Metro Vancouver Rental and Ownership Data

A great summary of the ownership, rental, and affordability state of the union for Metro Vancouver can be found over at metrovancouver.org.

• Key Facts
• Housing Diversity

In the latter link there is a presentation entitled Metro Vancouver Housing Data Book (PDF) that contains some wonderful demographic and affordability data that make authors of a housing analysis blog drool. A few key points made in this presentation:

• The median owner income of $69,318 is equal to approximately 125% of the median household income for the region.
• Based on the median income of $69,318, an “affordable housing cost” is equal to $1,733 per month using the standard that housing should not cost more than 30% of a household's gross annual income.
• In 2006, there were 817,230 households in Metro Vancouver; 531,725 (65%) were owners and 285,045 (35%) were renters.
• 21% (59,275) of renter households had annual incomes above $45,000. This fits the general definition of moderate and above income (above 80% of the regional median income). Of these households, 11% (31,220) had incomes between $70,000-$100,000, and 7% (19,975) had incomes above $100,000.
• Region wide, 39% (314,780) of all households had an annual income of $70,000 or above, of which 84% (262,035) were home owners and 16% (51,195) were renters. 20% (106,030) of owner households had annual incomes between $70,000-$100,000, and 29% (156,000) had incomes above $100,000.
• Of the 285,045 renter households in 2006, approximately 37% were accommodated in the 104,952 purpose-built apartment rental units counted by CMHC. The remaining rental stock is predominately non-market rentals, private condominium rentals, and rented single detached and other ground-oriented units
  
• The Statistics Canada Censuses shows that between 1991 and 2006 the total number of households increased from 609,380 to 817,035. For this period, as a percentage of the total housing inventory, apartment households increased from 34% (208,225) to 40% (321,970), while single detached households declined from 50% (302,120) to 35% (288,320).
• Data reported from CMHC shows that for Metro Vancouver for the period from 1999 to 2008 (10 years), average apartment rents increased from $725 to $937, an increase of 31% or 2.7% per year.
• During this same 10 year period for Metro Vancouver, according to the BC Stats Consumer Price Index, general prices increased by 20% or 1.8% per year on average.
• During this same 10 year period for British Columbia, according to BC Stats, average wages increased by 24% or 2.2% per year on average.
• Overall for the period, the average wage increase was greater than the general price increase, but lower than the average apartment rent increase.
  
• Metro Vancouver estimates that there are 69,200 - 75,500 secondary suites in the region. This represents approximately 22% to 24% of the total rental households (318,000) in 2009. [jesse: note the secondary suite accounting is all over the map. It is in many ways the proverbial "dark matter" of the city's housing market.]
  
• The average rent for a one bedroom secondary suite was $730, 20% ($189) less than the average rent in a conventional apartment building. The average rent for a two bedroom secondary suite was $862, 26% ($307) less than the average rent in a conventional apartment building.

There are much more data in the presentation. Well worth a read if you're trying to wrap your head around Metro Vancouver's housing market.

RBC Housing Affordability

The conclusion - Houses are not afforable

http://www.rbc.com/economics/market/pdf/house.pdf


British Columbia — Unaffordable and becoming riskier

Rapid price increases are quickly undoing last year’s improvement in affordability in British Columbia. In the first quarter, RBC affordability measures surged between 0.9 and 4.0 percentage points, by far the sharpest deterioration among the provinces. In the past three quarters, the measures reversed between one-third and one-half of their sharp drop in 2008 and early 2009. B.C. housing markets have been on a tear since last summer – with resale activity fully recovering to predownturn levels by the end of 2009 – although some signs of slowing have emerged since the beginning of this year. Nonetheless, the strong price momentum has continued largely unaffected in recent months, returning RBC affordability measures closer to their all-time highs in early 2008. Such poor affordability levels represent an element of risk for the province’s markets.

Risk - in real estate - say it ain't so.

Vancouver Real Estate Market Roller Coaster

From http://vancouvercondo.info/coaster - Good work.

Vancouver RE market rollercoaster from Vancouver Condo Info on Vimeo.

Danielle Park on Canadian Housing

Danielle Park gives an interview on howestreet.com on the Canadian housing market.

You can listen to the 16 minute interview here.

Federal government set to restrict mortgages

Federal government set to restrict mortgages

We will soon see what the changes will be.

From CBC:

Sources say the measures will discourage reckless real estate speculation, such as borrowing heavily for an investment property that is not the investor's primary residence. Flaherty is also set to deter households from taking on more mortgage debt than they can afford to repay when interest rates rise, as they are expected to do later this year.

The finance minister is also expected to discourage people from raising cash by refinancing their homes with larger mortgages — again because they may not be able to make the payments at higher interest rates.

The Canadian Press reports that Flaherty will implement a debt affordability or income test that applicants must pass to qualify for mortgages insured by the Canada Mortgage and Housing Corp.

Read more: http://www.cbc.ca/money/story/2010/02/15/flaherty-mortgage-rules.html#ixzz0ffwmWG2F

UPDATE:

National Post article outlining the changes: http://www.nationalpost.com/news/story.html?id=2570414

The Confidence Game

con·fi·dence n.

• Trust or faith in a person or thing.
• A trusting relationship: I took them into my confidence.
• That which is confided; a secret: A friend does not betray confidences.
• A feeling of assurance that a confidant will keep a secret: I am telling you this in strict confidence.
• A feeling of assurance, especially of self-assurance.
• The state or quality of being certain: I have every confidence in your ability to succeed.
• adj. Of, relating to, or involving a swindle or fraud: a confidence scheme; a confidence trickster

Consumer Confidence
Business Confidence
Builder Confidence

It all seems like all anyone really has these days is Confidence. We wouldn't want real profits or growth, or sustainable behaviours; would we?

Every day that goes by, I get more of the distinct impression that big chunks of the economy are part of a confidence game that resembles at best, blind faith and at worst, a giant swindle.

In relation to our local real estate market, to me, it resembles the giant swindle, with realtors and mortgage brokers taking advantage of the uninformed masses who place great 'faith' in the value of real estate ownership. They are blindly pursuing ownership at all costs with little or no thought to the immense risks they are taking on by putting themselves into massive amounts of debt. with little or no money down. We shouldn't come down too hard on the realtors and mortgage brokers though, since they are providing a service to willing consumers and they are just do their darndest to get that eager debtor the right amount of financing and the house they they just 'have to have'.

I actually put the blame squarely on the government and inappropriate rules that fail to guard the CMHC and hence taxpayers from massive losses in the future. After all, requiring a 10% downpayment is so 1999. Perhaps a speculator tax and extended ownership requirements for principle residence capital gains tax exemption (currently 12 months) would be appropriate rule changes too. After all, in countries with these sorts of rules, home ownership isn't a confidence game based on ever increasing home values and massive debt burdens but rather an appropriate personal and financial choice based on financial sustainability and lifestyle preferences.

Mortgage lender warns of housing bubble

File this article under: "No Shit Sherlock" and to beat all it is significantly worse in Vancouver.

November 12, 2009, Tony Wong, Business Reporter - Toronto Star

Low interest rates have caused some Canadians to act "irrationally" in the housing market, potentially taking on too much debt that could lead to economic difficulties down the road, says the president and CEO of ING Direct Canada.

"You have situations in some markets such as Toronto where people are making multiple offers for homes, they are paying thousands more and waiving conditions. It gives me concern they may not be thinking rationally, and this could lead to problems," Peter Aceto said in an interview Wednesday.

"Canadians are also paying their homes off slower and slower, and the concern for me is that they are buying more house than they can really afford."

Aceto said he is so concerned about the market that he has instructed staff to advise customers not to go with longer-term amortizations if they can help it. More than 50 per cent of all mortgages in Canada this year were amortizations longer than the standard 25 years, says Aceto.

As a result, the lender said he is worried that some consumers are biting off more than they can chew.

"It's almost as if Torontonians feel very concerned they are missing something with such low rates." said Aceto. "The problem is: can they afford to pay for their mortgage five years from now, when interest rates go back up?"

Sales of existing homes in the Toronto area were up 64 per cent in October from the same time last year, while average prices hit a record $423,559, up 20 per cent. Bidding wars have become common in choice neighbourhoods.

Bank of Canada Governor Mark Carney has already expressed concern that an asset bubble may be forming. And other financial community heavyweights such as CIBC World Markets senior economist Benjamin Tal told the Star last week that consumers are "blinded" by low interest rates.

However, Aceto is the first bank president to express concern over the housing market.
He acknowledged that his comments will likely not be popular with money lenders since he is also in the business of selling mortgages. "What I do know is that we shouldn't be focused on the short term," he said

"We shouldn't be interested in just selling mortgages to get our numbers up for the next quarter. If banks help our customers make the right financial decisions, then we will have a healthy and happy consumer and economy. It just makes sense."

Aceto's former job at ING was chief risk officer. He spent two years in California during the height of the real estate bubble, and felt that Canadians would not be as spendthrift as their American counterparts. But when he arrived back in Canada he was surprised to see that some consumers were acting in a similar way.

"Canadians have been proud internally that we're very different than the Americans in the way we behave in terms of our spending habits and the way we deal with credit. But over time we have become a lot closer than we think," said Aceto.

For consumers with 35-year amortizations, which ING sells, he advises that they accelerate their payments.

"That way if you have a $300,000 mortgage, instead of owing $280,000, maybe you only owe $200,000 when rates are higher. It prepares you for difficult times," said Aceto.

Despite his concerns, Aceto maintained that the Canadian economy is in much better shape than the U.S., where zero-down and longer amortizations created a massive housing bubble. And he said the Canadian government has done a good job in limiting long-term amortizations to 35 years.

"The banking system is much more sound, but that doesn't mean we should be complacent," he said.

Rental Rates

An article in the local newspaper the Georgia Straight indicates the effects of low interest rates.

The Metro Vancouver Housing Corporation is losing many of its moderate-income tenants to the housing market.

With variable mortgage rates going as low as 2.25 percent, plus incentives being offered by sellers, families are buying homes and moving out of affordable rental properties operated by the public housing body, according to a report by regional housing manager Don Littleford.

Although this may be good news for the real-estate industry, Littleford noted in his report—to be received tomorrow (October 23) by the MVHC board—that this is a matter of “growing concern”.

"Growing concern?" For whom exactly? The public housing that is offered by MVHC is often at a very low vacancy rate. The concern is, apparently, for MVHC's profits, not so much the tenants taking on high amounts of debt, though as a good Samaritan I would be concerned for both MVHC and the tenants. What is interesting, though, is an indication that the affordable rental market is predicting trouble filling its units. To fill the units they need only drop the price by some amount to attract more applicants, which will certainly hurt their profitability to some degree. I have little doubt they are capable of filling their units to near 100% capacity, but the luxury often awarded to these professionally-run outfits is they leeway choosing their tenants at the expense of charging slightly below-market rents. This luxury may be starting to evaporate. That produces a dilemma for the PMs: take a chance and rent to a suspect tenant or leave the unit vacant. If this is the course they take, profitability can drop by more than the implied decrease in profitability due to lower market rents.

We are hearing reports of weakness in the rental market, likely because of the combination of rising unemployment (causing people to use dwellings more efficiently) and continued dwelling completions exceeding the population growth rate. Low interest rates have allowed the choice of owning to be viable for many more compared to last year -- and a great many obviously prefer to own -- but someone choosing to own instead of rent does not change the overall dwelling supply. The weakness we are witnessing in the rental market is an indication of too much supply for what the population is willing to support. That does not bode well for residential construction starts in the next while, nor are sizable rent increases likely to stick en masse. That sounds awfully deflationary to me.

Hat tip to German Guy.

TD Economics - Real Estate Trends Could Impact Future Path Of Canadian Monetary Policy

I suggest you read this TD Economics report released today. It contains some interesting thoughts about monetary policy and the real estate market across Canada.

The Smell Test

Think about house prices in Vancouver for long enough and the price tags we discuss in our fair city don't seem to shock us after a while. Go away for a bit and return and you find that our real estate market is like a bad smell that you didn't notice when you were in the room but when you come back it seems intolerable.

Thinking about houses in Vancouver, where average household incomes are in the $60,000 / year range, I like to imagine who might live in that $1,000,000 house, recognizing that with a 10% down payment it still takes a $175,000 / year income to qualify for the mortgage. It might be a 'rich' foreigner or a successful lawyer or doctor or business owner. When I see pictures from listings like this one, I think that I may not be so delusional after all to think that most of the people who buy homes in Vancouver may not be able to actually afford them. Shocking, I know.

Keep in mind that this house with a near $1,000,000 price tag neighbours a commercial building and is metres away from the insanely busy Oak Street. Not exactly where I picture a successful lawyer, doctor or business owner living. The other pictures shed some light on who may live there and what kind of lifestyle they can afford. I've got nothing against having some old furniture in the den but this stuff is hideous and hardly what I think of when I think of a $1,000,000 house. Yuck.

Anyway, things just seem to be a little smellier than normal lately.

Personal Finance and Buying a Home

Something that I haven't quite got my head around is how so many (thousands per month) people can seemingly 'afford' to purchase homes in the Vancouver area considering the prices at which local homes seem to be sold at. Greater Vancouver benchmark for all dwelling types is just about $520,000 as of June 2009.

Let's look at a sample first time home buyer.

Let's imagine John and Jenny want to get started on the property ladder after getting married last year. They have saved $10,000 over the past couple years and they have about $25,000 in their RRSP accounts which they intend to use toward a property purchase under the Home Buyer's Plan. Jenny's parents have offered to help them purchase their first home as well with an extra $20,000 'loan' to be used toward a down payment that may never need to be paid back. They don't have any credit card debt but are making payments of a combined $900 per month on two car loans which have 3 years left on them. Combined down payment = $55,000.

John makes $60,000 per year working in the technology field and his job prospects are very good given his education and work experience. Jenny works in sales and her income has averaged $50,000 per year over the past two years. Although she does okay at work, her job prospects are sketchy as the company she works for has seen business drop off considerably and has laid off a few people in the last few months. Gross Annual Income = $110,000. Net Monthly Cashflow = $6,000.

They are wondering what they are able to afford (apparently they don't have a budget) so they go talk to a mortgage broker about their situation. The mortgage broker punches some numbers into the computer and comes up with a preapproval amount of $430,000. John and Jenny are amazed, they wonder what they have done to make the bank love them so much! This pre-approval emboldens them.

They call up a realtor and begin looking at homes in the $400,000 to $500,000 price range. The realtor shows them several condos and a few townhouses which meet their criteria and they settle on a nice townhouse and make an offer for $450,000 which is accepted and the deal is drawn up.

John and Jenny put $45,000 down by using the parent's money and withdrawing from their RRSP accounts under the Home Buyer's Plan. They have paid CMHC and legal fees of $9,000 which gets added to their mortgage so they owe a total of $414,000 and they have decided to amortize over 35 years (they will be 65 when it is finally paid off if they stick to the original plan with the original rate) with a 5 year term and a rate of 4.5%. They will be making principal and interest payment of $1,950 per month, they have added life insurance to the mortgage ($50) and are paying property tax monthly with their mortgage payment ($200). They now get to pay strata fees of $200 per month as well.

Let's have a look at John and Jenny's monthly budget.

John and Jenny's total monthly obligations are:

Mortgage - $1,950

Life Insurance - $50

Taxes - $200

Strata - $200

Car Payments - $900

Food - $600

Fuel - $400

Home and Auto Insurance - $400

Telephone/Internet/Cable - $300

Clothing/Other/Misc - $300

Entertainment/Vacations - $500

RRSP contributions - $200

Total = $6,000

This couple can have a 'reasonable' lifestyle based on these numbers but let's look a little closer. Let's test this for several common risks:

Death - The mortgage is life insured, the survivor would be financially okay so long as the life insurance remains in place.

Divorce - They are in bad financial shape if this happens. Neither one of the two could afford the townhouse if they split up and the townhouse would need to be sold quickly.

Children - They are in bad financial shape if they have kids. Not only would they have extra monthly expenses, which they don't have room for in the budget, they would also have less income for a period of time as it is typical for the mother to take some time off work after giving birth. Even if mom went back to work there are daycare costs, which are not small.

Job Loss - They are a financial disaster if one of the two loses employment of any extended period of time. They would be forced to make some significant life changes and likely sell the home.

Interest Rate Rise at Renewal - If interest rates rise by 100-200 basis points they would be extremely rough financial shape. Unless they had an increase in income, they would likely be forced to re-amortize the mortgage and/or make other lifestyle changes. If rates increased more than 200 basis points, they would not be able to maintain their current lifestyle in any shape or form.

1) 100 basis point rise to 5.5%, maintain original amortization, payments rise to $2180 / month

2) 200 basis point rise to 6.5%, maintain original amortization, payments rise to $2420 / month

3) 300 basis point rise to 7.5%, maintain original amortization, payments rise to $2670 / month

Time - This is the most insidious risk of all and the least recognized. As a financial planner, I see many people who have put themselves into this type of scenario and they manage to muddle through life, manage to pay off a modest home by retirement and save a very modest sum of money. They retire at 65 and have a fairly low standard of living since they have no real significant savings and no pensions. If none of the above risks occured and they both managed to work a full career, get regular raises, contribute to CPP, receive OAS and have some modest RRIF withdrawals, they would make it through life without severe financial hardship but as a debt slave. The bank would have made over $400,000 from them in interest payments and they would have never saved much. They would live month to month their entire life and financial freedom would be a mere dream as they play the lottery each week hoping their number is drawn.

The reality is that the risks noted above are very real and for John and Jenny's situation to work out they need everything to work perfect, with no hitches, glitches or problems. This seems unlikely to me. It would be far better for them financially to leave themselves more room in their monthly budget so that they could:

1) Live / survive with only one income

2) Maintain mortgage amortization if interest rates rise

3) Speed up mortgage pay down by making extra payments as they receive raises if things work out well.

4) Increase their personal savings to RRSP and/or TFSA to ensure they have money for the unexpected and for retirement.

There are only two ways for John and Jenny to make the above work in a sustainable manner:

1) Continue renting and saving aggressively

2) Buy a much cheaper home and aggressively pay down the mortgage

What are your thoughts? Do you know John and Jenny? I do.

RBC Housing Affordability

RBC has published their quarterly assessment of nationwide housing affordability and here it is.

This is what they have to say about BC.

Housing markets remain under heavy downward pressure in British Columbia. With the sharp rise in unemployment since last summer worrying households in the province, demand is generally weak and falls well short of available supply. This is sustaining the declining trend in prices for both existing and new homes. Nonetheless, there are signs that the situation might be close to stabilizing. After falling precipitously since hitting nearly record high levels in 2007, sales of existing homes appeared to have found a floor in the closing months of 2008 and the first two in 2009 – although at historically depressed levels. This, in part, might reflect a notable improvement in affordability, which removes a thorn in the B.C. markets’ side that emerged in the aftermath of the boom. From the end of 2007 to the end of 2008, RBC’s affordability measures in the province improved between 4.1 and 6.3 percentage points, depending on the housing type. Still, the restoration process has much further to go as measures remain significantly worse than historical averages.

Yes, they are correct, we are a long way from any kind of 'affordable' level.

This is what they have to say about Vancouver:

To say that things continue to be tough in the Vancouver housing market would be an understatement. A small up-tick in existing home sales since December has brought only cold comfort after the collapse of more than 60% in the preceding 15 months. Prices are down 4% to 9% from peak – or more than 30% if no account is made for the changing mix of housing types being sold – and still sliding. Pricing power remains firmly in the hands of buyers with the sales-to-new listings ratio at historical lows, indicating an enormous imbalance and suggesting that prices will likely correct further in the months ahead. Despite the price decline to date and the break on mortgage rates in the past year, the cost of homeownership in Vancouver is still exorbitant both in absolute terms and relative to income or rent. As families in the area worry increasingly about dwindling job prospects, poor affordability will continue to weigh on the market.

Time will tell of course but I agree that Vancouver prices are exorbitant and that we are not even close to the bottom.

In Derrick Penner's Shoes

The Vancouver Sun published an interesting discussion between so-called real estate experts with Sun reporter Derrick Penner asking the questions.

"The Sun invited to its editorial offices a panel of experts in Polygon Homes chairman Michael Audain, top realtor Patsy Hui with Re/Max Westcoast, and Tsur Somerville, director of the centre for urban economics and real estate at the Sauder School of Business at the University of British Columbia."

Here are the questions I would have asked if I were in Derrick Penner's shoes:

1) Please tell me how you each earn a paycheque? Do you feel how you earn your money helps you have an unbiased opinion on real estate matters?

2) What makes you a real estate expert? What are your qualifications?

3) Why should the Sun's readers heed your advice? Do you actually have any advice? What is in it for our readers? What's in it for you?

4) What would you say to someone who felt that prices of homes in the Vancouver area were destined to fall another 20-30% from current levels? What would you advise people to do if that were the case?

5) Where do you feel future buyers of real estate will come from since population growth is at historically low levels and the ownership rate has risen dramatically in the past 15 years? How will prices rise if there are fewer buyers than sellers?

What would you have asked if you were in Derrick Penner's shoes?

Is now a good time to invest in real estate? - NO, NO, NO!

With home sales — and prices — dropping in B.C., is now a good time to invest in real estate?

The B.C. Real Estate Association says it just might be, pointing to a large drop in carrying costs for an investment property today compared to a year ago.

“It doesn’t matter what the market is doing, I don’t say whether or not it’s a good time to buy,” association chief economist Cameron Muir said in an interview Monday. “That being said, I would suspect investors are actively looking in the marketplace for bargains. If you compare today vs. a year ago, investing in real estate is more attractive than it was then.”

Muir made the comment after the release of an association housing survey Monday that concluded the residential sales dollar volume on B.C.’s Multiple Listing Service declined 61 per cent to $873 million in January, compared to the same month in 2008 when sales totalled $2.25 billion. In the Metro Vancouver region, the sales volume was down 62 per cent over the same period, to $413 million from $1.09 billion in January 2008.

Muir — who said he also believes sales activity in the province will pick up in the spring because of improving affordability resulting from lower mortgage rates and home prices — cited a typical mortgage payment for a property in January 2009 compared to January 2008.

He said the benchmark price for a two-bedroom condo in Metro Vancouver was $334,602 in January, 11.5 per cent less than the $378,336 the same condo would have sold for 12 months earlier. A typical posted five-year fixed-term mortgage stood at 5.79 per cent in January, much lower than a similar mortgage rate of 7.39 per cent the previous January.

Therefore, he said, a condo with a 10-per-cent down payment (on a 25-year amortization) would have resulted in a monthly mortgage payment of $1,890 this January, nearly $600 less than the January 2008 mortgage payment of $2,468 (property taxes, maintenance fees and mortgage insurance fees not included).

Condos are still insanely expensive compared to rent.

On top of that, he said, there’s upward pressure on rents with the same two-bedroom condo renting in October 2008 for about $1,507 a month — a five-per-cent increase from October 2007.

“For both investors and home buyers, your mortgage payment would be several hundred dollars less than a year ago,” said Muir, who noted that investors have so far not been very active since the economic downturn started last year. “As an investor, the cash flow from the rent will more closely match your mortgage payment on the property.”

The BCREA survey also showed that residential unit sales fell 57 per cent to 2,115 units during the same period.

The average price on the MLS in B.C. was $412,934 in January, down nine per cent from the same month last year, the survey noted.

Muir said that home sales were sluggish in January, reflecting an overall malaise in consumer confidence and a weaker provincial economy.

Muir said that first-time buyers are especially affected by the economic news and are holding back because of a lack of confidence. “Demand from first-time buyers has been off significantly. First-time home buyers tend to be younger and not have years of experience in their occupations. Therefore, they have more concerns around job security. They’re more vulnerable to layoffs.”

Yes, those first time buyers would have to earn in excess of $100,000 per year to afford to buy very basic accomadations and I just don't see a lot of those people around right now.

Despite that, he said, the BCREA expects sales to rise this spring because of greater affordability and lower interest rates.

Muir noted that realtors are reporting increased activity from buyers over the past three weeks, but that it hasn’t yet materialized in sales statistics. “By all accounts, there’s increased interest. There’s more showings and more buyers kicking tires.”

Meanwhile, an Ipsos Reid poll released last week showed that a growing number of British Columbians think this is a good time to buy a home, though most say it isn’t a good time to sell.
The poll found that some 71 per cent of respondents said it is a somewhat good or very good time to buy real estate. In November, only 60 per cent of respondents told Ipsos Reid it was a good time to buy.

In the latest poll, though, 82 per cent said this is not a good time to sell a home. The poll also found that British Columbians’ expectations for falling prices are changing, with just 42 per cent of respondents saying they expected prices to be lower 12 months from now compared to 57 per cent in November.

The association represents 12 member real estate boards and about 18,000 realtors.

The last sentence is really all you need to read! The number of realtors declines each and every month right now.

The Argument Against Value Analysis in Vancouver

Much has been made by me and other long-time commenters on this blog about what housing prices would be in the absence of a bubble, the market's so-called fundamental value. Yet Vancouver's housing market has rarely (not never) been at a "fundamental" valuation in the past generation. Does value investing have a place in Vancouver real estate if prices rarely agree with the theory? I will outline the case for why not and offer some commentary.

Here I have attempted to paraphrase many of this blog's comments into this post. The information is not new, only presented. I do hope that readers, if they have time, read some of the comments here and in the archives for more insights into the fascinating subject of real estate in Vancouver, the "most bubbly city in the world".

The simple way of determining fundamental value is to look at an asset's current and expected future cash flows, discount them at your cost of capital, and sum them up. mohican uses a simple formula that I crudely derived here. There are other simpler and more complex methods of course and there is always disagreement over assumptions. With Vancouver specifically the last time properties were valued at what I consider to be fundamental valuation was around 2000 and before that in the mid '80s. Others will say 2000 was never at fundamental valuation, a local minimum that never quite reached the trigger point for them to consider it a good value investment.

The question is, if fundamental valuations have not been present since, say, the mid '80s, do they still have merit? The argument for why fundamental analysis is flawed for Vancouver real estate goes as follows. Real estate consists of cash flows from rents and capital appreciation. The Vancouver market has had many boom-bust cycles in its past. Even if an investor buys when prices are above fundamental value (not necessarily at the peak, mind), a subsequent boom cycle will allow the investor to exit with a decent overall return. Booms and busts are inherent to Vancouver's psyche. Given enough time, typically 7-10 years, you will always be able to cash out positive, the caveat being of course you avoid buying near or at the peak. Fundamental valuation is therefore rarely, if ever, achieved because investors anticipate future bubbles to compensate for poor rental yields.

In a nutshell, that is the argument. And before commenters rip it apart I will say that many people over the past generation have made decent real (or paper…) returns in this fashion. Most I have had discussions with do not engage in "pure" speculation (i.e. flipping) but actually rely mostly on rents for their return; "mostly" because for the return to really make sense they require some form of capital appreciation above inflation. The speculative component (i.e. prices above fundamentals) is apparently omnipresent within a typical investor's time frame.

The Vancouver price graph is indeed "biased" above fundamental value. So the argument goes, as I can make it out, you may have to wait a long long time for true fundamental valuations to return. If this is true, that Vancouver has a propensity for speculation, prices may never retreat to fundamentals in one's lifetime. In fact this is effectively the argument I hear on local blogs and amongst my acquaintances and family. Really they are saying that Vancouver is full of greater fools who will inevitably compensate us for poor cash flows or that their still fruitless but eternal hope of real income growth will manifest itself. And maybe they are right.

Of course speculation is a zero sum game and many we know have done well in the past generation in their real estate investments, "others" not so much. Here though I lob a few words of caution into the hubris.

First the assumption that Vancouver will experience another boom-bust cycle in most investors' time horizons is just that -- an assumption. There are precedents in other cities, most notably Tokyo, where prices have fallen for twenty years and counting. The market there had the ability to absorb a significant amount of investors with speculative components to their business cases and not lead to a subsequent boom; in other words a lot of speculators got burned waiting for the recovery that was not. Indeed the Japanese property market remained rational longer than speculators could remain solvent. Not to say this will not happen in Vancouver, but convincing yourself it won't is a high stakes assumption nonetheless.

Second is that oversupply this time around may all but guarantee a return to fundamentals. There are just not enough people for the number of units being built and, worse, we have seen Vancouver's population "spread out" from past decades. That is, the ratio of occupied bedrooms to the total number of bedrooms has been decreasing for the past decade due to what I believe to be both a demographic shift, and historically low and lasting unemployment (due in significant part to the construction boom as it happens). What is to stop this trend from reversing when average wages are falling? If you think mohican's graph of CMHC units under construction is scary, wait until under-productive dwellings are brought back to more full productivity as people tighten their belts.

Third the past generation has seen a perpetual reduction in mortgage rates and mortgage qualification thresholds from their highs in the early '80s. This in turn has improved affordability for existing owners and pushed up prices for future ones who can still miraculously tap credit lines. That trend is unlikely to continue much further. If mortgage rates increase, it will be decidedly bad for affordability. If mortgage approvals are stricter, fewer can qualify to buy at all. And prices will suffer.

It comes down to one thing, that Vancouver real estate has had a lengthy CV of booms and busts with a distinct bias above what would be justified by fundamentals. As an investor, you may well be relying on Vancouver's house price volatility to ensure your overall returns are satisfactory. Food for thought, though, that THIS time, it may indeed be different, though not in a good way for your future savings. On the flipside, for families looking to buy a personal residence only at fundamental value, there is some chance you could be waiting a long time, though perhaps not.

Demographia (again)

Demographia has released their new "international" housing affordability survey (pdf), picked up locally here and here. Local readers will no doubt be attuned to the survey consistently showing that Vancouver is indeed unaffordable compared to most other North American cities. The thing to keep in mind about the Demographia survey is that they are openly advocating for less restrictive land use. This is done by showing how cities with "restrictive" land use guidelines are generally less "affordable" than those with "less restrictive" guidelines.

Oh really.

There are some obvious flaws in the study as it pertains to affordability on which I will now elaborate.

Owning != Living

The study shows how house prices and affordability are correlated to the degree of land restriction. Yet it is not just housing affordability that should be looked at for a city's overall affordability. While many choose to own property, there are alternatives, namely renting. For the survey to truly gauge a city's affordability in terms of its population's ability to afford to live (not necessarily own), we must also include the rental option. Property values are subject to swings due to speculation and in themselves are a poor measure if rents are not increasing as well.

The survey does argue that land restriction can more easily lead to speculation. Maybe. Though some cities were notably absent from their data set (more below).

Affordable in the Rust Belt

p. 20 of the report has the evil red "unaffordable" cities lined up on the same chart as the haloed green "affordable" cities. Let's look at the green cities a bit more closely. Notables are: Indianapolis, Detroit, Cleveland, Cincinnati, and Pittsburgh. Is it too obvious to say that these cities have flat to decreasing populations and high unemployment? No wonder their land restrictions are so loose. The local authorities need to pull out all the stops to PREVENT people from leaving!

Cart and Horse

A question to ask, again a pretty obvious one, is whether restrictive land use is causally linked to affordability. The survey certainly shows correlation but seems to gloss over causation.

English Only

As hinted above, the survey seems to leave out other first world cities and concentrates on only English speaking cities. Why not include Paris, Stockholm, and Frankfurt? Could it be that these cities have restrictive land use policies but more favourable affordability?

Restriction? What Restriction?

Check out mohican's last post on CMHC construction data. If Vancouver has "restrictive" land use policies, it seems there may be a few loopholes, given the MASSIVE housing supply coming online. How could a city with such tight reins on land use produce such oversupply? It blows the mind.

Overall I am surprised the survey is given so much press. Their exclusion of data is suspect, their conclusions not well backed by logic, and their basic premises around what "affordability" really is are not discussed in their analysis. Every year there is a debate on local blogs about this survey. Sure, Vancouver is severely unaffordable. We all know that and this survey confirms the obvious. (Another annoyance is the types of data used for certain markets vary so the affordability number for Vancouver is not apples-apples with other cities) But this survey is not really about displaying the data and I'll stick to a more holistic combination of Case-Shiller, rents, and incomes, without the suspect analysis, thanks very much.

B-b-b-b-baby, You Just Ain't Seen Nothin' Yet

The Vancouver real estate market, along with the rest of BC and Canada, has now entered the full blown correction stage. Nobody is denying the reality that prices are falling and that it is very difficult to sell a home right now. Vancouver real estate prices have retreated nearly 15% in the past 7 months and Canadian prices as a whole have retreated 5-6%, depending on the data you use.

Many prognosticators, extrapolators, eternal optimists, and kool-aid drinkers have concluded that the worst is behind us in terms of price drops and I will now tell you why that is far from being the case.

Quite simply, there is TOO MUCH DAMN SUPPLY for the level of demand we had last year nevermind the level of demand we see today in the midst of a full blown credit contraction and recession. Shockingly ;-) people don't really want to commit themselves to a 35 year payment schedule, with payments double their current rent, when their job prospects are weak or at risk.

For those of you who are now planning on waiting until 'the market recovers' to sell your home, you may be waiting many, many years. The real estate market is not like the stock market, where crashes and recoveries can happen over a period of weeks or months. The real estate market takes years to exhibit the same market movement so get honest with yourself and don't let your realtor give you some mumbo-jumbo about a spring market rebound because the facts just don't bear that point of view out.

So the question becomes - When will we see more demand and less supply - ie. a recovery?

The answer of when a recovery will come is not complicated and actually we can make an educated estimate of when supply and demand should come back into balance. When supply and demand come back into balance, the worst of the price drops should be over and we can reasonably expect a 'recovery' of sorts, or at least no more big price drops!  This doesn't necessarily mean a return to the rapid price appreciation of the bubble years nor does it mean that we will attain the lofts heights of 2007 pricing again soon, in fact, it is likely that we will not see spring 2008 peak pricing for at least a decade and if we adjust for inflation, my children may never see that day.

In the current supply / demand situation, with well over 15 months of inventory in every major BC real estate market, we will see price drops in the order of -2% or more per month. This has been true of the past year.

For argument's sake, let's just say that the demand in the current real estate market does not deteriorate further and again let's imagine the looming supply of new homes under construction that will complete in the next 18 months is reasonably around 20,000 units. With current existing home inventories in the Greater Vancouver area and the growth in listings that is typical for the first half of the year we should see approximately 25,000 units for sale by the time May or June rolls around. Sales will likely be in the 1200 to 1500 per month range giving us a months of inventory metric well over 15 months again.

This means that 2009 will not be a positive year for prices in the local real estate market. In fact, assuming the trend shown in the chart above holds true this year, we should see continued price declines of 2% or more per month. If there is a further influx of inventory via new home completions or existing homes coming onto the market, or a further deterioration of demand, things could be much, much worse.

In regards to prices, here are my best case, reasonable case, and worst case scenarios for 2009:

Best Case - average of 2% declines per month, inventory does not exceed 25,000 units, sales hold up at 2008 levels, benchmark price finishes the year above $525,000.

Reasonable Case - average of 3% declines per month, inventory does not exceed 30,000 units, sales fall modestly from 2008, benchmark prices finishes the year above $475,000.

Worst Case - average of 4% declines per month, inventory exceeds 30,000 units, sales fall dramatically from 2008, benchmark prices barely finish the year over $400,000.

If these predictions seem alarming, then you haven't had a good look at the facts yet. There will be no recovery until 2011 at the earliest. For those of you looking to sell a home this year, get real, and drop your price to be the lowest in your neighbourhood, otherwise it isn't going to sell. For those of you looking to purchase, wait, or drive a very hard bargain, and be prepared for further price drops. If you are a developer, cut prices hard, 30% or more, and finish up your projects fast. If you are a city that happens to have a huge development full of unsold units on your hands, get rid of them, FAST.

Real estate prices will be 20-40% lower than now only 12 months from now so move fast if you're selling and move slow if you're buying.

Good luck because You Ain't Seen Nothin' Yet.

RBC Economics - Housing Affordability Improves in Vancouver - Long Way to Go Still

These comments (in italics) are from RBC Economics:

Housing downturn — Canadian-style

Canadians have watched with amazement for nearly two years now at the collapse of the housing sector in the United States, the United Kingdom and other countries that experienced overvalued housing prices with the sense that markets in this country stand on much more solid ground. After all, the sub-prime business never represented more than a marginal phenomenon here; Canadian households, while carrying heavier debt loads than in the past, were not financially overstretched; Canadian banks emerged islands of stability amid the global financial storm; incomes remained well supported by steady job creation and a strong domestic economy; and the influence of speculation — especially on new construction — was deemed to be subdued.

Then, late in 2007, red-hot Alberta markets began to slide, followed earlier this year by British Columbia’s markets. Most recently, Saskatchewan, last year’s hotspot, and areas in Ontario joined the weakening trend. All of a sudden, Canada no longer appeared immune to a generalized housing downturn. In fact, the souring of economic conditions, eroding consumer confidence and, in some instances, past excesses are creating a downdraft that the majority of Canada’s housing markets will be hard-pressed to resist.

As a sluggish economy threatens income growth and makes households much more skittish about major financial commitments, issues of affordability are coming to the fore. Much of the market correction taking place in British Columbia, Alberta and, now, parts of Saskatchewan can be traced to very poor affordability levels in those provinces.

However, high home ownership costs are not unique to western Canada. RBC’s affordability measures lie above long-run averages in all provinces and across all housing segments, which suggests that the downdraft will be felt widely.

Still, the extent of “unaffordability” varies substantially by province, with measures running as high as 48% above average in the B.C. standard townhouse segment and as low as 6% above average in the Quebec detached bungalow segment. Overall, British Columbia, Saskatchewan and Alberta remain the least affordable markets in Canada (relative to their respective historical norms).

While the Canadian housing sector is undoubtedly entering a cyclical downturn, the risk of experiencing a U.S.-style meltdown is remote. The supportive factors mentioned above are still mostly in play and should provide enough backing to prevent markets from spiraling down even as the Canadian economy slips into recession.

In short, RBC provides a half decent view on the current housing situation. They pull a couple punches when it comes to pointing out how ridiculously unaffordable BC and specifically Vancouver is but that is what I expect from the bank. This is what they have to say about BC:

British Columbia — In full-blown correction mode

The situation is unraveling fast in British Columbia. Provincial housing markets are correcting from extremely tight conditions that built up during the boom and drove prices sharply higher (more than doubling between 2002 and early 2008). By the first quarter of this year, RBC’s housing affordability measures for
British Columbia ranged from 38% to 50% above long-term averages — the most inflated ownership costs of all provinces (the higher the measure, the least affordable is home ownership) and clearly an unsustainable position. Demand has subsequently dried up, while elevated prices have attracted more sellers, swiftly shifting pricing power to buyers. Prices began to decline in the spring, a trend that gathered speed through the early fall. This has helped improve affordability modestly in the second and third quarters, but levels in British Columbia still suggest that further price correction should be expected in the near term.

Not too bad for a bank economist! This is what they have to say about Vancouver:

Vancouver — Bumpy ride on its way back to earth

Despite price declines since the first quarter, valuations in Greater Vancouver continue to reign supreme atop Canada’s housing markets. In the third quarter, prices were roughly double the national average for most housing types, with standard condominiums the exception at “only” 70% above average. Meanwhile, median family income in Vancouver is estimated to exceed the Canadian norm by just 8%. Poor affordability is nothing new to the city, as its home ownership costs have long been the highest in the country. However, the significant deterioration in the past three years or so has exacerbated the situation, attaining unprecedented levels by the start of 2008 and adding tremendous stress on the local market. Price drops so far this year have brought some minor relief but much more is likely coming. With qualifying income estimated at more than $150,000 for a standard two-storey home and $135,000 for a detached bungalow, the vast majority of Vancouver families are effectively shut out of those market segments. The only option for many remains standard condominiums where the cost of ownership is not as steep.

Fairly balanced and they do allude to further price drops. The report properly lays blame on unaffordability for the price decreases in the local real estate market. It is outrageous that prices have gotten to these current high levels and the current correction is going to be very severe out of the necessity to bring affordability back for average families in Greater Vancouver.

Not content to let sleeping dogs lie, Cameron Muir had to weigh in on the affordability discussion with some BCREA talking points. Here are the quotes from the Financial Post:

Cameron Muir, B.C. Real Estate Association chief economist, said that affordability has actually improved more than the RBC report suggests because the report is based on third-quarter data and more information has since been collected. "We've seen prices erode even further," Muir said. Sales numbers are unlikely to go much lower than those seen last month, he said. Muir anticipates that after the first quarter of next year, if not before, sales numbers will pick up.

Home prices will edge down as long as there's an imbalance between the number of buyers and number of sellers, Muir said. Over the next several months, he predicts that gap will narrow and "home prices will firm up." By the second quarter of 2009, Muir said "we expect to be in a situation where home prices are fairly flat," and home sales will begin to increase on a year-over-year basis.

We'll hold you to that prediction Cameron. It is now enshrined forever and we'll see how your rose coloured crystal ball works compared to some eyes-wide-open analysis.

Greater Vancouver Price / Rent Ratio

House prices in Greater Vancouver are overpriced and consequently the rental yield on properties is very low. The chart above (click to enlarge) shows the long term detached house price adjusted for inflation, the inflation adjusted rents for a 3 bedroom apartment and the price to rent ratio for the benchmark detached family home (I used a multiplier of 2 on the 3 bedroom apartment rent to represent the benchmark detached rent).

The price to rent ratio is at all time highs by a long shot with monthly rent representing 1/300th of the purchase price of a home. In some cases the ratio is much worse.


Any analysis of price vs rent would be ignorant if it did not account of the cost of capital, which is represented here by the five year mortgage rate. Mortgage rates were extremely high in the early 1980s and prices were also very high so the mortgage payment to rent ratio was extreme. It peaked in the third quarter of 1981 at 3.5 times equivalent rent to purchase the same property. In the current cycle we peaked at 2 times rent for equivalent properties. Clearly affordability was worse for a brief time in late 1980 through early 1982 compared to today.

The risk today is of course the prices themselves but the risk of mortgage rates rising is an additional risk that mortgage renewers must keep in mind. Would they be able to absorb an unexpected drop in house prices of 20% combined with a rate increase of 2-3%? Variable rate mortgage holders are in for just such a surprise over the next couple years. Fixed rate mortgage holders may dodge the bullet on the rate increase but the price decreases may leave them feeling a little trapped, especially if the payee loses his or her job.

Likely Outcome - Price Drops to continue to 2011/2012

In the efforts to visually represent a likely outcome for local housing prices I put together the chart (above - click to enlarge). I think it is likely that the benchmark detached house in Greater Vancouver will fall no less that 40% in value from the April / May 2008 peak price. This is a likely trajectory of the fall given the current and expected economic climate. I fully expect the majority of the price correction will take place over the first 24 months so we will see prices 30% lower by the time we are just about experiencing the hangover of hosting the Winter Olympics.

Of course nobody knows for certain how large this correction will be or how fast but I think based on current data this would seem a probable outcome.

It will be a good day when the average family can afford a basic home and condos are affordable for first time buyers.

Greater Vancouver House prices shoud be no more than $500k for a decent house in a decent neighbourhood and Fraser Valley houses $350k for the same. Greater Vancouver one bedroom condos should fall to $150k and Fraser Valley $120k. By the end of this, it will as if the bubble never happened except for the shattered finances of the speculators, and highly leveraged peak buyers.