Friday’s Financial Post featured an excellent article about a family in Alberta and the impact of falling real estate prices.  The family featured in the story “upgraded” from a condo to a house but kept the condo as an investment property.  The overall theme of the story is that falling property prices (in Alberta) is threatening to wipe out the family’s down payment.

This story highlights several problems that I presume to be very common amongst many Canadians in the wake of the real estate boom (or bubble as some would call it).

  • Failure to Evaluate Their Condominium as an Investment – The condo is currently generating $1,100 in rent but costs $1,800 to carry.  If the family looked at the cash flow, potential vacancy, CAP rates and rate of return on their “investment” they likely would not have kept the property.  It’s obvious that they were speculating on property prices continuing to increase.  Unfortunately, this family is probably not unique, I’ve had many conversations with individuals considering real estate investment who have no idea what “CAP rate” means nor have they put any thought into how much of their finances would be tied up in local real estate.  They are simply interested in real estate because they hear of so many other people making substantial sums of money.
  • Over Leveraging (Not Having Sufficient Down Payment) – The family purchased the $375,000 house with a $30,000 down payment.  At approximately 8% (equity) a small change in property prices has eroded their equity.
  • Belief That Real Estate Never Goes Down – The real estate boom of the past decade has created a generation of individuals who blindly buy into the “real estate never goes down” marketing.  I find it interesting that most of these same individuals would most likely agree with the rule “what goes up must come down”.  Logic dictates that only one of those two statements can be true.

It is encouraging to see that the family is willing to lower their asking price to sell the properties (the article indicates that they need to relocate for other reasons).  It seems that they have learned their lesson and will hopefully be able to start over without going into negative equity.  Others in the same position may be tempted to hold firm only to see the market drop even further.

Readers – what are your thoughts on this couple’s situation?  Is this a scenario that you hear all too often in the wake of this real estate bubble?

Disclaimer:  This blog has no professional association with any organizations or companies mentioned in the article.  The contents of the article are the personal opinion of the author at the time the article was posted and may be subject to change.  The blog and author are not responsible, nor will be held liable for any content posted by others in the blog comments.  Readers should complete their own due diligence prior to making any personal decisions.