[vc_row][vc_column width=”1/1″]

Defining ‘unaffordability’

Critics of real estate ownership often cite the average detached Vancouver house price against household income, e.g., ‘Today the(Vancouver) median income is $71,660 and the average (Vancouver detached) house costs $997,800 — 14 times annual income’.

There is an assumption being made that these metrics are co-dependent. This is a misleading correlation. It paints a picture of impossibility, and 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.

Let’s look at apples to apples.

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.

Port Moody’s (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. Whether a home rises to 14:1 or falls to 1:1 is somewhat irrelevant in the short term; what matters is if income covers expenses and if home ownership is 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 one’s residence as one’s sole 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  ~$1,350.00 per month, or $16,200.00 per year. This is approximately 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 $40,000 in 1985, clearly we were suckers buying into an ‘overheated’ market. And yet since 1995 the value never dipped below 160K ever again.

The payments on that home were $1600.00 per month on a $48,000 household income. It was not ‘unaffordable’ it was simply a new reality that we had to adjust out budget to accommodate.

Today our current home (measured by price) is more ‘unaffordable’, and our current mortgage rate more ‘unsustainable’ than ever. Yet we sleep soundly.

On a daily basis I take in applications and process files for clients consistently borrowing ~75% of the maximum they qualify to borrow. They have room to pay higher prices, yet they choose the more (Canadian) conservative path. They believe what they read in the papers, that everybody else is at the ragged edge of what they can afford. As a nation we are a conservative bunch, largely living within our means. That is why we weathered the 2009 financial storm as well as we did, as a country and as individuals.

Supply and demand

Vancouver real estate has grown increasingly expensive with each passing year, as have gas, groceries, date night… even air for your tires from the gas station is expensive now.

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 comes to pass.

Water to the west, mountains to the north, a border to the south, combined with farmland and more mountains to the east. Within these confines, mix in marshlands, steep slopes, old growth trees, speckled toads, an eagle’s nest, an arrowhead, an arrow head in an eagle’s nest, and myriad other development-limiting issues and… well, we only have a finite amount of space left to spread out on. All this with tens of thousands more people arriving every year wanting a place to live.

Will our children ever own a detached home in Vancouver? Perhaps not. Would they want to? Perhaps not. My wife and I never moved out of the Port Moody area. Will our kids have a shot at owning in outlying areas such as the Tri-Cities and the Fraser Valley? Entirely feasible well into the foreseeable future.

Supporting much of this is the wealth of data from the 20th annual CMHC Housing Outlook conference.

The myth of average prices

The following data is a compilation of my notes from a presentation Bob Rennie gave which is very interesting and worthy of deeper thought.

Mr. Rennie’s presentation paraphrased from memory a few months later:

Mr. Rennie opened with an analogy using cars; imagine opening a newspaper and seeing the average price of a new car is now $114,792.00 You walk away shaking your head. You will never own a car, clearly there is a bubble in the car market, and besides who can possibly afford the $1,569.27 per month car payments? (Have a quick read on the impact of car payments here.)

Ridiculous.

You dig a bit deeper though. Half of the cars on the lot are Rolls Royce Phantoms at $552,000.00 and the other half are Kia Optimas at $21,960.00

And there are a lot of Kias on the lot. You can easily afford a Kia.

Arriving at the lot you question the salesman on this. What kind of advertising are you guys doing? It had me thinking that I could never own a car. The response: ‘I know; we run our own advertisements, but they are called biased, and so the media publish many stories citing average price, along with the stories of how every week one of the sales guys advertises a Rolls Royce at $21,960 just to incite a bidding frenzy. This of course gets him some press with a headline “Rolls Royce sells $530,040.00 over asking price“. We knew all along it would fetch $552,000.00. But the media likes a juicy story, so we give them one, it sells newspapers and that is their goal. Informing is part of their mission for sure, but if the media can ‘inform’ with hyperbole and push up the sales of their own product, well what can you expect.

How many Kias (and Rolls Royces) are on the lot?

As of November 2014 there were just over 2500 unsold dwelling units under construction in the Lower Mainland. Eighty percent of what is being built is already sold.

Conclusion: Not a huge amount of current or new supply. 

 

We arrive at the heart of the affordability question now (thanks again, Bob Rennie).

If one removes the most expensive 20% of properties from the equation—which makes sense for a more realistic perspective on prices—the median prices for 2013 were:

Housing Type	Median Price	Supply
Detached house	$668K	14,500
Condo	$313K	12,674

Conclusion: The Lower Mainland is far more affordable that the media would have us believe.

 

What about that top 20%? What was the median price of those units?

Housing Type	Median Price
Detached house	$2.2M
Condo	$956K

Conclusion: There are really two different markets in the Lower Mainland, and each is robust.

 

All of this data and more helps keep us personally invested in Vancouver real estate beyond just our own home.

Thanks for your time.

Sign up for Mortgage Market blog posts direct to your inbox here.

Dustan Woodhouse