Bank of Montreal warns about the Boomer Trigger

So a Richmond home has now sold for 33% below assessed value. It's the Boomer Trigger at work. We talked about it back in March 2012:

The majority of the self-indulgent Boomer generation have failed to prepare for their senior years. 

Seven out of 10 Boomers do not have enough money set aside for retirement. And since 2011 marked the beginning of the great Boomer transition into retirement, this financial planning statistic is significant. 

Starting in 1946, the demographic Post-World War II baby boom began. And the Boomers at the front of this wave have benefitted most from seemingly everything. 

After having been raised in the post-war affluence of the 1950s and 1960s, the first wave of boomers entered their mid 20's starting in 1971. As they settled down between 1971 and 1976, these first Boomers bought homes which sold for between $40,000 and $60,000 in suburb communities like Richmond. 

Now, as these Boomers head into retirement without adequate funding to carry them through their golden years, the vast majority have a very simple retirement plan: sell their bubble inflated asset of a house, downsize and live off the proceeds. 

An average house on a large lot bought in 1971-1976 in Richmond for between $40,000 - $60,000 is now 'worth' between $1.5 - $2.5 million dollars. 

Thus the Boomer Trigger... trigger the sale of the one significant asset they have to fund their retirement. At the same time, if the market slows, Boomers can use their original purchase price advantage to under cut other sellers in a collapsing market - a maneuver which has the potential to crash the market if done by a large number of Boomers at the same time.

It remains one of the most viewed posts on this blog and it continues to generate a lot of email.

Most of the email is from indignant readers who either want 'proof' about the idea so many Boomers have failed to adequately plan ahead or they vent about how ridiculous the thesis is.

Well the haters now have a new target to which they can vent their frustrations: The Bank of Montreal.

As the Financial Post noted on Wednesday BMO announced: Boomers are warned using home sale to fund retirement could backfire.

About a third of Baby Boomers plan to sell their home to fund their retirement, according to a study that questions whether buyers will dry up as that massive segment of the population downsizes... 40% of respondents say they are not confident in their ability to save for retirement and 41% say they might just end up using their homes to shore up any shortfall in their golden years.

Bank of Montreal is warning Boomers not to count on that nest egg, while other observers suggest that even if prices don’t plunge, big increases in property values are a thing of the past. 

“They shouldn’t be relying on their homes because there are risks,” says Marlena Pospiech, a retirement strategist at the BMO Retirement Institute. 

The bank suggests the following risky scenario: As Canada’s population ages, more Boomers will be retiring and selling their homes, putting downward pressure on prices. [Boomers] could be in serious financial trouble if they are relying on their home, especially if they are highly leveraged.

Meanwhile the counter-arguments are heating up to assuage and dispelling concerns about this threat. And, as always, we are told it will be wealthy immigrants who are going to pour into the country and be our salvation:

Demographers say a collapse in prices based on Boomer homes flooding the market isn’t reality either. 

“There is going to be continuing demand for housing as long as we bring in 250,000 immigrants a year,” says Doug Norris, chief demographer at Environics Analytics. Given the creation of about 175,000 households each year (based on the latest census data), that’s plenty of demand.

Interestingly there is another twist to the counter-arguments:

Demographer David Foot, author of Boom, Bust and Echo, believes there are enough children of Boomers to soak up the housing supply. 

“The Boomers have been averaging about two kids per family [in the U.S.] and replacing themselves,” says Mr. Foot. 

“It’s a bigger issue in Canada because the Boomers only had about 1.6 or 1.7 kids per family. The echo isn’t quite as big.” 

He predicts the twenty somethings today that have been driving the condo market will at some point buy into single-family detached homes. “There are enough of them to buy the Boomers’ houses.” 

His more pressing worry is for the condominium segment. “It is question of whether they will move out to the suburbs to raise their kids like every other generation has,” says Mr. Foot. 

“My concern is who will buy all the condos when the twenty somethings vacate them.”

It's interesting to noteThe Financial Post offers these viewpoints in order to present a 'balanced' article and offset BMO's warning.

Now... why do you suppose the economists over at BMO didn't give these elements consideration before issuing their warning?

Do you think it's because Boomer kids can't afford their parent's houses at their current valuations?

There may be lots of Boomer kids who would be willing to purchase those homes, but where are they going to get the money to buy them?  

Without a dramatic, surging economy or negative interest rates combined with 50-60 year amortizations... it ain't going to happen.

And without that same surging worldwide economy, HAM simply isn't going to provide the immigrant incomes to save the Boomers.

That's why BMO is warning all and sundry that "as Canada’s population ages, more Boomers will be retiring and selling their homes, putting downward pressure on prices."

Even the banks can see what is coming.

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The Boomer Trigger

As we wait for news of the Federal Budget, an interesting scenario for you to ponder.

Tuesday's post made reference to Vancouver realtor Larry Yatkowsky and his website comment that a number of his colleagues believed that the Vancouver Real Estate market is currently in a state of  "turmoil."

All the negative reports about Real Estate in the mainstream media are combining with an absence of Asian buyers to severely dampen sales activity.

Tuesday's post also referenced early March data (unconfirmed) from Richmond suggesting that there are 1,000 houses for sale in the previous HAM hotbed with only 80 sold so far this month. This is a profound drop from the approximately 220 sold in each of March 2011 and 2010.

Yesterday Yatkowsky, in his monthly series of community snapshots, profiled Richmond and confirmed the trend of slowing sales with data available to him.

His description: March R/E sales in Richmond are best described as 'sliding into one of the communities deep ditches.'

R/E sales in Richmond have been sagging for a few months now. And for those properties that do sell, it seems that they only do so because sellers are prepared to move significantly on price.

Such is the case with this property at 6231 Gibbons Drive in Richmond.

This 3,500 square foot house sits on a huge 21,857 foot lot in the prestigious Terra Nova neighbourhood.

It's been on the market for a long time, originally listed on February 28th, 2008 for $2,388,000, the home competes for buyers with it's neighbour at 6251 Gibbons Drive (listed for $2,480,000).

Being side by side, the fact that both properties were simultaneously for sale was promoted as a selling point as you can see in this listing for 6251 Gibbons Drive (it makes note of the fact that the neighbouring 6231 is for sale too).

And why not? With almost identical asking prices, perhaps both could be picked up as a package deal, ideal for a speculator looking to develop. The massive lot size makes it a prime candidate in the high end Terra Nova area.

But the property has languished on the market for years now.  

Even at the height of all the HAM insanity, which seemed to bring other Richmond properties in line with it's high asking price, 6231 failed to sell.

Houses like 6231 represent what I like to call The Boomer Trigger.

By now faithful readers are well aware that the majority of the self-indulgent Boomer generation have failed to prepare for their senior years.

Seven out of 10 Boomers do not have enough money set aside for retirement. And since 2011 marked the beginning of the great Boomer transition into retirement, this financial planning statistic is significant.

Starting in 1946, the demographic Post-World War II baby boom began. And the Boomers at the front of this wave have benefitted most from seemingly everything.

After having been raised in the post-war affluence of the 1950s and 1960s, the first wave of boomers entered their mid 20's starting in 1971. As they settled down between 1971 and 1976, these first Boomers bought homes which sold for between $40,000 and $60,000 in suburb communities like Richmond.

Now, as these Boomers head into retirement without adequate funding to carry them through their golden years, the vast majority have a very simple retirement plan: sell their bubble inflated asset of a house, downsize and live off the proceeds.

A average house on a large lot bought in 1971-1976 in Richmond for between $40,000 - $60,000 is now 'worth' between $1.5 - $2.5 million dollars.

Thus the Boomer Trigger... trigger the sale of the one significant asset they have to fund their retirement. At the same time, if the market slows, Boomers can use their original purchase price advantage to under cut other sellers in a collapsing market - a maneuver which has the potential to crash the market if done by a large number of Boomers at the same time.

6231 Gibbons Drive represents the perfect example of this... and why the Boomer Trigger could burst the massive Greater Vancouver housing bubble.

The red hot real estate market in the Lower Mainland has started to turn. Richmond has stagnated. Down 10% month over month. 

Concern is mounting among the Boomers:

• Media reports have covered the stagnating markets on Vancouver Island.
• Kelowna's mounting foreclosure situation is on the radar.
• Whistler hotel condos are off 50% from their peak.
• The Governor of the Bank of Canada has been sounding warnings for over a year now.
• Widespread media reports are now predicting the housing bubble is about to burst.
• Expectations are that Finance Minister Flaherty will introduce a bubble busting budget to trigger a soft landing in real estate.
• The banking regulator in Canada has proposed highly restrictive loan regulations.

And with MOI treding up, inventory trending up, banks withdrawing capital from mortgage lending, Asian money disappearing as China engineers it's own soft landing in real estate and CMHC tightening up thanks to OSFI; it’s all there.

A perfect storm.

Enter the Boomer Trigger. Home owners, like the one at 6231, probably see the writing on the wall. It's time to act and strike a deal before it is too late.

I am told 6231 Gibbons Drive sold this week.  

After lowering the asking price to $1,888,000, the property sold for $1,428,000. That's $960,000 off the original asking price or 40% lower.

It's still a windfall for the owner.  Sure... it's not the $2.4 million he originally insisted upon. But unlike the condo at the Four Seasons Whistler hotel which sold for 50% off the original $1.1 million purchase price, this house was probably bought for only $60,000. 

With that perspective, $1.4 million is a massive appreciation over the original purchase price. 

And coming down almost a cool $1 million off the asking price to make the sale isn't all that hard to do once the psychological barrier of what the property is 'worth' is overcome.

It's the Boomer advantage.

Look for more and more Boomers to pull that Trigger if conditions continue to stagnate as the year moves along.

And if they do, market 'turmoil' will quickly become market 'panic'.

In fact 'panic' doesn't even come close to describing what could evolve.

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Fri Post #1: Do not ask for whom the bell tolls...

Yesterday we ruminated on the impact the plethora of mainstream media articles about the Canadian Housing Bubble was going to have on the real estate market.

How long before all the negative press convinces buyers (local and internationally) that now is NOT the time to buy?

Yesterday morning TD Bank may have just upped the "do not buy" ante.

In a note to clients, economists at TD said that a "housing correction will take hold in 2013." Prices are already down from their highs in May of 2011 and TD sees 2012 being a weak year... but the real 'correction' will start in 2013.

Ummm... okay.

So let me ask you a question.  If you are looking to buy, prices have been dropping lately, everyone and their dog is talking about housing bubble, listings are booming, sales are dropping... and TD Bank comes out and says the real 'correction' won't ramp up until 2013 - would you buy this year?

More importantly, if you are one of those 70% of Boomers who don't have adequate funds set aside for retirement and whose entire plan for your golden years is selling your bubble inflated real estate and downsizing in the next 5 years... do you hit the panic button yet?

Thirty-five years ago you bought that Richmond, Burnaby or even Vancouver house for $65,000.  It currently is valued at anywhere from $700,000 to $2,000,000... if local prices start to slide much more, do you undercut the market and still get out with a succulent profit (thereby creating even more downward pressure on prices) or do you stubbornly hold on because the house was valued at 15% more last May and it's "worth" at least that now?

2012 is shaping up to be a very interesting year.

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Only 24% of BC Boomers own their home mortgage free

How's this for a looming disaster on the horizon?

According to a news release by TD Canada Trust, only 24% of BC Boomers own their home mortgage free (hat tip to pipewrench in yesterday's comments section).

In addition to that chilling statistic, TD Canada Trust found that only 40% of BC Boomers are likely to live in their current home during retirement.

This is consistent with an new Ipsos-Reid poll that says 64% of BC homeowners plan to sell their homes within the next 10 years.

Can you see the recipe for disaster here?

We already know that 70% of all Boomers don't have funds set aside for retirement. Any retirement funds they hope to have will come from the sale of their home.

These two studies all but confirm that Boomer's plans are to down-size, pay off their mortgages, move to a smaller home and use the left over funds as their retirement income.

And to make that work more effectively, TD Canada Trust has found that almost half of boomers in B.C. will consider buying a property south of the border where real estate has completely crashed in the United States.

The chilling statistic here is that since over 75% of BC Boomers have an outstanding mortgage to pay off, it leaves them in a potential retirement pickle.

Once they pay off the mortgage, and then buy a smaller, cheaper house free and clear... there's only so much room left over for a retirement fund.

When you consider that this is the first year that Boomers are hitting retirement age, and that right now they are selling into a stagnating market, how long before we see the significant price reductions start?

And when the downward slide begins, how long before those other Boomers - a couple of years out from retirement - start to panic?

How long before they see the margins on their bubble inflated homes begin to shrink to the point where they fear prices dropping below a level they need to cash out and still have a retirement fund?

Bank of Canada Governor Mark Carney has suggested there is a possibility of "an abrupt drop in the housing market". What sort of mad dash will there be to slash prices and 'get out' if there is a perception the market has started that 'abrupt drop'?

If there is a 15% market drop, without a rebound like we saw in 2009, you will see a lot of Boomers panicking.

And panicking Boomers who fear their retirement is at stake will slash prices to move their property ASAP.

There is far too much at stake not to.

It all strengthens my belief that Vancouver is shaping up to experience the mother of all housing collapses.

I can easily see a 50% price correction and firmly believe it will be closer to 70% as the Boomer wave moves into retirement.

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Show me the money

Ultimately the great debate about real estate in the Village on the Edge of the Rainforest will come down to prices.

Will prices go up, stagnate or decline?

All these discussions about declining year over year monthly sales and building months of inventory, while indicators of what comes next, are moot until the 'what-comes-next' happens.

And it is the 'hard facts' which are now starting to appear.

What is fascinating is the depth of the declines we are seeing from the get-go with developers.

We've posted about prices being down 40-50% in the Okanagan. We've talked about Bob Rennie slashing 40% off new units at Invue in Kelowna and at Fairmont Estates in Vancouver. Up in Whistler we took a look at a condo which had been put up for court-ordered sale at 40% off the original 2002 sale price (it has now sold). Two days ago we profiled Watermark Developments discounting prices 35% below 2006 pre-sales prices.

Even to the casual observer, this is a steep and shocking start to this chapter in the real estate saga.

But as I have posted before, despite these examples, this will be a slow melt. The mainstream public is still oblivious to what is going on.

Those who don't have to sell, won't... at least for a little while yet.

They will pull listings or steadfastly refuse to budge on outrageous asking prices convinced that what we are experiencing is a temporary 'dip'... which is what most mainstream owners view the 2008/2009 pullback as. A temporary dip.

Only those who have to sell, will cut prices. Those going through divorce, settling estates because of a family member's death, or those displaced and forced to move elsewhere.

There is a another dynamic we will see though. And is it the looming wave of retiring boomers.

Boomers have never been great savers. Spending what they have and 'enjoying life', their plan has long been to use their massively appreciated real estate as their retirement fund.

Statistics show that 70% of boomers have not saved adequately for retirement if at all. Their retirement 'plan' lies in tapping the giant equity jackpot of the massive real estate bubble that has blown around us.

But as sales drop dramatically, as months of inventory build... a stagnating real estate market is fodder for the one demographic beyond the three D's (divorce, death, displacement) who will reduce their price to sell.

Faithful readers will recall one such example we cited in the middle of July.

Promoted as an outstanding Dunbar character home in immaculate, move-in condition, this 3,359 square foot 4 bedroom, 2 bathroom home which sits on a 6,700 square foot lot was offered for sale.

Originally listed for sale at $1.549,000 on June 7th, 2010, the price was reduced on June 12th, 2010 the asking price was reduced to $1.449,000 (a reduction of $100,000) a mere 5 days after the property was originally listed!

And with no one jumping in on that, the seller obviously received an offer from a buyer sensing the desperation and on July 6th, 2010 the home sold for $1,340,000 (another $109,000 shaved off the latest asking price).

That's a total drop of $209,000 (or 13.5%) off the original asking price with a property only on the market for a month.

More recently is this example at 3042 West 33rd Avenue in Dunbar from our friends over at VREAA.

This 2,489 sqft home on a 50×133 lot was listed on May 28th, 2010 for $1,638,000.

On June 22nd, 2010 the asking price was dropped to $1,580,000, then to $1,550,000 and then yanked from the market on Aug 31st, 2010.

Later that day the property was relisted with and asking price of $1,499,000.

It finally sold on September 19th, 2010 for $1,370,000... $268,000 less than the original asking price (just over 16%).

Both of these are a far cry from the 40-50% examples above, but provide evidence that there are desperate sellers who will move their price to see a sale.

If the market continues to stagnate, more and more boomers who have to sell will overcome resistance and cut prices.

That 'stubbornness' giving way to compromise can be seen in this Kelowna offering which a faithful reader has passed on to us.

Located at 740 Wilson Avenue, faithful reader advises that they have been watching this house for the past 6 months when it was listed in late April or early May.

Mortgage free, the now retired owner was hoping to reap the capital gains from a home which has appreciated rapidly these past 15 years.

The house was originally listed at $429,000 and quickly dropped to $399,000.

With no offers received whatsoever, the owner was no doubt shocked when a similar house across the street was listed for $340,000 - an asking almost $89,000 less that her original asking price. That lowball house sold within a month!

In July, the owner was offered $375,000... and promptly rejected.

Now, several months later, the asking price has been reduced to $344,000. Stubbornness is beginning to give way to desperation.

Faithful reader offers this observation on the Kelowna market:

• "I know other people in Kelowna who are also trying to sell their houses. Unfortunately many of them are mortgaged to the max and can't drop the price even a penny. And so they linger on the market for months and months. And there are many others, people in their 30s, who bought at the height of the boom (presales happened in Kelowna too), and are now sitting in negative equity territory, or pretty close. I know a few who are amateur landlords-and the rent doesn't even cover the mortgage! Everyone was convinced they would get rich by owning real estate. Why buy one place when you can buy 2 or 3? And I don't think it will get any better... there are lots of condos for sale, and according a realtor friend of mine, a huge inventory of condos that aren't listed-people waiting for the market to "recover" before they list.?"

MOI, declining year over year monthly sales totals... they are only symptoms.

It's all about results... about values.

The developers are slashing 40-50% and saying, "SHOW ME THE MONEY".

The boomers who are depending on their homes as retirement funds have to sell and are starting to say, "SHOW ME THE MONEY".

We will see what the result is in the coming months.

(What about you? Are there any properties you have been watching that have been dropping their asking price? If yes, drop me an email and tell me about it.)

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What would happend if the R/E market was flooded with listings?

The Rainforest Roundtable held it's monthly meeting last night.

Amid beer, B-B-Q and rain (fall is officially here), we were discussing the parents of one of our group.

As the youngest member of our little fraternity, Robert's parents are at the forefront of the Boomer generation and have only just retired last year. Their story is one that will most certainly be repeated over and over in the years to come.

Asset rich and cash poor, they are comfortable and their pensions allow them to make ends meet. But they are far from being considered 'rich' in so far as their bank accounts go... at least until now.

It has long been their plan to sell their spacious Kitsilano home and 'downsize'. Bought in the early 1970s for $86,000, the property was sold last week for $1.7 million dollars.

The sale was the culmination of a deliberate retirement strategy.

Our roundtable colleague freely admits his parents have never been great savers. Spending what they have and 'enjoying life', their plan has long been to use their massively appreciated home as their retirement fund.

After taking a scare over the past winter, they are overjoyed to see the market recover allowing them to capitalize on their plans to sell at the 'proper price'.

It is a retirement strategy common to many boomers.

Surveys consistently show about 85% of all the family net worth in the country sits in residential real estate.

59% of all Canadians are living paycheque to paycheque. In fact for many Canadians, if they miss one single paycheque by a single week, they wouldn’t be able to make ends meet at all. Compound that with surveys that show half of Canadians are incapable of saving 5% of their income, and the 'home as retirement fund' plan is common to many boomers.

Why? Because it's all about 'living the lifestyle'.

Statistics consistently show that a majority of Canadians have no retirement savings and don’t expect to get any.

They are like Robert's parents. Their house is their retirement fund. 85% of all family net worth in this country is tied up in the family home.

Can you see what looms on the horizon?

The first year of the boomer generation turns 65 this year. Our aging Canadian population is inching towards retirement. And the younger Gen X's are a much smaller group.

With each passing year more and more retiring Boomers will be enacting their retirement strategy just like Robert's parents. For the next 20 years wave after wave of boomers will retire.

Meaning that, with each successive year, we will see wave after wave of homes listed to finance underfunded retirement plans.

Who will buy them all?

This alone is going to trigger significant downward pressure on housing prices.

And then there is interest rates. Have we mentioned what this might do to the market?

You really don't need a market oracle to see how this is going to play out.

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