Vancouver Real Estate – How I learned to stop worrying and Love the Bubble.
Don’t believe the Hype. (the Bubble-Hype that is)
Short Version
- Vancouver Real Estate – in particular detached home prices can, and likely will, rise further.
- As more single family home lots are assembled and redeveloped into multi-family product so dwindles the supply of detached homes in Vancouver. Less Supply = higher prices still. Alternative paths to increased density continue to flourish as well.
- In 1991 Vancouver became the most expensive City in Canada in which to purchase a detached home. Since 1991 the gap has steadily widened.
- If you are going to live out your life in Vancouver and wish to own a home, then do not sit on the sidelines waiting for a crash that is supposedly coming…as you might have done since 1991 when values began to deviate from the norm.
- Low interest rates are in fact not allowing Canadians to qualify for larger mortgages that they did 5 or 6 years ago at notably higher rates. Government Regulation has seen to that.
- Low interest rates could be here for some time to come.
Think about the irony demonstrated in the next two stats cited in a 2012 CAAMP presentation;
- 83% of CDN’s are comfortable with the amount of Equity in their own homes.
- 77% of CDN’s believe that low rates mean many CDN’s own homes who should not.
Canadians individually believe they personally are OK, but are worried about their neighbours…and vice versa.
How very prudent and very Canadian of us.
Long Version
We often see both social and economic commentary, think-tank studies, statistics, & opinions, (lots of opinions) making the argument that the cost of home ownership in Canada, in particular Vancouver, is both ‘unaffordable‘ and ‘unsustainable‘.
Of course it all depends upon ones definitions of unaffordable and unsustainable.
Prices are due to correct, even the IMF says so...
Vancouver pricing corrections are historically short-lived and are rarely of tremendous significance to most of us. The statistical fact is that 98% of homeowners carry on making payments and pull through to the next round of appreciation.
The events around a major correction, the nearest example being 2008/2009, typically reduce prospective purchasers power (via decreased employment) as well as hampering most potential buyers psychologically (as humans tend to illogically ‘buy-high‘ and ‘sell-low‘) often demonstrating a greater fear of buying into a dropping market than of buying via multiple-bid into a fast-rising market.
One key trigger of a large drop in Vancouver Real Estate values would be a large drop in employment and/or incomes. Assuming there is some unforeseen fundamental shift downward in unemployment, then yes there will be an increase of supply on the market and with that increased competition for a small pool of buyers (remember most buyers are out of the market now as they too presumably lost jobs) with corresponding low sales volumes – similar to what occurred in Jan – March of 2009.
In hindsight re 2009, one must also consider the impact on sales activity that record setting snow fall in January 2009 had on a City that seizes up with more than a 1cm dusting. Economic crises or not, January 2009 was doomed to inactivity by weather alone. Also prolific into the Spring of 2009 was a ‘world is ending‘ psychology that had many buyers sitting on the fence waiting for deeper drops. Then, before those fence sitters knew it, prices were on the way back upward and the window of opportunity had closed.
‘Unsustainability’
Current Arrears rates in Canada for CMHC insured mortgages, arguable the ‘riskiest’ of the bunch has dropped steadily from a recent peak of 0.45% to 0.31%, approaching historic lows. It should be noted that in 1992, and in 1997, the arrears rate peaked at .65%. More than double todays level. (still a very low number) All the while home prices trended in an upward arc.
It would seem that CDN’s are in fact having less trouble with regard to making their mortgage payments than in previous years, despite carrying larger average mortgage balances…which are in line with rising incomes.
Based on a 99.69% rate of compliance with mortgage repayment by CDN homeowners it seems reasonable to suggest that things are perhaps more stable than might otherwise be suggested.
What if interest rates double? Interest rates rising or falling has little to no day-to-day effect on the 47% of Vancouver homeowners currently mortgage free. As for the balance of homeowners this concern was addressed in detail in a previous post and the impact is nowhere near as dramatic as one might expect. It should also be considered that over 80% of new mortgages written in 2013 were 5yr fixed under 3%. A spike in rates does not impact many homeowners until 2018.
There is little evidence of rate hikes for clients in variable rate mortgages any time soon either. Clear statements have been made by the Bank of Canada regularly, such as “All we’re really doing is being honest that at this stage, we think that interest rates will stay where they are for quite some time,”
If interest rates spike there will be a wave of foreclosure deals…
The Canadian foreclosure system is heavily biased in favour of keeping people in their homes, long after they stop making payments on them in fact. A lender can take 18-24 months to effectively remove people from a home once they cease making payments. It is not uncommon for a sale date on a foreclosure to be over two years beyond the date of the first missed mortgage payment. Once a Judge approves said sale the lender is then obligated to track down the original homeowner and pay them out the remaining equity as well.
It is a very socialized process. One that should make us proud to be Canadian to a great extent.
What this means is that with an overwhelming majority of Canadians in very low rate fixed mortgages, (~80% in ~3% 5yr fixed from 2013) a rate-spike would not start to impact many homeowners until 2018. Allow for a few months of payments made before slipping behind, then add in another 2 years for the entire foreclosure process to get to the point of the property being sold and we are talking about sitting on the sidelines for 6+ years, or until 2020, all the while paying rent and living in a world of inflation rates outpacing savings rates.
This is not a realistic plan. Nor has it been over the past 30 years.
‘Unaffordability’
Critics of Real Estate ownership often cite the average detached Vancouver house price and average income. i.e. ‘Today the (BC) median income is $68,970, and the average (Vancouver Detached) house costs $922,600.’ ‘13.4 times annual income’. As if somehow these metrics are co-dependent. This is a misleading correlation.
Lets instead look at apples to apples;
i.e. Average income and Average mortgage size.
- The BC median income of $68,970.00 and average BC mortgage balance of $288,750.00 presents a less hype inducing ratio of 4.18 times income.
- The Port Moody (my neck of the woods) median income of $93,015.00 and average Port Moody mortgage balance of $295,427.00 presents an even less hype inducing ratio of 3.17 times income.
It seems reasonable, if less ‘exciting’, to focus on a ratio of monies earned to monies owed. It paints of picture of impossibility, has done for years. Here is the reality check. It is not about income and house-price, it is ALL about income and mortgage-size.
Whether a home rises to 14:1 or falls to 1:1 is somewhat irrelevant in the short term, what matters is whether income covers expenses and is home ownership a long term plan? If yes, then it is likely one will weather a boom and a bust… or three.
A home is just that, a place to make a life. For some it is a forced savings plan, for others a dream realised of owning their piece of the world. There is value beyond just dollars in owning a home, and without viewing ones residence as a singular retirement savings vehicle there are many degrees of safety and stability as well.
Are there several Vancouverites with mortgages of 500K or more? Yes, and those folks have household incomes proportionately larger (in excess of 100K). Typically they are dual income households with a basement suite supplementing payments. in many cases these are highly employable people with multiple revenue streams, salary, investments, rental income, who also have family support to call on if need be.
Again, looking at real numbers, the average BC mortgage balance requires a payment of approx ~$1,350.00 per month, or $16,200.00 per year. This is approx 24% of the gross annual median income being used to debt service the average mortgage balance.
Fear inducing headlines about ‘unaffordability’ and ‘unsustainability’ touting the end of the Real Estate world have been around as long as my wife and I have owned Real Estate. Values cannot get any higher! Rates can’t get any lower! – we have heard these refrains since our first detached home purchase @ 160K in 1995 when rates were at an ‘unsustainable’ low of 8.75%. The vendor of that home had purchased for 40K in 1985, clearly we were suckers buying into an overheated market. And yet the value never dipped below 160K ever again.
Today our current home is more ‘unaffordable’, and our current mortgage rate more ‘unsustainable’ than ever. Yet we sleep soundly.
The Future
Vancouver has grown increasingly more expensive all my life.
It is my opinion that the gap between average BC income and the price of a detached home in Vancouver will continue to widen. the very limited supply of land, the lack of detached housing starts, and the ever increasing demand as migration and immigration continue will almost certainly ensure this.
Water to the West, Mountains to the North, a Border to the South, combined with Farmland and more Mountains to the East. Throw in trees, Frogs, Birds, steep slopes and other development-limiting issues and well – we only have a finite amount of space left to spread out on. With tens of thousands more people arriving every year wanting a place to live.
Will my children ever own a detached home in Vancouver? Perhaps not. Would they want to? Perhaps not. Will they have a shot at owning in outlying areas such as the tri-cities and the Fraser Valley? Entirely feasible for the foreseeable future.
All of this data and more helps keep us personally invested in Vancouver Real Estate beyond just our own home.
Thanks for your time.
As a bonus for actually reading this entire post; if you are the third person to email me with an interest in attending the upcoming Money Talks 2014 World Outlook Conference I will get you onto the guestlist. Just say the word.
Have an excellent day!