Is Vancouver ‘Severely Unaffordable’?

I just found this story in the sun from way back in January – It’s about a study that ranked cities housing affordability based on the ratio between median house prices and median income, and guess what – Vancouver was rated worst in Canada, and 15th worst city in the world for affordability at that time.

This is the second year for the survey, which was developed to compare housing affordability around the world, the report’s co-author Hugh Pavletich said in a telephone interview from New Zealand.

“We felt there was a desperate need for an easily understood measure of housing affordability both within countries and across borders,” Pavletich said. “So it doesn’t matter what currencies we’re talking about, or even the house prices and the household incomes. The key thing is the multiple of household income it takes to buy a home.”

This multiple should not be greater than three, Pavletich said. He called Vancouver’s index of 6.6 “bloody absurd.”

“Historically back in the 1970s and 1980s within the property industry, it was always considered a rough rule of thumb that people should not have to spend any more than three times their household income to buy their homes,” he said.

Now as house prices get “out of hand,” this guideline has faded from public view, Pavletich said.

See? Things are different now! And since things are different that means the prices will never go down. Maybe ‘bloody absurd’ is the new reality?

In unaffordable cities, the key problem was the “strangulation of land supply” by local government, Pavletich said. Not allowing enough land to be developed was creating an artificial scarcity which is driving prices up, he said.

Three cities in Canada made the most affordable list with Winnipeg in third place worldwide with a house price to income ratio of 2.4, followed by Edmonton and Quebec City, tied at 14th with an index of 2.8.

The United States, with the world’s most unaffordable real estate, also had the most affordable, with indices of 2.2 in both Buffalo and Rochester, N.Y.

Pavletich hopes the survey will get people to question housing affordability and urge governments to actually set housing affordability targets.

Hmm.. I wonder how much of a role government can play in prices. Obviously things like interest rates and employment factors have some impact on prices, but is the current boom due to ‘not enough land’ to build on? If they opened up the land just northeast of terminal and main would that make a difference? Should they open up Stanley Park, Jericho beach park and the UBC endowment lands to condo developments?

Buy or Rent?

Are you paying someone elses mortgage? Probably not if you’re renting in a building thats just a few years old. The gap between rental costs and owning cost have grown rather severely over the last few years, a fact that makes some people wonder whether buying makes financial sense. This point is debated in an article in todays business edge.

“Today there’s more pressure to make your best offer first, and you don’t get the chance to come back with a counter-offer, usually,” Mastracci says.

“The danger is always that the market gets away on you. If it gets away and prices rise dramatically, as they have in certain locales across Canada, it really hurts when you go and plunk your money down on the table for your first purchase.”

According to a recent housing affordability report by RBC Economics, home prices continued rising faster than incomes during the second quarter. B.C. remained the least affordable province, but Alberta’s energy boom sent the cost of a two-storey home jumping $28,000 in just three months.

However, even in a torrid market “you shouldn’t think this is really going to be the end-all and be-all, your best investment,” Mastracci cautions. “It may not be – especially if you buy at a high time.”

Over 20 to 30 years most homeowners might get an annualized return of four to six per cent, he estimates.

So if you buy now and hold for 20 or 30 years you might make six percent per year. What if you had bought in 1980 or 1991? What if you buy in 2011?

What if a condo rents for $1500 per month vs. a monthly mortgage payment of $3000. What if you were incredibly disciplined and you put the $1500 monthly difference into a savings account or GICs?

What if the housing fairy came to vancouver and magically turned all homes here into wonderful, solid, trouble-free buildings?

That would be awesome.

Slowing market ‘returning to balance’

According to an article in todays Province CMHC has gotten out the crystal balls and they forsee a ‘return to balance‘ in the next year or so in the Vancouver housing market. Hopefully they’re reading the tea leaves and not smoking them. As prices and interest rates have inched up over the years they believe that the recent slow-down is a sign of things to come:

“In general, we see a trend toward more balanced conditions next year,” said Cameron Muir, senior market analyst for CMHC in Vancouver. “In the last few years, most markets in the province have been in the seller’s favour.

“The erosion of affordability is going to begin to impact the market next year. High home prices and increasing interest rates will make housing less affordable and squeeze out buyers at the margins.

“With fewer first-time buyers able to afford homes, it will ripple through the whole market.

“It’s not a disaster, it’s a return to balance,” Muir added.

Ever seen a see-saw when one person gets off? The unlucky fella left on the other end usually ends up with a bloody nose.

Olympics are expensive

I don’t think that anyone could have predicted this, but apparently it is quite expensive to host the Olympics. Original cost estimates have this way of ballooning over time and suddenly people aren’t so keen on paying for it all.

Today’s tale of olympic price over-runs is in the vancouver sun where we learn that building the Paralympic sledge hocky arena may now be too expensive for Whistler.

The price tag for Whistler to build a bells-and-whistles 2,750-seat arena in the village for Paralympic sledge hockey may force the resort municipality to abandon the project.

It could also result in much of the 2010 Paralympic Winter Games being moved to Vancouver.

Nearly four weeks after telling a council meeting that the cost, now believed to be in the $45-million to $50-million range and the long-term operating costs, were “more than we can comfortably afford,” Mayor Ken Melamed says it may be too late to salvage the project.

“There comes a point in time when we can’t physically build it in time,” Melamed said. “Frankly, we may have crossed it.”

Meanwhile Athens struggles to find a use for Olympic venues built there for the 2004 olympics.

In what critics say is a checklist of how not to do things for future Olympic cities, especially London in 2012, Athens is still struggling to find use for the state-of-the-art venues it paid more than 3.5 billion euros ($4.50 billion) to build.
Promising to showcase modern Greece, the Games went off without a hitch despite years of construction delays, but left a legacy of over-spending and venues in a state of abandon.
The wild water canoe and kayak facility was hailed as the world’s best, as were the rowing centre and the weightlifting arena.
But two years after the Games that cost a record 12 billion euros, most venues remain fully or partly shut as the government desperately seeks private investors, the only viable option to recoup some of the funds pumped in to build and maintain them.
“We cannot keep them as Soviet-style sports venues alone. What would Greece do with the world’s best canoe and kayak facility?” said Christos Hadjiemmanouil, the head of the company managing most Olympic venues.

How much are you paying for a burger?

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.

“Wages only become meaningful in relation to prices — that is, what can be bought with the money earned,” it said.
The bank calculated the “weighted net hourly wage in 14 professions” and divided it into the local price of “a globally available product,” 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?