affordability?
The affordability index for a detached bungalow in Canada’s largest cities:
• Vancouver 70.1%
• Toronto 43.8%
• Calgary 40.9%
• Edmonton 33.4%
• Montreal 36%
• Ottawa 30.8 %
“The higher the city is in an index, the more costly it is to afford a home. For example, a reading of 50 per cent means that homeownership costs, including mortgage payments, utilities and property taxes, take up half of a typical household’s monthly pre-tax income.”
report in the Globe & Mail
With predictions of a bumpy economy next year should we expect affordability go up or down?
December 22nd, 2006 at 1:07 pm
"What are we talking about here, gold, silver? Those will only go up in a recession."At first this sounds reasonable. But lets delve deeper.Demand for gold comes from four areas:1. Industrial demand2. Cosmetic demand (jewelry)3. Inflation hedge4. Store of wealth5. Flight to safetyClearly the demand from the first two go down in a recession.What about inflation hedge? Nope, recession and inflation DO NOT go hand in hand.Store of wealth? Recession equals less demand to store wealth.Flight to safety. Yes, some have a batten down the hatches mentality and may buy gold in response to a stock market crash. But in response to a recession in general?A quick Google finds that:"In the 1981-82 recession, the real gold bullion price increased by 2% but in the 1990-91 recession, real gold prices fell by 12%. Thus, the more recent experience would suggest that gold bullion does not provide a good hedge against the threat of economic downturn."http://tinyurl.com/yh4nrsAnd that is gold. Silver much less so? Copper, nickel etc. Down down down.
December 22nd, 2006 at 11:23 am
What are we talking about here, gold, silver? Those will only go up in a recession.I thought Red Mountain was mined out years ago. Aren't we talking lead/zinc/copper in this province?
December 22nd, 2006 at 11:19 am
Freako, 6:38pmYea, you’re right…as they say, people will believe what they want to believe until they can deny no more. That’s the point where the pain becomes unbearable (dang collectors start calling, mortgage companies start hounding, and the spouse starts screaming divorce..hehe!).The smart ones by then would have gotten out long ago! With some profit to boot!
December 22nd, 2006 at 11:14 am
The argument that oil prices or any commodity prices will stay up hence it will prop up our high real estate prices is fundamentally flawed. You simply cannot make that conclusion even if oil prices stay above $50 or $60.Remember, economically, within a 10 year cycle of any primary uptrend, there will be secular bears and bulls. Markets and hence, prices, do not move uniformly upwards or downwards, they move in cycles. There will be intermediate downtrends and uptrends within a primary uptrend.Assuming then that the prices of oil will continue to go up in general (primary trend), given that the secular trend has been up, what is the next secular segment…the answer is down. When you connect the commodity factor to the real estate market (if you can), then you have simply got to answer that given there has already been a strong uptrend, the next intermediate cycle will be a downtrend…the unknown then becomes, when will the next trend begin!
December 22nd, 2006 at 11:02 am
Markx, 5.23pmFor me, the 70.1% affordability index is a strong indicator of the current overextended state of our real estate market. Particularly due to the fact that Vancouver’s economic profile is significantly different from that of NYC or other cities. NYC’s or for that matter, Geneva’s city characteristic creates a property demand profile that is considerably different from that of Vancouver. NYC is considered to be a global financial centre in both hard and good times. Hence, the level of NYC’s average property demand is quite a lot higher than that of Vancouver. In my opinion, Vancouver’s average demand level is considerably lower on a per capita basis. Therefore, you’ve got to ask a simple question, “if locals are not buying Vancouver’s property to live, who is or is anyone?†If the answer is foreigners or locals buying as a vacation home or as an “investmentâ€, then we’ve got a problem when things start to get dicey.
December 22nd, 2006 at 9:30 am
. I don't see any downside for metals,I do, if there is a U.S. recessionWhat are we talking about here, gold, silver? Those will only go up in a recession.but its never going below $50/barrel,Is that a feeling in your left big toe, or is there some analysis behind those numbers? Oil is up quite a bit over the last 4 years. Are you sure that the supply/demand imbalance is permanent?OPEC seems to have found a new level they are comfortable with, and I'll loosely define it as "above $60/bbl", based on their supply cutbacks last week. A US recession won't change the demand as much as it did in the past, due to the rapidly increasing demands around the world. And yes, I think we have gone past the point of no return with supply and demand. A lot of the peak oil arguments share a lot with the bears around here. "It just can't keep going on like this…" But I won't get into that.
December 22nd, 2006 at 9:08 am
Grover Borequist said… Has anyone ever wondered how much of an impact our underground economy has on the housing market? According to a rather old article by the Guardian, BC's pot production is worth somewhere around 7 billion a year. It helps us cope with our high mortgages.
December 22nd, 2006 at 6:38 am
Has anyone ever wondered how much of an impact our underground economy has on the housing market? According to a rather old article by the Guardian, BC's pot production is worth somewhere around 7 billion a year.
December 21st, 2006 at 10:21 pm
70.1 percent or anything remotely approaching this figure cannot be sustained and it will not be. Even though this is still over the top in relative terms, 50% can be sustained in this very "special" city of which I am a native. GVRD RE prices will drop 25% or so to reach the 50% level sometime over the next two years give or take, on average (some more, some less and a few little to not at all).This has been the patten over four decades and I have not seen nor read anything that suggests this pattern will not repeat itself.Denial, particularly when you have a vested interest, dies very hard and over a protracted period. By the time it withers away, the Fat Lady has already sung.
December 21st, 2006 at 9:36 pm
"I meant it's not a smooth curve. There is a significant jump in income as one crosses the non-homeowner/owner threshold. "I am sure that his generalization is valid, but it is not necessarily the cause of the poor affordability.The market is set at the margin. Potential buyers are renters, trade up, lateral or trade down.Obviously the impact of lateral move is nil. The trade up cohort gets a hand with the down payment, but still needs to contend with payments.Back to the point. You suggest that owners of SFH are wealthier than renters, hence they are not a random sample and are not subject to 70% payments. However, your argument really is backwards, as these people already own. Price is set by those ENTERING the SFH market, not those ALREADY owning. Hence with this new twist on your previous logic, the poor affordability is even more confounding.As Tulip suggests, worsening affordability from historical figures is cause for concern. Especially since population growth is historically modest.
December 21st, 2006 at 9:16 pm
"The 70.1% simply means the income gap between home owners and non homeowners is most marked in Vancouver. "I understand your point as well as Freako's and the affordability index is a very crude measure; nonetheless it is an indication of a problem, when the index is very high by historical and comparative measure.And the question has to be asked: What has changed so much from when it was within the range of other North American cities?What happened last time the index hit this value?Tick Tock, Tick Tock
December 21st, 2006 at 6:49 pm
The 70.1% simply means the income gap between home owners and non homeowners is most marked in Vancouver. I meant it's not a smooth curve. There is a significant jump in income as one crosses the non-homeowner/owner threshold. Comparing average income to average home ownership costs may not be valid for a city like Vancouver with its huge income and wealth diparities say compared to Saskatoon.
December 21st, 2006 at 6:38 pm
The 70.1% simply means the income gap between home owners and non homeowners is most marked in Vancouver. How exactly do you arrive at that conclusion? If speculators feel, strong emphasis on “FEELâ€, that one or both of these factors could take a serious hit, off to the exits they go. I think the "speculators" in local real estate is a lot dumber than the movers and shakers who are hip to this type of thing. Hence, the writing on the wall may need to be in neon.The truth is, the average family don't live in a SFH. That is what I was getting at earlier. Very very few families struggle with 70% debt loads to live in SFH in Van proper. The median income either lives in higher density or has moved to SFH in the sticks. Such an eventuality is inevitable in a growing metropolis, but I think we are moving ahead of ourselves here.
December 21st, 2006 at 6:32 pm
. I don't see any downside for metals, I do, if there is a U.S. recessionI'm not bullish on BC's lumber industry, but its been crap for a long time.Right, so that means crap plus even more crap.but its never going below $50/barrel,Is that a feeling in your left big toe, or is there some analysis behind those numbers? Oil is up quite a bit over the last 4 years. Are you sure that the supply/demand imbalance is permanent?
December 21st, 2006 at 5:23 pm
Personally I don't give much weight to affordability index. If you apply the same method to NYC, you will probably get a number that's above 100%. The truth is, the average family don't live in a SFH. Instead, TWO average family live in a SFH, hence the Vancouver Special. Look at it another way, is rent affordable? Should average household be able to rent a median SFH?
December 21st, 2006 at 3:28 pm
“Reference: rentingsucks, 2.29â€My take on this is that the housing affordability index is simply a measure of how much pre-tax income is needed to own a home based on a 75% mortgage ratio.It doesn’t give an entirely accurate view of everyone's situation, but it generally applies to most individuals in the economy.I think you’re right in saying that as the index drops, more people can afford it. The key emphasis is “affordâ€. They may not buy it immediately due to various reasons such as the wait n’ see approach, etc., but they certainly can afford it more.Another factor that needs to be thrown into the mix is that as the affordability index drops, more people may get out of the market. This is due to the fact that other economic factors are detrimentally affected from dropping house prices which causes people to be out of work (being that the construction industry is one of our economy’s major driving forces).
December 21st, 2006 at 3:05 pm
One only has to look at the 70.1% figure (of GROSS income) to realize that there is a huge amount of speculative froth in Vancouver’s housing prices…whether or not a bubble exists is uncertain (definition of bubble is not clear as no one knows how much froth there needs in a bubble).This is my take on things. Economic component has a huge effect on housing prices no so much based on what actually happens but what is felt to happen. It goes something like this: Speculative money is flighty money. The primary drivers of BC’s economy are resource and construction. If speculators feel, strong emphasis on “FEELâ€, that one or both of these factors could take a serious hit, off to the exits they go. It’s my view that the spark of a market decline from a pro-longed bull uptrend is not caused by anything substantial, but rather emotional perception. As the real estate market is an illiquid market, the dumping effect may take hold depending on how motivated speculators are to exit. The dumping effect tends to skew housing prices and cause the “crash†phenomena.
December 21st, 2006 at 2:29 pm
Freako said… "True, but also don't forget that the median income is not in the market for the median SFH (which this survey refers to)."I've been trying to grasp the implications of this. Does it mean lots of froth at the low end and lack of oxygen at the high end?I mean if prices drop more and more people on the low end are able to afford. In this case you are adding new people to the mix. For the high end people will slide from one affordability level to the next. Will it all just slide up the scale as new people are added adding people evenly all the way along the affordability curve? Will this keep the market sticky on the way down? Or as things start to slip people take a wait and see attitude and seriously downgrade what they are willing to pay in absense of appreciation?
December 21st, 2006 at 1:41 pm
Anon 12:04,I know…but clearly Anon 9:52 didn't get that (unless he was being sarcastic)
December 21st, 2006 at 12:04 pm
exactly. the 70% figure is incomes vs current prices, not incomes vs prices years ago, when most people bought. Whether or not you've heard anyone say they couldn't afford to buy their house today, that is precisely what the 70% figure demonstrates.
December 21st, 2006 at 11:49 am
Anonymous said… The 70.1% simply means the income gap between home owners and non homeowners is most marked in Vancouver. Wrong!How often have you heard a discussion between a homeowner and a renter where the homeowner says "yeah, we couldn't afford to buy our place today"?Personally, I've heard this several times.
December 21st, 2006 at 11:17 am
the income gap between home owners and non homeowners is most marked in Vancouver.very true, and if a home owner buys another home what does he do with the one he's got? Sell it to another homeowner? Rent it out for 1/3 its supposed market value?Eventually someone gets left holding the bag.
December 21st, 2006 at 10:12 am
The Albertan economy will be fine, but BC economy will be shot. Energy is a global commodity, while lumber is pretty much a North American only commodity, and pretty much confined to residential construction. As soon as US builders empty their pipeline of construction, lumber industry is dead in the water.
December 21st, 2006 at 9:52 am
The 70.1% simply means the income gap between home owners and non homeowners is most marked in Vancouver.
December 21st, 2006 at 8:24 am
there may be a dip in oil, but its never going below $50/barrel, and is still a great medium-long term investment in my opinion.I'm guessing you were referring to Calgary, and I suspect you're right about oil prices. But Calgary RE may correct anyway when home builders catch up to demand. (They're not running out of land). Also, I wonder if demand will shrink? First, if there's a recession south of the border (world's biggest oil consumer), will all the oil sands projects go ahead as scheduled? Second, aren't some of the construction/manufacturing jobs being shifted to China because of high Alberta labour costs? So increasing supply / decreased demand –> lower prices.
December 21st, 2006 at 8:20 am
I'm not bullish on BC's lumber industry, but its been crap for a long time.I think it might have been crap for a while, but they were still sending as much lumber as they could south of the border before the softwood lumber agreement kicked in … kind of a race against the clock for reasons I don't recall. I'm guessing that shipments have slowed since the lumber deal kicked in. Also, even if there is no U.S. recession, watch out when Russia starts shipping their non-environmentally-friendly and cheaper lumber to the U.S. These deals are in the works. So I think we'll be losing market share.
December 21st, 2006 at 6:21 am
eats up future demand. "True, but also don't forget that the median income is not in the market for the median SFH (which this survey refers to). I don't think that has been the case in Vancouver proper for a very long time. Vancouver is definitely densifying, as one would expect a metro area crossing the 2 million mark to do."• Vancouver 70.1%• Toronto 43.8%Nice gap, man what I would give to hear a local usual suspect explain it."And the gap will likely remain a gap. However, how much upside is there?
December 21st, 2006 at 1:01 am
How's the petroleum industry employment in Vancouver?Excellent. We have many gas stations.
December 20th, 2006 at 11:20 pm
70% affordability obviously means that people simply aren't buying in the normal ways, unless they are making lateral moves in-market.Rather it's crazy speculation or borrow-from-mom-and-dad stuff which eats up future demand. I don't see any downside for metals, and there may be a dip in oil, but its never going below $50/barrel, and is still a great medium-long term investment in my opinion.No downside for metals? How is copper doing? Where do they mine that stuff?Yes, there will always be demand for oil. How's the petroleum industry employment in Vancouver?
December 20th, 2006 at 8:53 pm
I was basing the resource sectors being hit on slowing imports by the US due to their economic slow down which is already happening.External forces dampening Canadian economy in 2007: TD Economics
December 20th, 2006 at 8:14 pm
• Vancouver 70.1%• Toronto 43.8%Nice gap, man what I would give to hear a local usual suspect explain it.
December 20th, 2006 at 7:54 pm
The usual suspects will tell you the affordability limits do not apply to Vancouver. Because we are a world class city and local incomes don't matter.Sure, I believe the jet set are buying knock down crack houses in East Van for 700k.Tick Tock, Tick Tock
December 20th, 2006 at 7:13 pm
Among other things in that article, it listed the required home income for purchasing something in Vancouver, calculated at 25% down (who has that?). It was $120k or somesuch nonsense.Why do you say resource based economies will be hit hard? I'm not bullish on BC's lumber industry, but its been crap for a long time. I don't see any downside for metals, and there may be a dip in oil, but its never going below $50/barrel, and is still a great medium-long term investment in my opinion.
December 20th, 2006 at 6:49 pm
"Myself, I wouldn't want to be in a house that took 70% of my pre-tax income. "Obviously this number shouldn't be taken literally. People don't buy homes that eat up 70% of the pre-tax income, because that would leave negative 10% to for food, beers and all that other good stuff.Still, it truly has to put upside limits to the appreciation potential of SFH.
December 20th, 2006 at 6:48 pm
Christ, we still have 30% more to go!I knew I called this one too early…
December 20th, 2006 at 6:37 pm
Resource based economies will be hit the hardest. It will be dependent on the recovery in the US. If it happens, like they say, then 6 months won't make too much of an impact.If it draws out longer, there will probably be some hardship.If that's the case then I would imagine housing in those areas will probably correct. Even if there is no economic hardship you still would think Vancouver and other areas that have such high affordability issues would correct regardless.Myself, I wouldn't want to be in a house that took 70% of my pre-tax income.