’t leave a lot for her and her son to live on.  In fact, she is running monthly deficit which is evident in the credit card balance.

The good news is that Heather is currently overpaying on her mortgage, thus she can reduce her payments back to $3500/month which will free up $18k per year and bring her to cash flow positive.   I would then take that cash flow and pay off any credit card debt and sever the family payments she is receiving.

The next step, and perhaps the hardest, is that she will need to downgrade her lifestyle.  I understand that Heather is used to a certain lifestyle, but times have changed, especially with significantly reduced income on the horizon.  I feel that Heather should sell her $1M house to either rent or use the equity to purchase a $300k-$400k townhouse free and clear.

By purchasing a townhouse, she will be left with about $100k cash lump sum in addition to reducing her annual expenses from $90k to $30k per year.  If she sells her $1M home in the next year or so, it will leave her with $60k per year in excess cash flow or $240k over four years.

This will leave her in good shape as her potential $50k salary ($36k after tax and deductions) should be enough to cover her annual expenses once her spousal support runs out.

By following this plan, after five years she will have about $340k in the bank and a career that pays her enough to cover her annual expenses.

In the longer term, Heather is going for financial freedom by 50, or 8 years from now.  This is very aggressive considering the financial situation she is in right now.  Assuming a full annual TFSA contributions and 5% return, after 8 years the balance should be around $75k.  Assuming no other RRSP contributions, the value of the account should grow $260k.  If the $60k in mortgage payment savings over 4 years is invested for the 8 year term, the balance should be about $400k.

With these assumptions, total investable assets grow to $730k.  The problem is that the time frame is only 8 years, and although the market has never lost money over any 20 year or longer period, the market can be very volatile over an 8 year period.  In addition, with retirement at age 50, the portfolio would need to last 40 years or so.

Due to potentially long retirement time frame, I would invest in income producing investments that have a history of increasing their dividends (for inflation protection) and live off the distributions only.  However in this case, even the portfolio managed to obtain a generous 4% yield, it is still not enough to cover her required $40k budget.  On the bright side, if she stays invested for another 5-7 years and keeps maxing out her TFSA annually, she should be in good shape.  Canada Pension Plan along with Old Age Security when she turns 65 will be icing on the cake.

Final Thoughts

I realize that this post was a little wordy, so here are the highlights of my thoughts on Heather’s financial situation.

  1. Reduce mortgage to minimum payment, use freed up cash to start paying down credit card debt;
  2. Sell the $1M house;
  3. Buy a town house for $300k-$400k;
  4. Put any cash left over ($100k) into TFSA (up to maximum amount), then the remainder into a non-registered investment account (avoid RRSP at this point);
  5. Invest old mortgage payment to add to non-registered portfolio ($60k/yr for 4-5 years); and,
  6. Start career ASAP, and create an aggressive budget so that TFSA can be maxed out every year without taking on any more credit card debt.

What are your thoughts about Heather’s financial situation?

Do you have a personal finance question? Contact me here!

Disclaimer:  This post is for informational purposes only.  Contact a financial professional before acting on anything written in this post.







36 Comments, Comment or Ping

  1. 1. Michael

    Excellent independent advice, and it was refreshing to see that it did not include investing in a portfolio of mutual funds (with their costs). Also, if she downsizes her home she will probably see a decrease in property tax, utilities, and maintenance costs as well. Might add up to $1-2K per year savings.

  2. 2. Charles in Vancouver

    A $300-400K townhouse in Vancouver? I hope it’s bigger than a shoebox.

  3. 3. Matt

    Well done. Not sure I can see any other way than what you have advised. There seems to be a mismatch in expectations and reality in this situation especially when you consider that she has been effectively recruiting her family members to pay off her mortgage early.

  4. 4. Paul T

    I wouldn’t be so sure about your 5 years as “stable” income. If the other spouse loses their job, or becomes underemployed, the spousal and child support amounts may be revisited. I’d err on the side of caution and sell while the going’s good.

    The lifestyle that the submitter enjoyed, was when both spouses were contributing to the pot. Now at least 1/2 that contribution is gone. Lifestyle adjusts need to be made to account for the new reality. That means:
    - Living in a more modest home
    - Less vacations
    - Cut back where you can on excessive spending.

  5. 5. Matt

    One more thing, what about RESP’s for her child?

  6. 6. Dan

    Good post. I’d be curious to know if it’s possible to buy a townhouse in a central location like the house for $670k. Buying in a central area would mea relying less on a vehicle – lower gas costs, lower insurance, less wear and tear and more life out of your current vehicle.

    Also, two things to consider. I agree with buying a townhome in this case but would be curious what the condo/strata fees would be. is it possible to get a reasonably priced townhome that has (relatively) low fees? This could be a cash flow issue in the future if the fees keep rising. And what is the penalty for breaking the mortgage at this point? It could be big and would need to be considered as well.

    Either way – best of luck on the financial decisions

  7. 7. Paul

    Well thought out advice. But indeed $300k-$400k will likely not get you a townhouse in Vancouver (property prices being crazy there). The Economist has written articles forecasting a housing crash in Vancouver for a number of years – I think they expect a 25% decline or so. But it has not yet happened… Will it… Probably but who knows when… I’m not an expert and even they often call it wrong…

    >>The goal is financial independence by 50. I think I’ll need at least 40,000 a year to retire

    That’s a worthy goal but with finances always be cautious. Don’t take unnecessary risks just to reach your goal

    40,000 a year for retirement is actually quite a lot. Consider what size your pension pot would have to be in order to retire for say 25 years on 40,000 a year. You’ll need a very substantial pot. Given you will be mortgage free, do some fresh calculations – do you actually need 40,000 a year? Your calcs should include tax too – how much tax on that 40,000 or your new amount will you need to pay.

    Retirement specialists advise keeping what you withdraw from your pension pot (for retirement income) 3% to 4% of the entire pot. Since you cannot guarantee what will happen to the stock market, it’s best to withdraw the least you need – particularly in the early years of retirement.

    Your situation is complex. I would seek out professional fee-based (not commission) financial advice.

  8. 8. Dividends on the Prairie

    FT,

    I agree with your recommendations however I’m curious why you’re recommending putting the remainder of funds (after TFSA max) in a non-registered account (vs RRSPs)? I get the sense that Heather will receive less income at retirement than present levels and would therefore be at a lower tax bracket in the future.

  9. 9. Tyler

    I think it’s best to sell the house and take all the equity and buy a 1 or 2 bed room condo. Around Burnaby/Surrey/Coquitlam, it’s only around 150 -300 k. However, there’s the extra 15 -20 minute commute each way to work but thats the price for cheaper.

    Living Mortgage free would be a great new chapter in your life.
    Everything you’d recieve from spousal support should go into your financial portfolio of Dividend payers and or Canadian Couch potato model.

    “In order to build wealth, one must spend and live below your means.”

  10. 10. SST

    If the letter writer is concerned “the housing market is going to take a financial downfall soon…I can get a nice new home for $670,000 and be mortgage free. Town homes are around $300k – $400k” — the appropriate thing to do would be to sell and rent, not sell just to buy something else only to watch its market price decline.

    May we ask WHY you think there will be a housing market “financial downfall soon”?

    But I’m sure you have enough on your plate without more opinions.
    Good luck.

  11. 11. saveddijon

    I, too, would be inclined to sell.

    She doesn’t say when her mortgage term ends. 3.48% is an excellent rate, but rates have been uncharacteristically low over the recent years. At the end of the term if rates are back at 5-6% then she could be faced with paying interest on $400K or so at 6% which is $24K/year. Not pleasant given everything else.

    Better to sell now and eliminate that risk.

  12. 12. SST

    She’ll also pay over $40,000 in land transfer tax and realtor fees if she sells her house.

  13. Thanks for the support guys!

    @Dan, I didnt’ mention it in the post, but I did consider future condo fees which is why I kept her future property tax/insurance rates the same as her current rates. That should help cover condo fees. However, I did not know her mortgage term and did not account for mortgage breakage fee which could be significant on a $400k mortgage.

    @Dividends on the Prarie, that is a good point. Do you know the status of spousal payments? Is it 100% taxable as income?

    @SST, real estate/legal fees are accounted for. House is worth $1M, she has $565k equity, I assumed she would walk away with $500k.

  14. 14. Dividends on the Prairie

    FT,

    After some quick research it seems that spousal payments are 100% taxed like regular income.

  15. 15. Dwilly

    Interesting situation and kudos to the reader for having the courage to share her situation and ask for help.

    Agree with the themes as generally discussed. Heather, if you are reading this, the following is very important: You MUST downgrade your lifestyle and learn to live on less. You clearly cannot continue to live at your current rate of consumption on 50k/yr. At first blush this can sound intimidating and negative but it can be far less so than your initial reaction, and can even be a positive and uplifting experience.

    Moreover, you have been blessed with TIME. For most people that need to make such a transition, the reality is abrupt, brought on by a sudden incident and leaving no choice. But you will/should have 5 years of stable income to make the transition. Count your blessings and do no squander this.

    Here is my specific advice: Sell the house, and fast. You’ll pay commissions, taxes, etc., but you have no choice. Nuke the consumer debt. You should be left with, say, $450k-ish in the bank.

    Do not buy another home for $670k, you can’t afford it. And stop viewing a home as a retirement plan, it’s dangerous. Given prices in Vancouver today, I’d rather rent. Rent someplace (apartment, do you + one child need any more than that?) for $1800/mo, and invest your 450k wisely. With your RRSPs, you now have $650k in the bank. If you must buy a home, you need to spend a lot less than $670k. I know Vancouver is expensive, but this is what you can afford.

    As to your expenses:
    Car insurance: 1,600 year – fine
    Home taxes : 1,800 year – rent and this disappears.
    Cable, phone: 1,200 year – see if you can cut this in half. $50/mo for a phone. Who needs TV?
    Utilities, 1,100 year – Should drop if you rent
    Electric, gas: 2,000 year – Should drop if you rent
    Maintenance : 2,000 year – rent and this disappears
    Vacation: 2,000 year – you don’t need this, you live in Beautiful BC, go somewhere for less, camp, hike, etc.
    Entertainment: 700 year – fair enough
    Gas: 4,000 year – How is it you live in Vancouver proper in a $1m home yet still spend 350/mo on gas? Can you live closer to work/school?
    Child expenses: 3,000 year – fair
    Home insurance: 1,600 year – rent and this drops
    Groceries: 10,000 year – Almost $1000/mo for food seems a bit high (my family of 4 eats well for $600/mo). I generally dont like to question people about food, but does this include a lot of eating out? If so, try to cut back.
    Mortgage: 60,000 year (overpaying by $18,000/yr) – buhbye

    Add up all those changes and I get something around 18k-22k per year after taxes. Add in your $1800/mo rent and you get something like $42k/yr net – doable given your expected 50k gross.

    And that is living fairly reasonably, modestly, and without great sacrifice. You still have money for entertainment and your child. And you have $650k in the bank.

    Now it gets better. Do this TODAY, not in 5yrs, and you can bank $2000-$3000/month for the next 5yrs, courtesy of your ex. That’s another $120k-180k to add to your savings, bringing you well over 3/4 of a mil. Get help from a fee-for-service advisor to build you a low cost portfolio of ETFs.

    I know your situation may seem scary right now. But in reality you can be in a very good position if you take action now. Your dream of early retirement can happen if you take the right steps.

  16. 16. Dwilly

    Another way to put this – you are in a VERY good spot right now because you have a large positive net worth today (perhaps around $700k). That’s very good for someone at your age and a big step toward your early retirement.

    The bad news is that (a) your net worth is highly invested in your home and (b) you now, given recent life changes, have a very serious negative cash flow. If left unchanged, you will soon begin to blow through your positive equity and head in reverse.

    So simply, you must:
    1) Arrest the cash burn ASAP.
    2) Get out of the house ASAP. It’s more than you can handle financially and is nothing but a giant anchor around your financial neck.

    Correct those and you are actually looking quite good, I think.

  17. 17. Paul

    Dwilly, good analysis but I’d be concerned about renting… Maybe in the short term (1-3 years) it would be okay but long term wise, I would buy. The Economist has been saying for many years that house prices will drop in Vancouver by 25% or so but will it happen? Who knows…

    The stock market generally has much more risk than investing in a house – provided you’re not buying in a property bubble. Eg the TSX (for the new folks: Toronto Stock Exchange) lost 33% in 2008.

    With decisions like this, Heather should seek the advice of a professional financial advisor – a fee-based one, not commission. FT and you folks are doing great, but she needs to talk to an advisor as well.

  18. 18. SST

    re: Dwilly –

    “You MUST downgrade your lifestyle and learn to live on less.”

    So true. It’s a bit of a incongruent situation, this. Obviously the spouse makes a very good living to be able to dish out $84,000/yr in spousal support, which might mean Heather, whilst married, grew accustomed to a certain upper-crust lifestyle (perhaps, we don’t really know).

    Thing is, in Vancouver, a $1 million house is not what everyone thinks a million dollar house should be. With a $435k mortgage, this couple probably bought the house in the last 5 years or so. I have relatives who bought a Vancouver house for $300k ten years ago, it’s now pushing $900k market value (it’s still a $300k house). So even though the income was high, I doubt they were living in luxurious surroundings.

    On a few other points:
    “Home taxes : 1,800 year – rent and this disappears.
    Maintenance : 2,000 year – rent and this disappears.”
    Wrong.
    If the land-lord is any good, these costs will be built into the rent.

    “Cable, phone: 1,200 year – Who needs TV?”
    The other part of the equation: the 13-year old kid, that’s who.
    Divorce is almost never easy, especially so for children at that age.
    TV is probably a plus at this point.

    “Gas: 4,000 year – How is it you live in Vancouver proper in a $1m home yet still spend 350/mo on gas? Can you live closer to work/school?”
    FYI — Vancouver is car crazy. It’s the 2nd most congested city in N. America. People love their cars.

    “Groceries: 10,000 year – Almost $1000/mo for food seems a bit high (my family of 4 eats well for $600/mo).”
    Again, we are talking about B.C. It’s pretty much the most expensive non-Northern province in the country. But, yeah, $10k is pretty out there (my family spends ~$6k, that includes a lot of special occasion/party spreads).

  19. 19. Dwilly

    @paul. This is exactly what I’m saying we need to get away from, this idea that a house is a good safe retirement plan and investments aren’t. You notice I said a portfolio of investments, not “stocks”. There are literally a handful of times in all of recorded history where a balanced, conservative portfolio has dropped by more than 20%, and literally NO times when it’s been down over 8-10 years. I’d consider a properly balanced portfolio safer than a house in Vancouver right now.

    @SST. Understood about BC prices. I realize a 900k vancouver home right now is no giant mansion. But what doesn’t change is what ppl can afford, and on a 50k income, a $1m house, even if it isn’t huge, is not a good idea. Especially when you can rent the same for 2000/mth.

    Re the taxes and maintenance, yes of course they aren’t gone. I just meant that they are included in your rent, and given those lofty BC prices you mention, price/rent ratios are very high right now and suggest renting as the best alternative.

    Re the cable, good point. Netflix is $8/mo, perhaps try that instead?

    Re gas, sure, traffic can be bad. I still think you could look for ways to save here. Smaller car?

    Re the food, again recognize the prices, but as you say, I think almost 900/mo for one mother and one child is a bit rich. I really don’t like to pick too much on people’s food spending, because I think what you put in your body is not the place you want go cheap out on. But I think there are savings opportunities here.

  20. 20. Jennifer

    Everyone here has excellent advice! My comment is that perhaps Heather thinks that her current home is a good investment and still has an upside given that Vancouver is the World’s top livable city. There is a huge influx of Chinese cash buyers looking for good property. Heather lives away from Vancouver proper, hence the 400 a month car fuel bill and relatively lower home value ( I realize 1M seems high, but not in Van) She probably drives an SUV to boot, lol. Heather’ s son will be 18 in five years, so she probably wants to stay in the family home until the child becomes an adult and the spousal runs out…she may think her home is still going to increase in value? Real Estate has always made at least 6% gains over the long haul and been a safe investment choice. I agree that downsizing makes sense now, just saying…had Heather sold three years ago, she would have missed out on a huge ( at least) 200,000 price increase in Vancouver property values. tax free increase, no less. At this point in Heather’s life, the home may be a gamble though.

  21. 21. Paul

    @Dwilly: Good follow-up and I agree. My warning was more for others that read this thread – too many will simply think ‘stocks’, not balanced portfolio (different asset classes, lots of diversification etc).

    @Jennifer: True but Vancouver prices are hugely out of sync with reality. Salaries are about 30% higher in Toronto yet property costs around 50% less there! The hot money from cash-rich Asian buyers has been a huge cause of this crazy situation in Vancouver. The danger is that if The Economist is right, the Vancouver folks are due for a big price correction.

    Globe and Mail did a great article on the topic. Average salary (2009) in metro Vancouver was $41,176 (lowest was $33,350 a year in Richmond). Meanwhile the average detached house price in Vancouver is $1.116-million!!! That’s madness…

  22. 22. Jennifer

    @Paul, I think I would agree with you. Real Estate can be a safer investment than the stock market.
    @SST, what exactly is a ” balanced conservative portfolio ” in your view, can you LIVE in a conservative portfolio? I mean yes, money is great to have in banks and investments but a home, property, it has future value as well as being a place you live in. I think it would be sad to rent with a child when Heather CAN buy a smaller home, in a different neighborhood.
    Also, you say your relatives bought for 300,000 and their property is now worth 900,000. Are they thinking of selling soon?
    I’m just playing devil’s advocate here, why can’t Heather just wait the five years out, bring down her mortgage payments and sell in five years. Who knows where the market is heading?

  23. 23. Jennifer

    @Paul, I agree that the average salary in Vancouver vs. Average home price don’t make sense, madness, as you rightly suggest. I live just outside Vancouver, a nice upper class neighborhood, prices jumped 300,000 here in five years and are holding steady so far. There is not a single home for sale immediately around me…If one goes up, it’s snatched up, gobbled up by rich Asian buyers. and they’re not even living in these homes. Seriously, I have neighbors I never met. The leaves fell off their maple tree and no one picked them up, no garbage collection, nothing, empty! But how much longer can this go on? There are MANY foreign buyers. When will they disappear? I don’t know if they will, Vancouver is so attractive to foreigners and wealthy folks perhaps…people find ways to afford nice property.
    I once read that a good piece of property is like a blue chip stock…worth keeping forever as Buffet would perhaps say. When money becomes less valuable over time, due to inflation or perhaps other factors, good property will hold its value.
    Another thought…what if Heather rents out her home? buys a small condo and uses the Smith maneuver?

  24. 24. SST

    @Jennifer:
    “I think it would be sad to rent with a child when Heather CAN buy a smaller home, in a different neighborhood.”

    The point I was getting at is Heather is “concerned the housing market is going to take a financial downfall soon”. So why would she sell at the top and buy into a declining market? Say she buys that brand new $670k house and the fore-coming “financial downfall” lops $150k off the market value — good deal or no? She could rent, put the full purchase amount into some kind of bearing account, sit back and wait for real estate to fall and scoop up the same house for a great deal. This would then add mucho dollars to her retirement fund. Would you rent for 2 years if it meant you could retire 5 years earlier?

    The North American stigma of being a renter (and obsession with ownership) is absurd.

    re: “I once read that a good piece of property is like a blue chip stock…”

    Not even close. Perhaps LAND has shades of being blue chipish, but a house is the polar opposite of a stock. A stock is an asset; a house is a depreciating consumer durables.

    $1 million will buy you severely different residential real estate products across the globe. It will, however, purchase the exact same amount of KO, IBM, or JNJ stock regardless of locale.

    Above all, it’s rather creepy and egocentric to be squabbling over financial POVs in relation to someone else’s demise.

    Hope Heather seeks actual professional advice.

  25. 25. Jennifer

    @SST, thank you for your candor. My intention was definitely a good hearted one, I included the caveat that I’m playing devil’s advocate here for the sake of exploring possibilities and all aspects of Heather’s questions. She doesn’t know what the RE market will do, nor do I…she is wondering what are the different options…as am I. I did some research about Vancouver and it’s RE market because I’m knee deep in that market as well. In fact, I am very interested and thankful for your input as well as are other readers. I agree that if the market loses 150,000 it would be an excellent move to take the money out while the going is good, wait and see what happens and then go in at a lower price. I was just giving my opinion that a good piece of property ( you are correct, I should have qualified it as land) is a safe bet over the long run. I’m just like Heather, exploring possibilities and angles within an unusual RE milieu. Of course everyone ought to consult a financial planner, it’s a given. No creepiness or squabbling intended whatsoever, just some thoughts and you know it’s true, not everyone is a fan of renting. Is that wrong to say? For example, I have lots of furniture, household items, etc collected over the years. I don’t want to put it in storage while renting while waiting for RE prices to drop. If I lose 150,000, I buy for less too. Thanks for entertaining my ideas. There are many folks in Heather’s type of situation, wondering and exploring options. Can there not be more than one right answer?

  26. 26. Dwilly

    I definitely agree that Heather should seek trustworthy professional advice. Trustworthy being a very important qualifier there. :-)

    From my perspective, there’s a lot of back & forth here with speculation about where markets will head. I think trying to divine the direction of a market (housing, stocks, or anything) is a fool’s errand and likely to lead to discontent. Instead, what I think is important here is to focus on a few fundamental realities. Whether or not you buy a house vs. rent can be distilled to a couple basic factors, one being the Price/Rent ratios locally, and the second being absolute housing prices in relation to your income/net worth.

    With a net worth of $700k, Heather cannot afford a $700k house and expect to retire. Someone said you can’t live in stocks, and that’s true, you absolutely need a place to live. Likewise, you can’t eat your house, so you need some money not tied up in a house. It’s difficult to contemplate retirement with so high a portion of your net worth locked into a home.

    This is where Price/Rent ratios come in. A generally accepted practice is that an investment portfolio can be drawn on at perhaps 4% annually with minimal risk of depletion (the % can and should be tweaked to your personal situation, but let’s use 4%). Suppose you can rent a house in Vancouver that you deem acceptable for $2000/mo, or $24k/yr (I think this is a very reasonable amount of rent). That means you need 24k/0.04=600k in the bank to “fund” that home.

    Now, if you can buy that home for, say, $300k, then you probably should. In this case, the Price/Rent ratio is low and suggest it’s more economical to buy. If, on the other hand, that house costs $900k to buy, you probably should not. The Price/Rent ratio is high, and you can rent it for less. Most of Vancouver/Victoria falls very clearly in the high to excessively-high Price/Rent ratio category these days.

    This is over-simplified and needs help to be tuned to anyone’s particular situation. But looking broadly at Heather’s overall situation as well as the Vancouver market, I, personally, would sure as heck not be selling my $1m house to buy a $700k one.

  27. 27. SST

    Take a look at the numbers (and language): one of her options is not for “a smaller home”, but “big…half the size of the lot…” for $670,000. Thus, Heather is selling for $1 million but would essentially be buying for $1.34 million (Heather is confusing “downsizing” with size of lot — remember, it’s not the structure that’s worth the money, it’s the land).

    In stock terminology, that’s a 1:1.5 reverse split.

    Don’t get sucked in — again.

  28. 28. Jennifer

    @SST, I slept on your comments and common sense. You are right! Light bulb flashed. Half the size lot is indeed what she said and what is available for many new homes here these days. A good piece of land, that’s what’s rare. It would be a mistake to over pay for less land, worse location. Thanks for making sense of it for someone like Heather and myself as well.
    Thanks to FT for the article, I’m sure many can benefit. Cheers.

  29. 29. Jennifer

    @Dwilly, I agree that trading to the 700K is a mistake. The 300K more affordable homes do exist in areas within 30 to 40 mins out if Vancouver DT. Town homes in some areas are priced within the affordability range. That town home purchase will now provide a place to live but no longer is an investment in that there are so many town homes being over built now in the Vancouver outskirts. But it’s the reality of the current RE market here and you are right that one needs to live where the price/ rent ratio makes most sense. And btw, lol, I can’t stop laughing at the comment that yes you can’t live in stocks but you can’t eat your house either….so very true! touché

  30. 30. Dwilly

    @SST: Agree certainly that in a place like Vancouver (and many large cities), land value drives the pricing more than the value or square footage of the structure itself. And so in that regard, comparing a house on a 25′ lot to a house on a 35′ lot is apples to oranges. The building is absolutely a depreciating asset. The land historically hasn’t been, but as we’ve already discussed can be volatile and is probably expensive today.

    But in this case, that largely does not matter anyway. Whether it’s a 25′ or a 25 acre lot, you shouldn’t be paying $700k for it if your net worth is $700k. Not if you hope to retire in 8 years. That’s just the reality of the situation, IMO.

  31. 31. Paul

    @SST… “The North American stigma of being a renter (and obsession with ownership) is absurd.”

    The thing is SST; buying has served Vancouver residents exceptionally well. For nearly two decades they have seen 8% to 10% annual increases on their homes. That’s one hell of an investment return.

    Jennifer had a great post regarding houses in her area being bought by wealthy foreign buyers as soon as they hit the market, and many of those buyers do not move in.

    I have your concern too though – what if the market corrects, if so, then when and by how much.

    But the hot money from Asia is hugely distorting the picture here. From a Canadian salary perspective, house prices in Vancouver are HUGELY overvalued.

    But the $$$$ from overseas keeps on coming… At what point will these (often very wealthy) buyers decide prices are too high in Vancouver?

    It looks like the government will not intervene despite housing now being unaffordable for young Canadians here in Vancouver.

  32. 32. Jennifer

    @Paul, I agree with you so much. Maybe I’m getting away from Heather’s situation a little in adding this, but Vancouver residents, including suburbia here, have been enjoying nice returns. It’s hard to walk away from that given how unaffordeable new property is and smaller lots, etc. I have been wondering when the overseas money will end and if it will stop at all. A social geographer at UBC, Daniel Hiebert, projects that Ethnic Chinese numbers in a city of 2.2 Million will double to 800,000 by 2031. There may be a substantial body of wealth coming in that may just not run out. Those arriving are not only wealthy but extremely intelligent, often with Doctorates etc. That’s why Heather and I also wonder when the right time is to get out of this extraordinary market that conventional wisdom escapes due to very particular if not peculiar circumstances. We in Vancouver are in what someone called a “Bizarre Land”. Thanks so much to everyone weighing in, I know I’m not alone in trying to figure things out here.

  33. 33. vmty

    Advice: get out of that s.. hole that is Vancouver. Thanks to our outdated laws, Vancouver’s real estate is a money laundering tool for Asians.

  34. 34. SST

    @Paul: “For nearly two decades they have seen 8% to 10% annual increases on their homes. That’s one hell of an investment return.”

    A principle residence is not an investment.
    Even if it was, the increases are completely moot, as demonstrated in this thread, unless:
    i) the seller is taking the money into a less expensive market (eg. PEI)
    ii) the owner is using the equity in the house to buy other assets.

    http://vreaa.files.wordpress.com/2013/01/van_house_price_1960_2012.png

  35. Great Advice! She definitely needs to sell and cut back on expenses as per @Dwilly. Vancouver is not a cheap place to be and people tend to get caught up in expensive lifestyles.
    It’s good that she is seeking advice now and not in 5 years time when her support is about to run out.
    Great post for anyone living in Vancouver right now, thanks for sharing.

  36. 36. KC

    The post says spousal support then spousal/child support. Keep in mind that a lot of people tend to interchange these terms. If it’s spousal, then it’s 100% taxable. If it’s child support, it’s tax free (must still be reported). If it’s a combo of both, then obviously a percentage of it will be taxable depending on the court agreement. Since she said that support will run out in 5 years sounds more like child support.

    Your advice was spot on. That’s exactly what I would have said to her. She needs to sell the while she still can and use the money wisely. The fact that her family is supporting her while she’s making overpayments on the mortgage is a sign of poor cash management. That very generous support payments should be used to the max to ensure the well-being of both her and her child.

    The mortgage penalty for breaking it early is something else that must be considered into selling the house.

    Bottom line, it’s a lifestyle change that must be done. She will be in a very good position as soon as she sells house and downsize to a smaller one and save the leftover.

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