A study released by UBS bank compares the cost of living in different cities based on the average number of minutes required to work to afford a BigMac at local market prices. At the very top of the results is Tokyo, where average wages mean 10 minutes of work equals one Big Mac. Unfortunately it doesn’t look like they included Vancouver in the study (come on guys! we’re world class!), but in Toronto the average wage means 14 minutes of work to buy the burger.
Tokyo scored at the top of the survey, which aims to eliminate variables such as exchange rates, even though it is one of the most expensive cities in the world, UBS said in the Prices and Earnings report released Wednesday.
â€œWages only become meaningful in relation to prices â€” that is, what can be bought with the money earned,â€ it said.
The bank calculated the â€œweighted net hourly wage in 14 professionsâ€ and divided it into the local price of â€œa globally available product,â€ for which it chose McDonald’s flagship hamburger.
It seems very strange to me that even though they have the highest purchasing power, a graph of Tokyo land prices over the last 20 years looks like this:
What happened there? Maybe there is no fundamental link between real-estate prices and local market earning power. Another example: the price of an average house in Vancouver will get you two average houses in Toronto, but the average income in Toronto is higher than Vancouver. For 2004 statcan says average family income in Toronto was 60,100 while in Vancouver it was 56,200.
Obviously income is not the only factor in local market value, but how much are we betting that future demand will hold if local economic factors don’t change dramatically?
Builders are building cheaper condos, apartments and townhomes because that’s what the market is demanding. Solid well-built homes are no longer fashionable as buyers now desire homes made out of cardboard and duct tape. New material technology makes the leaky condo crisis a thing of the past as new homes can simply be wrung out by hand if they become too moist.
“Canada’s construction boom continued in July, but Canada Mortgage and Housing Corp. says it is seeing a swing away from single-family units towards cheaper condominiums, townhouses and apartments.”
Is that evidence of increased demand for this kind of dwelling or are the limits of affordability being reached? Ah! Here it we are, its a ‘growing interest in less expensive dwellings’:
“Strong multiple starts reflect a growing interest in relatively less expensive dwellings,” said Bob Dugan, chief economist at CMHC’s market analysis centre.
Single-family homes have been trending down for several months, reaching their lowest level of the year in July. It is a trend that Dugan expects will continue for the remainder of the year.
“Rising prices and slightly higher mortgage rates are expected to soften the demand for new homes in the second half of 2006,â€ he said.”
article on CBC
I think there is a tendancy among people looking to buy in a booming real estate market to think that people who bought several years ago have it easy. If you are out house-hunting, looking at the way prices have risen dramatically over the last couple of years, you probably have a couple of worries: What if I don’t buy and prices keep going up until I can’t afford to buy anything? Or the flip side: What if I buy and prices drop wiping out my downpayment or interest rates go up and I can’t afford my mortgage?
These are all valid concerns, but what about current owners? Owning real estate in vancouver is not the panacea that some might think, and some of the same concerns affect the comfort and security of people who bought years ago. If you own and prices are high your money is only paper-wealth. Until you sell and actually capture that money it merely means that your property taxes are higher. I suppose it also means that you can take out multiple mortgages based on the paper value of your property, but that’s just more debt, not more money.
So what do you do as an owner after seeing prices rise like they have? If you sell and grab the cash what do you do with it? Buying another home in Vancouver just means you’re buying at current values, which doesn’t add anything to your bottom line. With the high Canadian dollar and market starting to falter in the US it might be a good time to think about investing there, but do you really want to move? Do you rent and wait to see if prices drop or level off?
Either way it’s a gamble. Bubbly real estate markets can be emotional rollercoaster for owners as well as sellers and buyers. What does the future hold? We’ll just have to wait and see.
Gee whiz! Newsweek just can’t stop stomping all over the US market. Here’s another article filled with gloom and doom about the real estate market there, seems like they’re printing one or two a day now:
..those who banked on rates remaining near the 4.6 percent lows of 2003, are getting some unpleasant shocks when their mortgage bills arrive in the mail. As their payments rise, many are struggling to keep up. Foreclosures and delinquency rates are rising. And with the markets cooling in many regionsâ€”existing home sales across the country have slipped for three months straight and new home sales nationwide have declining as wellâ€”there are growing fears of a looming crisis.
Aren’t you glad it can’t happen here? At least we don’t have the ridiculous volume of ‘creative’ mortgages. I do wonder though – is what’s happening south of the border going to have a tightening effect on the availability of credit here?
There’s an interesting Newsweek article on MSNBC.com about the growing debt problem in the USA. In 1952 the average debt to income ratio was under 40%. Now its 126%. In BC we spend an average of $1.07 for every dollar earned.
So is this really a problem?
I don’t know because I have discovered the power of ignorance. Though I am occasionally bothered by doubts, I am embracing my inner ignoramus and plowing head-first into the future. What’s my secret? I have fashioned a sturdy hat out of these shoe boxes.
I highly recommend it.