A Money Coach in Canada

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2085541144_b925053054.jpgI’m feeling a bit doom and gloomy about the economy. One possible bright side is that the people who live and work here in Vancouver, who make it a city and not a ghost town, may yet afford a place here. So take heart, Krystal.

It all has to do with this Asset Backed Commercial Paper problem. Don’t run away from me. It won’t be boring, I promise. And remember, I’m a money coach, I’m not an economist, so what follows may be way off base. But here’s the future as I see it:

Joe wants to buy Sally’s $300K condo. He doesn’t have $300K available just then (he’s not John Chow).

So Joe goes to Friendly Credit Union or Big Bank to borrow the money.

Now here’s the thing. Do you think Friendly Credit Union has the $300K sitting around? No! They don’t either! (seriously. they don’t.) So how do they get the money to pay Sally out? Two ways:

1. For every $1 dollar banks do have sitting around (in term deposits, gic’s, savings etc) they can essentially use their own credit to give Sally approximately $20 or a little less. (Think of it a bit like writing yourself a cheque on your line of credit.) So let’s say they have $10K in savings. They can pay out Sally $210 and owe themselves $200 which of course they’ll get from Joe over the years. But where’s the remaining $90K they still need to pay Sally?

2. Friendly Credit Union or Big Bank would go to outside sources, and “sell” that part of the mortgage to a third party. With the proceeds of the sale, Friendly Credit Union would then pay out Sally. Often, these third parties were american companies. And often these companies also provided mortgages for less than stellar people … who increasingly defaulted their payments in 2007. So now these companies are extremely jittery about lending out their money anymore – if they even have any to lend.

What that means is this. In the coming months, Friendly Credit Unions and Big Banks will have to be a lot more cautious about who they lend to. Why? Because they can only go to those third parties if Joe is a super-secure kinda guy. If he’s not, the third party companies won’t touch him, and the FCU or BB won’t be able to pull together the cash to pay out Sally.

It also means the FCUs and BBs are going to do all they can to get some cash coming in (see point #1 above if you don’t understand why) so expect pretty good rates on term deposits and high interest savings.

Here’s the doom and gloom part. Say Joe wasn’t a good risk. He’s more likely to get turned down than ever before. So Sally doesn’t get to sell her place. But there’s worse news. Sally isn’t the greatest risk in the world herself, and her mortgage has is up for renewal. She actually rents her place out (she doesn’t live in it) and doesn’t get as much in rent as her monthly mortgage payments. So Friendly Credit Union or Big Bank may end up not renewing her mortgage. So Sally goes from Bank to Bank and finally finds one who will lend to her – but at an interest rate so high that her cash flow would mean no lattes or ski trips for the year.

What would you do if you were Sally? You may start to feel pretty anxious. You may decide it’s not worth it, and dump the property. You may drop the price of your place to get someone – anyone – to take it off your hands.

And that’s where Krystal and all the other average joe/ette Vancouverites may find a gleam of hope.

I don’t know if I should laugh or cry. Or if I should take my own future-telling seriously.

Readers: what do you think? Will the other factors undergirding the Vancouver economy keep housing prices up? Or will the ‘credit crunch’ lead to falling prices and a fair bit of panic? Is the cold and rain of Vancouver just getting to me and skewing my perspective?

Photo credit: Azrainman (who apparently shares my sense of gloom)

About the Author


Imagine if Canadians were known for being all over their money. Engaged. Proactive. Getting out of debt. Savvy. Saving. Generous. Nancy wants to help. Nancy started her own journey with money over 15 years ago, and formed her company “Your Money by Design” in 2004 to help others along the same path. It’s not the usual financial advising/investment stuff. It’s about taking control of day-to-day finances –managing monthly cashflow effectively, spending appropriately, getting out of debt, saving. If you're ready to take control over your finances, pop by her business site, YourMoneybyDesign.com

2 Comments

  1. This is the second time in the past day I have seen speculation that Vancouver Housing prices are coming down. I’m just not seeing it. What I am seeing is people actually able to afford more as more people are going for a 40 mortgage than a 25 year one. I have heard rumblings that the banks are going to tighten up on their lending requirements due to the sub-prime fiasco in the States. I think that is a good thing. It always makes me nervous when I see people extend themselves to the point of danger. If I was Sally I would never have bought a rental property that had negative cash flow, except if it was only for a year or so and I was hopping to “flip’ the property and make my profit in the increase in the value of the property, something that can be risky because you are anticipating what the market is going to do. At this point if Sally sold in Vancouver, assuming she has held the property for a few years she would be making a good profit.
    My advice to Joe would be to get a Money Coach! That way he can learn to adjust his lifestyle and try to save and become a better risk for the bank, if owning real estate is what he strives for.

    [Reply]

    Mar 26, 2008

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  1. Nancy Zimmerman: a canadian money coach (not a financial planner!) » Blog Archive » Thursday Guest Post: how to relax in the midst of all the hard news about the economy

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