First some history:
Average home prices have catapulted into the stratosphere recently.
The price of a benchmark condominium in Greater Vancouver has risen 111.5% in the past five years to a disgustingly unaffordable $377,579.
The price of a benchmark townhouse in Greater Vancouver has risen 100.8% in the past five years to a sickeningly unreachable $456,941.
The price of a benchmark single family home in Greater Vancouver has risen 95.5% in the past five years to nauseatingly excessive $730,399.
Even adjusted for inflation we are far above any historical norm.
What this means is that the average family can’t afford to buy a first home or upgrade since the income required to fund this purchase via a mortgage is double or triple what they make.
Now our current house prices wouldn't be a problem if people were earning more money but they aren't. Average incomes have not increased to the extent necessary to afford the average home.
This wouldn't be all that concerning on its own either if rents were rising but the crux of the matter is that the income yield or rent from real estate in the Vancouver area has not increased to the extent necessary to justify today's high prices.
Many observers point to low interest rates to justify current real estate prices but this does not explain our current situation either. If interest rates were low enough to justify current prices then we should see a similarity between mortgage payments and rents but we see a wide disparity between the two at this point in time. In fact we would have to go back to the heyday of 1981 and 18% interest rates for the mortgage payment to rent ratio to be as high as it is today.
Many people see the current building boom and assume we have high population growth which, if it were true, would partially explain the huge run up in prices but it is just not true as population growth has not been high by historic standards.
Granted, we have had population growth (in 1000s of persons) and all of these people do need to live somewhere. We did go through a period of time in the late 1990s and early 2000s when developers were not building a lot of new homes because there wasn't a lot of profit in it and demand seemed low but that changed quickly as interest rates declined dramatically after the tech bubble crash and 9/11. Subsequently, people went out house shopping in droves causing a shortage of supply in our local market.
We do live in a mostly free market economy and supply demand economic equations really come into play when we are discussing price movement of commodities such as real estate. When development companies are able to make a profit selling a home they will do so and the higher the profit earned they will consequently build even more homes. Logically, this would suggest that we shouldn't have a problem at all with prices because supply and demand should quickly come into balance but this is not so.
The problem is that real estate product takes from 6 to 24 months to produce and the time lag is substantial as people, after all, do need a roof over their head. This lag produces another effect - speculation - savvy speculators perceive shortage in the marketplace and act quickly to take advantage of the obvious price implications of shortage by buying any available units. This competition for housing causes prices to rise very quickly. This also causes a feedback loop and sends a signal to developers indicating that there is even more demand and so they build even more units. This feedback loop causes further effects such as skilled labour shortages and escalating construction costs as other people become aware and want to take advantage of the perceived shortage. People now feel the prices are justified because of these higher costs.
All the while the loop increases until we have exhausted all demand and the feedback loop that made everyone feel we were in a boom ends and it is replaced by a vicious circle of increasing developer inventory, speculators who cannot sell the homes they speculated on, decreasing construction input costs as competition becomes fierce, and increasing unemployment which further exacerbates the problem. We are nearing this exhaustion point as the number of units under construction in the Vancouver Census Metropolitan Area is way higher than justified by our population and many projects have completed or are scheduled to complete in the next 12 - 24 months.
Anecdotes abound of Realtors, mortgage brokers, and wanna-be Donald Trumps picking up 4, 8, or 12 housing units before they are even completed so they can sell at a profit when the building is finished. The problem is that this will cause the vicious circle mentioned above and prices will decrease as all demand is exhausted and the supply burgeons with newly completed inventory and desperate speculators.
The prospects are bleak for Vancouver real estate as there are very few potential buyers out there, population growth is low, average incomes are below urban Canadian averages and we have a housing inventory that is projected to increase dramatically in the next 12 - 24 months. Stay tuned and grab some popcorn since this is going to get real interesting.
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