Six Canadian households...

[scottish]

In today's paper:   http://www.theglobeandmail.com/globe-investor/personal-finance/genymoney/how-six-canadian-families-are-coping-with-the-high-cost-of-homeownership/article33279549/?reqid=acebc338-9a34-4b87-8ef0-78d720dbae4e

This isn't really shame and comedy, this is just a sad statement on lack of financial literacy.   Every one of these profiles is up to their eyeballs in debt on a house they can't really afford.    Almost all of their assets are in this one property and they have no diversification, and some of them are very heavily leveraged.     

What can we do to avoid people getting into this situation?    I'd hate to see my kids do something like this, and I'm doing my best to provide them with a basic financial education.    I worry that they still have a sense of entitlement though.

[afulldeck]

In today's paper:   http://www.theglobeandmail.com/globe-investor/personal-finance/genymoney/how-six-canadian-families-are-coping-with-the-high-cost-of-homeownership/article33279549/?reqid=acebc338-9a34-4b87-8ef0-78d720dbae4e

This isn't really shame and comedy, this is just a sad statement on lack of financial literacy.   Every one of these profiles is up to their eyeballs in debt on a house they can't really afford.    Almost all of their assets are in this one property and they have no diversification, and some of them are very heavily leveraged.     

What can we do to avoid people getting into this situation?    I'd hate to see my kids do something like this, and I'm doing my best to provide them with a basic financial education.    I worry that they still have a sense of entitlement though.

Doesn't almost everyone? We work hard to raise our "lot" not to decrease it. But sometimes, even with the best of plans, life gets derailed.

Yes there is over spending, but isn't the real problem in especially in Canada the stagnation of salary vs cost of assets (like homes, cars, etc).

[scottish]

Not so sure.   I've been lucky enough to have landed in an in-demand field when I left university.

I look at these families situations.   If interest rates go up (and they're currently the lowest I've ever seen), they'll be in trouble.    If house prices drop (and they are dropping in the big cities out west), they'll be underwater.     Effectively, they could lose their entire stash!

[human]

The first one is sad. Starting a new business with a second mortgage? I know people like to be their own boss but man that's risky stuff.

[Chaplin]

There are some genuinely tough situations here when it comes to divorces, accidents and ill fortune. But it also struck me how often situations were described in a way that made it seem like they had not control when they did.

Best line: "The Barayas have been looking to trim their budget, moving to Caledon, where prices are cheaper, but farther away from their favourite takeout joints in their current Brampton neighbourhood. "

[Stachey]

And so often people have to pick up and move to the other side of the country to get work here so why they tie themselves down with mortgages that they can't afford that they will have to unload quickly.

[Koogie]

Yes, it was a really depressing read.   A lot of self inflicted misery there.  Either through innumeracy or poor decision making.

I was angriest at the 27 year old that "had" to buy her house even though she makes a small salary.  Then I read daddy was a realtor and the "bingo" light went off.

A double pisser for me was reading in the same paper the weekly "financial makeover"    Two Fed employees who wanted to retire early with fully indexed pensions (about 72k/yr), 3+MM net worth and they needed "help" figuring it out.

Almost nauseating.

[Stachey]

So what are everyone's thoughts on whether this financial illiteracy will lead to a housing crash.
More and more people are digging themselves holes that they can't get out of...surely the tipping point will arrive at some point?

[Greenway52]

I find housing in Canada is a very emotional investment. I think that's partially because, that's the only investment people know. Most people don't know (and don't care to learn) how stocks/bonds/ETFs work. In fact, both financial analysts in the company I work at has bought houses and don't invest in the market, because they don't believe in the stock market.

Except for a small dip in 2008, Canadian housing has been on an upward trend for most of the last few decades. So people literally don't believe that housing prices can go down. I can't tell you how many times people have bragged about how much their house has appreciated in value. It doesn't really impact me, because I know there is a bubble in Toronto and Vancouver, but I can imagine for a lot of people who hear these stories decide to buy a house so that they can also make money on it. It's really a self-fulfilling prophecy. People tell others how much their house has gone up in value, others want to join in so they buy houses, which leads to the said increase in value. The problem with this is that the housing prices are not built on any fundamentals, so as soon as housing prices start to drop .... watch out.

I'm hoping for a soft landing, so that people like those in this article won't be hurt too much, but the longer this goes on, the less likely I think it is.

[lostamonkey]

This is what happens when home prices are extremely out of touch with income levels. There are several reasons for these prices but the primary reasons are low interest rates, and a general expectation that prices will never go down (so people are willing to pay whatever it takes). Secondary reasons include foreign buyers, high rate of immigration to the big cities, supply issues (stupid zoning rules, building restrictions, etc), and concentration of job growth in the big cities.

I really don't think this price growth is sustainable. I think there are a few things that could happen. The first is a long period of zero real growth (ie:house prices just go up with inflation). There could be a soft landing with a small decrease in home prices and a few years of very little growth. Or there could be a hard landing with a huge decrease in prices, which will result in many people panic selling and going bankrupt. The CMHC and the government is very concerned with this hard landing scenario which is why they put into place the new mortgage rules.

I am torn on which scenario I would prefer. On one hand, a hard landing would totally destroy the Canadian economy for a few years and would hurt a lot of Canadians. On the other hand, a hard landing would be an amazing opportunity for me to make a lot of money.

[maustache]

I was surprised to see a couple people cited medical issues as partly responsible for their financial situation.  I thought this would be less of a factor in Canada than it is here. 

[TheGrimSqueaker]

I was surprised to see a couple people cited medical issues as partly responsible for their financial situation.  I thought this would be less of a factor in Canada than it is here.

Out of work is out of work no matter where you live. Also, medical care is heavily subsidized but prescriptions are not. If you're on a bizarre name-brand drug from Big Pharma it can still set you back hundreds of dollars a day.

[Kitsune]

I was surprised to see a couple people cited medical issues as partly responsible for their financial situation.  I thought this would be less of a factor in Canada than it is here.

Out of work is out of work no matter where you live. Also, medical care is heavily subsidized but prescriptions are not. If you're on a bizarre name-brand drug from Big Pharma it can still set you back hundreds of dollars a day.

Unless you're in Quebec - mandatory medication insurance either through work or rough a public plan, and that means you can't pay more than 80$/month on prescription meds, total, before they're fully covered.

But yeah. Out of work is out of work, regardless. And while most people will have disability insurance (for us, it's included in what we pay for the medical insurance), that covers about 50% of your salary for a limited time, during which time expenses usually go up (if you're too sick/injured to work, I'm expecting at least some ready-made food, some household help maybe, perhaps some mobility assistance tools, clothing needs that change, etc...)

[MrsPete]

There are some genuinely tough situations here when it comes to divorces, accidents and ill fortune. But it also struck me how often situations were described in a way that made it seem like they had not control when they did.

My thoughts exactly.  I mean, taking out a mortgage on your house to start a business -- when the house seems to have been a bit of a stretch anyway and you have four kids -- might've been a red flag.  If your emergency fund can be wiped out by a dog's illness, you didn't have much of an emergency fund to start with.  You bought a house that had fire damage -- either you didn't have an inspection done, or you should sue your inspector. 

And some of these people have options they're not really considering.  For example, the woman who renovated her upstairs for a daughter who then married /moved overseas could rent out that nice upstairs to someone else.  The last guy sounded like he had his game together when he said he doesn't order pizza and cooks big meals on Sunday, which he can eat all week ... but then he talks about taking a month-long vacation.  Yeah, that sounds great, but it's also a choice for a person whose financial life is in order, not a guy who's saying he can't afford the renovations he's making on his house. 

A double pisser for me was reading in the same paper the weekly "financial makeover"    Two Fed employees who wanted to retire early with fully indexed pensions (about 72k/yr), 3+MM net worth and they needed "help" figuring it out.

Well, my husband and I have substantial assets and I am almost finished earning my pension ... yet we read fairly often to be sure we are "figuring it out".  Don't read that as, "I don't know how we'll make ends meet"; rather, we have spent years amassing these assets, now how should we allocate our funds so that they'll last 50 years, even with obstacles that may arise?  How should we leave things to our children so that they're protected from the government?  And so forth?

So what are everyone's thoughts on whether this financial illiteracy will lead to a housing crash.
More and more people are digging themselves holes that they can't get out of...surely the tipping point will arrive at some point?

I think the issue is that people are willing to borrow, borrow, borrow to have THE HOUSE and THE CAR ... oh, and nice clothes, vacations, and meals out too!  And banks are willing to lend more and more and more.  An average middle class person today lives in a MUCH nicer house than did his counterparts of my childhood.  What's made the difference?  The willingness and the ability to borrow past what's wise. 

[daverobev]

Non-mortgage debts: $46,000 ($16,000 on a car loan, $13,000 on a line of credit and $17,000 on credit cards)

Biggest monthly non-housing expense: Paying off credit card debt

Are you regularly putting money away for savings or investments? $1,200 a month in RRSPs, between $500 and $1,000 a month in an emergency fund.

Now, it could be that the cc debt is MBNA at 0-1% but if not... WAT?

Fuck me, these get worse:

Price paid for home: Just purchased a new house in Caledon East for $615,000

Outstanding mortgage balance: $585,000

Non-mortgage debts: Each has about $20,000 on lines of credit; balance on VW Golf, balance on new Chrysler Pacifica minivan.

Biggest monthly non-housing expense: Car payments. The vehicle payments are $315 biweekly for the Pacifica, and another $177 for the Golf.

[scottish]

Hey is this true?

Unless you're in Quebec - mandatory medication insurance either through work or (th)rough a public plan, and that means you can't pay more than 80$/month on prescription meds, total, before they're fully covered.

My specialist is trying to get me to start a drug that costs about $24K/year.   I've been trying to figure out the best way to work this into my ER plans, i.e. I lose my high priced drug plan when I retire.

So people literally don't believe that housing prices can go down.

This is very true.    My friend in Vancouver was pointing out that you still could make a killing even with house prices declining.   He seemed to miss my points about risk and diversification.

[Kitsune]

Hey is this true?

Unless you're in Quebec - mandatory medication insurance either through work or (th)rough a public plan, and that means you can't pay more than 80$/month on prescription meds, total, before they're fully covered.

My specialist is trying to get me to start a drug that costs about $24K/year.   I've been trying to figure out the best way to work this into my ER plans, i.e. I lose my high priced drug plan when I retire.

true with caveats. You need to be a quebec resident with Quebec insurance plan (public or private).

If it's a high-cost drug, it CAN be approved, but usually your doctor has to fill out a médicament d'exception form (basically a form that confirmes what a high-cost drug is prescribed for - its meant to ensure that treatment costs stay reasonable by covering medication for what it's indicated for, basically). If you want to know for the specific therapy you need, check out drugcoverage.ca - it's the best resource for what is covered by each provinces formulary (and legally in Quebec if the public insurance covers it the private ones have to match that coverage, basically).

Detailed information on Quebec drug insurance plan and limit: http://www.ramq.gouv.qc.ca/en/citizens/prescription-drug-insurance/Pages/prescription-drug-insurance.aspxhttp://www.ramq.gouv.qc.ca/en/citizens/prescription-drug-insurance/Pages/prescription-drug-insurance.aspx

Once you're a resident, you're ensured, and your 24k/yr drug is approved for your use? Out of pocket costs of 80-odd$/month. Yes. Confirmed. (I recall 82$, but that was 2 years ago, might've shifted by a dollar or two since then.

[sleepyguy]

Yeah that case study "Barayas" and the guy who bought the duplex fixer upper was pretty cringe worthy.  I mean the guy is blah blah, on the edge because any failure could be disasterous... but yet gonna go do a Europe/Spain trip... What the?  Expensive luxuries can wait until you get your financial shit in order!

The others although pretty bad has some pretty bad life circumstances.

Toronto area real estate is pretty insane right now, I'm really glad we bought the WORST house on the block about 8yrs ago (gut job) and aren't looking around at all.

BIL and cousin are both looking at houses in the $800k-$1Mil range currently... insane imho to carry that much mortgage without making $250k/yr+

There are some genuinely tough situations here when it comes to divorces, accidents and ill fortune. But it also struck me how often situations were described in a way that made it seem like they had not control when they did.

Best line: "The Barayas have been looking to trim their budget, moving to Caledon, where prices are cheaper, but farther away from their favourite takeout joints in their current Brampton neighbourhood. "

[scottish]

Thanks, Kitsune.   Ontario has a similar plan, but they want you to pay up to 4% of your gross income from the previous year.    This is still alot more manageable than $25K/year though.    none of the provinces seem to have this med listed yet  :-(, it was only approved by Health Canada about 1 1/2 years ago.

[Kitsune]

Thanks, Kitsune.   Ontario has a similar plan, but they want you to pay up to 4% of your gross income from the previous year.    This is still alot more manageable than $25K/year though.    none of the provinces seem to have this med listed yet  :-(, it was only approved by Health Canada about 1 1/2 years ago.

Yeah, it takes a while.

HOWEVER (learn from my previous job!); call the manufacturer of the drug, if you get it prescribed. ASK how best to get access.

For super high-cost drugs (and anything over about 1.5K per month qualifies here) there's usually a patient access program run by the manufacturer (as in, they figured out that, if they staff a program dedicated to helping people get their insurance to pay for it, they make more than enough money to pay for the program AND profit compared to sales otherwise - win-win for the consumer, basically). The PAP is usually kick-started alongside drug approval by Health Canada, and will put pressure on provinces to adopt the medication onto forumulary, but in the meantime MAY have compassionate use programs and whatnot that could help you (depending on the drug and condition - lots of compassionate use for cancer treatments, less so for some quality-of-life treatments, though still some). Most people don't know about this.

But seriously: call or email the manufacturer. Until the drug is on formulary and covered, they're your best bet for attempting access.

[The Fake Cheap]

Non-mortgage debts: $46,000 ($16,000 on a car loan, $13,000 on a line of credit and $17,000 on credit cards)

Biggest monthly non-housing expense: Paying off credit card debt

Are you regularly putting money away for savings or investments? $1,200 a month in RRSPs, between $500 and $1,000 a month in an emergency fund.

Now, it could be that the cc debt is MBNA at 0-1% but if not... WAT?

Yeah, people who put money into the emergency fund while having credit card debt really gets my blood boiling! 
I would be willing to wager that this is not an 0-1% balance transfer promo.