[AltaRed]

It is not clear to me where your house figures into this. I am assuming a good portion of your (and your husband's) net worth is thus tied up in the $1.1M mortgage? If it is what it seems to me, you and your husband could get rid of the $1.1M mortgage (as/when possible without penalty) and still have $0.5k of net worth each, presumably in portfolio assets? $1M of portfolio assets (combined) and mortgage free would seem to be an excellent position to be in...in Vancouver.

 

[AltaRed]

Of course the interest rate and amortization is everything in this comparison. The comparison is always carrying costs, not the sticker price. Carrying costs today (MIT) are reasonably proportional to carrying costs in the 70s and 80s. It is just the terms on which one could buy a house back then were far more onerous and thus house prices had to be much less to match supply and demand.

I don't really get why folks today cannot logically understand that and why we keep having this conversation. Had the government done nothing to 'make houses more affordable' with more generous terms over recent decades, we would not have seen the price inflation we now have. It is simple Econ101 James. You know better than to write what you just wrote.

 

[AltaRed]

What is a forever home? It seems to me you must currently have a house of $1.8M market value or more so what more do you think you need (as compared to perhaps want)?

 

[AltaRed]

No, I completely disagree with your analysis that only carrying cost matters.

It is not the only thing that matters. The price of the home (relative to income) matters, it's a fundamental aspect of affordability.

It has not worked that way historically. Affordability has always been defined as carrying cost for the 50+ years I have owned real estate (10+ houses). Increase "affordability" by playing with one or more components of the carrying cost and the incremental surge in demand will drive prices up back to an equilibrium of ability to carry. As has been discussed ad nauseum many times, supply has to be increased to reduce the demand pressure that drives prices up.

 

[AltaRed]

I agree with you that the down payment issue is far more significant today especially if one is putting 20% down but sorry, the rest of your argument doesn't cut it.

It was the spectacular easing of terms of qualification and interest rates that drove up demand exponentially, such as counting 2 incomes, 30 year amortizations, 5-10% down payments, etc. that drove demand spectacularly and drove up prices. None of you who were buying in those decades really get it. Prices would be less than half of what they are today if '70s and '80s terms of qualification still applied, e.g. only one salary for qualification purposes, 10-15% mortgage rates, 20% down.

Those are the real facts but I will not continue to argue what is set in stone in minds today.

 

[AltaRed]

Some 5? years ago or so, a millennial relative of ours in Vancouver with 2 children shared a nanny 50/50 with another family when their kids were pre-school. I am not quite sure what the arrangement was but it provided great relief to them at 50% of the cost of employment of a full time nanny. I think the arrangement ended with the youngest entered Grade 1. It is an option if one can find another family, and the nanny of course, willing to accommodate such an arrangement.,

 

[AltaRed]

Sure, but I don't really get your point regarding affordability -- That if the high interest rates and terms of '80 stayed that way perpetually, then boomers' mortgages would have been a severe financial burden for 30 long year as well, just like it's shaping up to be for the Gen Zs? So it's all the same I guess?? But that's not what happened!

Even if the outcome was the result of natural market fluctuations, which it's not, the loser is still somewhat entitled to be bitter about his bad luck. When it's the result of manipulation by CBs, governments, and corporations to suppress middle class asset ownership and labor's wages, the bitterness grows. You can't have an entire cohort of financial losers, which is what the 15-25 age bracket appears to be walking towards. And if that IS their outcome, we all better watch the hell out...

It's like if one guy puts his life savings into the stock market at the peak, and then gets a 0% return for the next 20 years, and the next guy puts his in at the low and gets a 15% return for the next 20 years... You can't just say "hey there's no difference there because that's how stock markets work!"

No, you don't get it. CBs do a far better job today of managing interest rates than they did in the '70s and '80s with huge oscillations. My first summer job paid $1.65/hour. My first engineering job post-graduation with Ontario Hydro paid about $630/month in the nuclear power industry. There was no money available to folks in their 20s. I paid $45000 for my first house, a crappy, poorly built duplex in 1974 in Burlington.

Housing prices are no different than any other Econ101 commodity. They rise when financing conditions allow more people to qualify for mortgages and/or larger mortgages and increase demand that outpaces supply. House prices decrease when demand decreases due to inability to carry the financing conditions. Had qualification criteria not changed to allow 2 incomes to qualify for mortgage payments, demand would have never had a step change (or doubled if 2 incomes = twice one income). Likewise demand would have never had a step change if interest rates stayed at 10% rather than fall to 1% and prices would have never increased. Qualification criteria today bears no resemblance to qualification criteria in the '70s and '80s and THAT is why house prices doubled and quadrupled.

Guess what? Increased interest rates the last 2 years have resulted in less demand due to inability to qualify and house prices decreased. Imagine that! It is the laws of supply and demand. When young boomers were trying to buy houses, we all faced qualification criteria of our own. Few of us could buy in the inflation ridden '70s. I had to take on a second mortgage for a high ratio mortgage at a higher interest rate to reduce down payment requirements AND we had to borrow from family for the rest of the down payment. What is different from today? The comparison is not 100% equal because there are too many variables but I have seen analysis a few years ago (never kept the link) that showed how the same metrics are at work.

What really gets me is the bogus comparison of house prices today being 8-10x income versus 3-4x income 40-50 years ago. That is comparing apples with walnuts, not even apples with oranges because the qualifying conditions have been relaxed by at least an order of magnitude and interest rates are half of what they were 40-50 years ago. That, more or less, allows a couple today to qualify for 4 times as much mortgage today as they could 40-50 years ago. So they do and buy a house 8-10x a single income. It is a bogus comparison and those that promote this bullshite comparison are manipulative at best and nefarious at worst.

BTW, I do fully understand that 15-20% interest rates did not last forever so that when 5 year terms rolled over, boomers who had homes already got to reduce their mortgage payments. But when interest rates came down <10%, house prices surged because all the new people in the late '80s and into the '90s looking for houses could qualify for far more mortgage and they drove demand. IOW, house prices followed.

Your same argument could be applied for all those Silent generation folks who bought houses in the '60s at 5-6% mortgages. The young boomers of the '70s were screwed compared to those who bought houses in the '50s and '60s. Those looking for housing today and complaining about the situation have not looked in the mirror at 50-70 years of housing history to find that EVERYONE in the market for their first house, whether in 1970 or 2024 are in the same relative situation. The numbers have changed but the goal posts have not.

Ten years from now, we will hear the same complaints from Gen-Zers and Gen-As trying to buy into housing and Millennials who have been in housing for those 10 years already will have built their equity and if they have not blown their salaries on consumption and instead focus on paying their mortgages will wonder what the complaining is all about.

Repeat after me: Affordability is the equilibrium point at which the ability to buy is matched with the ability to qualify and carry the mortgage for properties at the conditions of the day (income qualification criteria, stress test, wages, interest rates, amortization, LTV limitations, etc). Everything the government does to improve 'affordability' simply increases demand due to more buyers meeting criteria, and by feedback loop, increased house prices. It will always be so absent a complete change in mentality.

Added: I said earlier I wasn't going to engage in this absurd discussion on housing any more. Alas, I did because you brought up this 'woe is me stuff' that young people feel today. It is no different than what young people felt in the '70s and '80s. I can assure you my cohort felt the same issues but I don't think we complained so much about it. At least not from a media coverage perspective. Everyone has to pass through this rite of passage. It is time to recognize that is how it is.

 

[AltaRed]

So, basically single people and single income households are screwed now. That's one key difference right there.

Yes indeed. As soon as 2 incomes could be used to qualify for mortgages, that pretty much required everyone buying houses to have two incomes due to increase demand for housing and the price surge. A prime example of the government "improving" affordability and ultimately resulting in nothing, or worse, disadvantages.

The other really big one was allowing 1% mortgage interest rates in recent times. The stress test was introduced to counterweight that some but it didn't apply to everyone, e.g. alternate mortgages, and thus it was/is relatively ineffective. The bank of Mom and Dad came to the rescue for a select lucky cohort.

In hindsight, the qualification criteria of the '70s and '80s should have never changed, but that wouldn't have allowed the asset inflation bubble that governments feed off of as a result either.

 

[AltaRed]

Thanks, but I still think the point is missed. As the numbers get bigger, I realize more and more that it does not matter. My QOL will always be at the level I am now, and nothing will change. I grew up thinking I’d be able to afford a lot more than my current lifestyle as a white collar designated professional, and if the past 7-10 years didn’t go the way it did, it would’ve been a reality for me. So really, I am mostly comparing to what I expected to be at this point of my life, to the reality now. I think I will just have to learn to accept this.

And as someone else said in this thread, I think I’ll just start to ramp down my work life in my 40s and work in a slower paced environment.. a government job with a pension maybe.

I think it does matter but in more subtle ways than perhaps one expects. QOL may not change without a quantum step change, e.g. a portfolio of $5M instead of $1M, but comfort and security changes with a larger cushion of assets. While I was working, my QOL, or perhaps my Standard of Living, did not vary much regardless of whether the portfolio was $0.5M or $1M, but it made a difference in terms of when I was able to retire and the stress that was alleviated knowing I was not going to have to plod until I was 65.

 

[AltaRed]

I am driving a 16 year old car at the moment, the one I bought at graduation. We’ve been trying to buy a RAV4 Hybrid or Lexus NX Hybrid for the past year and a bit, and am now reluctantly looking at the Tesla Model Y because that’s the only suitable car readily available.. we’re still going to keep my husband’s 15 year old car because he’s fine with it, but he wants to replace it with Civic Hatchback lol..

But why? Because it is politically correct? Because of peer pressure? What is wrong with any one of a dozen CUVs? The category is crowded with options if you are willing to buy an ICE instead. In 5 years when the other old vehicle may be ready for replacement, consider a hybrid then. There will be far more of them available with improved batteries no less.

 

[AltaRed]

Does that include the house? If yes my net worth would be more like $1.1-1.2m including the mortgage.

That remains confusing for some of us. If you have a $1M house but a $0.5M mortgage, your net worth is only $0.5M. IOW, there is no such thing as 'including the mortgage' in net worth, albeit if you mean it as a deduction, then maybe say it that way.

 

[AltaRed]

Riddle me this - would you dump $600k cash to pay down your mortgage at 1.44%, or would you take that money and put it in a GIC at 5.5%? I personally chose to put it in GICs.

Ah, but you probably will when that term expires I suspect when the AT value of GIC interest becomes equal to or less than that of non-deductible mortgage interest. Pandemic era mortgage rates are toast at renewal time.

Re: post #70, I know what you are saying but your choice of words seems to be an odd way of saying it. Net worth, net of mortgage/debt (assets less liabilities), is a more understandable way of saying it. It is common to include one's net equity of their home in net worth, but not any other personal goods, most of which are either illiquid or depreciating goods. For many mid-journey in life, their house is almost all of their net worth as it would be for any generation of their time. Until I had the mortgage paid off circa 1990, my net worth was approximately zero.

As to vehicle, my suggestion would be to go with something a lot less costly until the mortgage is beaten down. Neither BEVs or PHEVs are cost effective yet, at least not without subsidy, nor have a track record of cost effective full life cycle maintenance. That will (should) likely change dramatically in circa 5 years. A New Westminster based relative has given up trying to buy a new PHEV and rightfully so. It is currently a supply/demand mismatch and will be for perhaps 3-5 more years.

 

[AltaRed]

Ya, not saying it is difficult to do but rather to do net worth calculations accurately folks should likely factor-in their tax-rate to related to all assets vs. liabilities.

I agree a net worth number is not overly meaningful other than as a 'rule of thumb' metric (guideline) for basic withdrawal strategies, i.e. 4% SWR, modified 4% SWR. VPW. I don't try to factor in tax rates for various assets and cash flow streams.

For me, it is a secondary (output) item in that there is gross revenue generated with tax paid/projected/estimated simply a budget item on the expense side, just like food and utilities. One can estimate tax burden by imply looking at past 2-3 year trends off one's T1 tax filing and projecting it out. Some will have more fully taxed Other Income (of various types such as RRIFs, US domiciled investments, interest) than will others with higher proportions of eligible dividend income and/or realized cap gains. Other than the cap gains component (both controlled and uncontrolled) which can vary considerably year by year, the other streams are relatively predictable within 10% accuracy. Too many people get hung up on the preciseness demanded of (and caused by) spreadsheets. Sometimes better results can be obtained with estimates using a pencil and a diner napkin.

 

[AltaRed]

However, net worth is a reference point for determining how much cash flow COULD be consumed, cash flow being the sum of annuity income, recurring investment income AND some monetization of invested capital. There is ultimately no rationality to NOT tapping into invested capital on an ongoing basis as it will otherwise grow through capital appreciation.

Hence the 4% SWR, modified 4% SWR and VPW methodologies to establish those 'ceiling' guidelines. For someone like me aged 76 with a 90/10 portfolio, the VPW table for the closest proxy of 70/30 is 6.3% of my portfolio value on 1/1/2025.

That would be a maximum withdrawal of $63k this year on a $1M portfolio, $189k on a $3M portfolio, etc. Some of that 6.3% would come from recurring investment income, e.g. a portfolio yield of 3% while the rest will come from invested capital....to the extent someone wishes to spend at 'maximum rates'. Most with large portfolios will not spend at that rate but it provides flexibility to do so either directly or in combination with gifting, or padding an eventual legacy.

 

[AltaRed]

It is normal to be more cautious in the first few years or retirement until one settles in and determines the key desires and drivers of retirement life.

To be clear, I do not advocate for anyone spending at the VPW limit but to recognize what that number means, and what and how one wishes to spend relative to that number.

 

[AltaRed]

The other decumulation option is VRIF with a 4% distribution yield, on a constant monthly basis, adjusted once per year based on portfolio value among other factors. It too is a combination of interest, dividends, capital gains and return of capital. Vanguard believes this is sustainable over time with ROC being a small component of the distribution. It needs a 10+ year performance record to see if it plays out as Vanguard suggests.

There are a number of variations of sustained, or modified, SWR with recent analysis by the founder of 4% SWR now saying 4.7% SWR is sustainable. However, that again is US based and with relatively low MER/AUM charges that the majority of retail investors will incur (as compared to more savvy DIY investors).

Point being, decumulation should always assume Total Return and not just recurring investment income. There are few viable portfolio constructs that would yield 4% recurring investment income long term without being highly concentrated in a few asset types, a potential route to possible ruin. Diversification (not diworstification) is a key component of a robust portfolio that will withstand a wide range of scenarios.

 

[AltaRed]

I believe it started life as a 50/50 mix. I don't know why it has been 40/60 for some time when it would seem that 60/40 would be better, but if you think you are smarter than the Vanguard sub-advisor team, I suggest you market your expertise to them.