NOTE: This article first appeared in the Vancouver Courier's sister publication Real Estate Weekly. For the unedited version of the story click here. For more on real estate go to rew.ca.
It’s always a hot topic in the media generally, but these past few weeks the issue of Vancouver’s lack of affordability has been more discussed than ever.
First, a few weeks ago, the price of a typical Greater Vancouver single-family home surpassed $1 million for the first time. On Jan. 13, Workopolis published a survey that got picked up by media outlets outlining what you need to earn to buy an average house in Canada’s cities. Needless to say, Vancouver came out worst, at $147,023 a year.
Then, on Jan. 19, an annual survey by Demographia asserted that Vancouver was the world’s second-least affordable metropolitan region, after Hong Kong.
But is it really as bad as the headlines make it seem? After all, the real estate market is hotter than ever, with home sales in 2014 up 16 per cent compared with 2013. So if Vancouver real estate is so very unaffordable, how are all those buyers affording it?
And we’re not talking about overseas investors, who make up about third of the luxury market and a much smaller fraction of the market overall. We’re talking about regular folk with their average incomes, buying typical homes.
Here’s how. There are three major, often-overlooked reasons why families and individuals continue to be able to afford real estate in a supposedly unaffordable market.
- Most People Have Existing Equity
Around 70 per cent of all real-estate purchases are made by non-first-time buyers. That is, people who are selling a home to buy the next, and therefore already have equity to offset against the cost of their new mortgage.
A typical family buying that typical million-dollar single-family home has probably been in the market for around 10 or 15 years: first buying a condo as a couple, then moving to a townhome or duplex when the kids are small, and then finding their “forever” home to grow into. It’s not as though they are taking out a full million-dollar mortgage and having to pay that off with their average household income.
This family has been able to take full advantage of the rising house prices in selling their previous homes, so the sharp rise in prices has worked as much for them as it has against them.
This means that the income-to-mortgage ratios of surveys like those by Demographia and Workopolis simply do not apply in the real world, especially when you factor in reason #2 below.
And what about first-time buyers who do not have any equity? They need to follow the same process as our family above, like everybody else. And if they want to live in downtown Vancouver but can’t even afford a one-bedroom condo, then why not build up equity by buying in an up-and-coming outlying area, rent it out and carry on renting downtown? Or just live in it and work your way up the ladder back to your desired area.
- Income-to-Price Ratio Skewed
There is a fundamental flaw in the methodology of comparing average household incomes with average house prices in Vancouver.
Let’s take the Demographia survey as an example. It cited a median price (mid-point of all sales prices) of $704,800 and a median household income of $66,400.
This median price factors in all those super-luxury homes generally bought by rich overseas investors, as well as the regular homes more generally bought by locals. But if you are factoring in homes bought by the super-rich from overseas, then you need to factor their income into the average household income of the “buying public” – not just Vancouver residents.
Either that, or strip the super-luxury market from the equation entirely – bringing the median price down considerably. But don’t compare apples with oranges.
- Interest Rates at Historic Lows
On Jan. 22, at the Urban Development Institute 2015 Luncheon, Neil Chrystal of Polygon Homes made a crucial point. He observed that because of the current historically low interest rates, the mortgage payments on a typical home in 2014 were only slightly higher than those made on a home in the late 80s and early 90s. Allowing for the increase in average annual income in that time, and it is now probably cheaper to pay a mortgage on a typical home than it was back then. Of course, Chrystal is in the business of getting people to buy homes, but his point is nevertheless valid.
Now that interest rates have just dropped even further, this is truer than ever. Of course, all home buyers must be careful to allow for future rate increases, but we are extremely unlikely to see the highs of the early 90s any time soon.
