Revisiting Affordability

The discussion around affordability keeps coming up, especially with the recent drop in housing prices and lower interest rates.  Arguments for and against real estate are often rationalized based on affordability from both bulls and bears.  But what exactly does the historic and current data show?

First let’s define affordability.  It is simply the percent of household income taken up by ownership costs.   For this exercise, I followed the methodology used by RBC ( because past information was readily available.  Household income is based on published numbers for Greater Vancouver (median) and mortgage costs are based on a five year fixed rate mortgage amortized over 25 years. You may argue that this is not representative of buyers for whatever reason, but to do so would be to miss the larger point, which is to simply compare where we are now relative to the past.

Second, let’s look at historic data.  I referenced the RBC to obtain affordability percentages (rounded to 5% increments) for various years, as follows (see page 5):

Condo       TH        SFH

1986      20%      25%      35%
1990      40%      50%      70% (Peak)
1992      30%      40%      50%
1995      35%      45%      65% (Peak)
2000      25%      35%      45%
2004      25%      35%      50%
2008      40%      50%      75% (Peak)

To define the norm, I looked to where affordability ranged for most of the time (say 80%) going back to the early 80’s. The historic norms for condominiums, townhomes and single family homes have roughly fallen between 20-30%, 30-40% and 45-55%, respectively.  These ranges ignore the ‘spikes’ of low affordability at peak years (e.g. spring 2008), but also the ‘trough’ of high affordability in the early 80’s.

And finally, where are we now?  Using $60k as the median household GVRD income (used by RBC), the latest MLS GVRD benchmark prices (Mar 2009) and the current five-year fixed rate mortgage (using the ING calculator), I come up with 27% for condominiums, 33% for townhomes and 51% for single family homes.

All of those values fall near the mid-range of historic affordability.

– Dave

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Dave's R/E office is pass Hope. Its beyond Hope.



Inflation in itself should not affect prices since incomes and rents are rising as well.

Inflation will not affect real house prices in the long run if they are based on fundamentals. We saw this in the 70's when real prices were fairly flat over the decade.

But if house prices are detached from fundamentals, and are prevented from free fall only by historically low interest rates, the sudden jump in interest rates brought about by a return of inflation will destroy affordability and push house prices off the cliff, regardless of whether wages keep up with inflation. If wages go up 10% in a year, but interest rates rise from 4% to 12% over the same year, how much house can you then afford? Do the math.


Keeping an Eye on The Pimps: "One possible way out would be massive super hyper hyperinflation to eat away at the massive debt load Vancouverites have accumulated." Like patriotz said, inflating one's way out of this mess is impossible. Inflation in itself should not affect prices since incomes and rents are rising as well. But — and here's the kicker — increased inflation adds uncertainty to the future value of inflation and that results in larger spreads on debt. That is bad for a highly leveraged asset market like real estate, especially in Vancouver as the RBC report indicates. In today's market, with debt loads high and income streams shaky, the last thing the central bank wants to do is inflate. The rising cost of capital would further hamper those trying to wind down leveraged positions. Inflation I am sure… Read more »

read on

Don't the japanese usually just commit suicide? (I'm only half-joking there, by the way)


We passed Japans unemployment rate a few months ago. The Japanese unemployed are running out of EI benefits as long term structural unemployment becomes a reality. Factories which used to lay people off are now closing permanently. The BC economy is shutting down one industry at a time. Tourism-in the tank, Fisheries-in the tank, Forestry-in the tank, Mining -in the tank, Film-getting flushed, Construction -down 60% and declining, Tech-dying a not too slow death, real estate-down 70% and grinding lower. When the EI weeks run out here we'll see a massive increase in the homeless population. ‘Crisis Situation’ Japan’s jobless rate will soar to a record of 5.7 percent by the end of March 2010 after reaching a three-year high of 4.4 percent in February, according to a Bloomberg survey of 11 economists. That’s the highest since 1953 when records… Read more »


Keeping an Eye on The Pimps:

One possible way out would be massive super hyper hyperinflation to eat away at the massive debt load Vancouverites have accumulated.

Got wage inflation? Because that's the only way you eat away at a personal debt load. That's what made the 70's different from today. Workers were able to keep up with inflation.

Oh BTW, inflation means much, much higher interest rates.

No way out of the debt trap except bankruptcy.


Revisions and clarifications regarding the Unemployment numbers are already coming out, only hours after the 'official' numbers were released. Apparently there has been a little fudging again. This AM we were told that 61300 jobs were lost in March. Now it's jumped to 79,500 FULLTIME JOBS lost, but there was an offsetting gain in disqualification, part time jobs and self employment projections. What a mystery, since when is a full time job 'offset' by a 'surge' in the creation of menial part time jobs. From the history of these revisions releases for sure we'll have flown way past the 100,000 mark by tomorrow. 100,000 jobs lost by the way of a per capita comparison with the US is equivalent to 1,000,000 jobs lost in the US. Meaning that Canada is losing jobs faster than the US. AND BTW, when is… Read more »

Keeping an Eye on Th


"falling interest rates have eased affordability, this time round it could be that interest rates will fall further to ease affordability but if this does not pan out, or if interest rates rise, prices are in for an @ss whoppin’."

Yes, in the last 20years interest rates dropped by 1500bsp, at this point no matter how much lower interests are forced down artificially, it can't get the same lift as what 1500bsp.

One possible way out would be massive super hyper hyperinflation to eat away at the massive debt load Vancouverites have accumulated.

Or someway of increasing productivity to the extent that it could support an increase in wages to average household incomes of 120K plus and still maintain low interest rates.

I don't think there is much doubt prices will be crashing.



No kidding eh?

…I will send you to Europe, buy you a car and babysit your multipoo for 2 years if you buy my duplex.

Realtors with clients don't even think about it!

You would think with an ad like this the seller may be open to exploring all potential avenues for sale.


paulb: "Agents if you are serious or curious, please Do Not call. This is a private sale. "

¿Realtors? We don't neeeeed no stinkin' Realtors!


Dave, thanks for posting this. I disagree with some of the analysis but it's interesting to discuss nonetheless.

One major point is that poor levels of affordability in past peaks have been in high interest rate environments. This latest peak has been in a low interest rate environment. In the past, falling interest rates have eased affordability, this time round it could be that interest rates will fall further to ease affordability but if this does not pan out, or if interest rates rise, prices are in for an @ss whoppin'.

Don Lapre


Her other blog entries are just as good…. just a warning; don't eat/drink anything while reading her entries unless you want your comptuter to resember a jackson pollock painting.


Worlds largest development goes dark. Las Vegas mega projects is a bust.

Las Vegas trophy project becomes symbol of trouble

"LAS VEGAS (Reuters) – It was conceived as the centerpiece of a thriving Las Vegas — one of the world's most expensive building projects that would bring back glamour to the Strip and cap an unprecedented three-year economic boom.

Instead the $9 billion development named CityCenter — touted as the city's most ambitious endeavor — has come to symbolize a global retail and leisure slump and the city's struggles to come to grips with crushing unemployment and dwindling casino revenue."


I guess it is very hot out there, desperation, and anything goes.

So, the industry (housing) is saying anything, twisting anything, mumbling anything just to unload anything or something.

Grasping for straws.

Are we in the "anything goes" stage? Then the free fall?


This bimbo has to get the prize for the most outrageous realtard spin . Theres just too many good laughs in the release to list. "Yes, it’s a great time to get into the Kelowna Real Estate Market and I am very positive about what 2009 will bring! The December ’08 Stats for the Central Okanagan have just been released from the Okanagan Mainline Real Estate Board (OMREB). Here’s what they show (December ’08)………….. LISTINGS – We currently have 4,740 active listings in the Central Okanagan, Which means we are only +60% up over December ’07. (Listing inventory is continuing slowly decline….which is positive since our supply was over exceeding demand for many months now causing sales and prices to drop respectively). SALES – Sales are again down by -56% for the month of Dec. ’08 vs. Dec. ’07, and… Read more »


B.C. housing starts down 70 per cent from a year ago, reports CMHC Well-supplied resale market, weaker demand contribute to drop Real bad time to go to Kelowna for a construction job. Must be the reason for all those grow ops, RCMP busted 19 in Kelowna over the past two days alone. Housing starts across British Columbia remained depressed in the first quarter of 2009, falling almost 70 per cent from the same quarter of 2008, Canada Mortgage and Housing Corp. reported Wednesday. While housing starts ticked up slightly in March on a national basis, builders in B.C. started work on 2,517 new homes in the first three months compared with 8,532 in 2008. Locally, the declines in starts ranged from almost 93 per cent in Kelowna, where builders started on 72 new homes compared with 985 in the first… Read more »


Vancouver new house price index falls 200% faster than national average.

Vancouver new house price index declines 2.9%

Financial PostApril 9, 2009 10:02 AM

OTTAWA — Canada’s new house price index dropped again in February, down 0.7 per cent, compared with a decline of 0.6 per cent one month earlier.


hughz: These data, collected primarily from income tax returns submitted to the Canada Revenue Agency (CRA)is based on gross income but when it comes to mortgage approval the bank will also consider facts about hourly wages and your job status whether you are a part time or a full time employee.If you are a full time employee your gross income will be based on 2080 hours per year however,if your orignal gross income is higher than the calculated amount the bank will go back to look at two or three previous year and setup a median income point whether it is progressive or backing up.These process is to increase the mortgage amount only if your borrowing amount is too low the bank will not attempt to go back and fourth.


The real estate boom is bust……everywhere, even wher money was no object. Dubai is a cautionary tale fo everyone, everywhere. Dubai on the down and out: Buddy, can you spare a dirham? booming emirate of Dubai has been getting some bad press lately, to go with its suddenly queasy economy. Real Estate prices are down by half, after growing for five years in a row. The government sold $10 billion in bonds as part of a fund to help struggling state-affiliated companies. The former government minister for finance and industry has been indicted on charges of embezzlement and "harming state interests", and some of its big investments — including a monster $9 billion development in Las Vegas — have been nothing but trouble. To top it all off, Sheikh Mohammed bin Rashid al-Maktoum, who rules Dubai and is Prime Minister… Read more »


The 'good news' of late isn't good news at all. And have you noticed how the propagandists go suddenly quiet when the stats come out and only gett jiggity and bombastic in between reporting periods? BOOM TO BUST TO BLIP? DAVID EBNER AND HEATHER SCOFFIELD 00:00 EDT Thursday, April 09, 2009 VANCOUVER and OTTAWA — The 42-storey Arriva condo tower just south of downtown Calgary was to be the tallest residential building in Alberta, a much-touted development by Torode Realty Advisors. Now, the project is in court protection from creditors, with only about half the units sold and 20 per cent of the tower built. Arriva was a product of Canada's extended 2002-2008 home building boom, powered by Alberta and British Columbia, and now stands as a symbol of the crash that continues to ravage the real estate market in… Read more »


Jackie Treehorn: We must use gross income to describe tax brackets.

Note:If you are self employeed you may not be eligible for mortgage approval,Talk to your bank and find out.

Jackie Treehorn

i should also add you have to realize the median family income also includes retirees that are no longer working, have paid off homes etc… This skews the numbers.

Ultimately though, when you look at the percentages that are published (which are also based on gross income!), it doesn't take a genius to realize how unaffordable and unsustainable prices in this city have become.


US jobs numbers equally dismal and accelerating. Coupled with the data that points out that the bulk of the Alt-A and Option Arm ( highest at risk categories) will begin to reset in 2010 and won't peak until 2012 the whole picture looks bleak going forward. You'd really have to be a dipshit to step in front of this train. The government data released Thursday bolster recent projections from the Federal Reserve and private economists that the nation's job market will remain weak into next year as companies purge thousands more workers. The Labor Department said the tally of initial jobless claims fell to a seasonally adjusted 654,000, down from a revised 674,000 the previous week. Analysts expected claims to drop to 660,000. But the total number of laid-off Americans receiving unemployment rose to 5.84 million, from 5.75 million. That… Read more »

Jackie Treehorn

I notice there is a lot of confustion as to whether to use gross or net income when calculating affortdability.

Just an fyi, when the banks suggest that no more than 32% of your income should go to servicing your housing costs, they're referring to gross income. This is mostly for convenience sake as this percentage is a general guideline.

Now obviously, the actual % of income that goes to servicing housing debt is much higher thanks to the tax man.