Tag Archives: math

Can someone please explain this market?

The following was posted by ‘Whistler or bust?‘ in the comments this weekend:

I will be the first to admit I have been very wrong about the direction of Van RE in the past 2-3 years. That disclaimer said, lets examine some facts to see if there is any upside left:

These are the incomes required to be in each % (Source CBC)

10% of income earners $80,400*
1% of income earners $191,100*
0.1% of income earners $685,000**
0.01% of income earners $2.57 million*

So with the average Vancouver detached home at $1,408,722 (Source Yatter Matters)

A DP of $281,744 is required to buy
PPT is $26,174
Misc Closing $2,000
Total $309,918

Mortgage $1,126,978 @ 2.59 for 5 yrs = $66,072 Annually ( I will note these are record low rates)
Assume 1% Annual Maintenance (This is a standard benchmark over many years) $14,080
Property Taxes – These can vary but lets assume $7,000?

So Annual carrying costs total $87,152 AFTER TAX – I am excluding heating and hydro which vary but in no cases less than $3,000 annually for a detached home

Back to our chart above – Lets assume a 30% avg tax rate for the 10%, 35% for the 1% and 45% for the 0.1 and 0.01%.
After Tax
10% of income earners $56,200* – This house would take up 155% of the after-tax income
1% of income earners $124,215* – This house would take up 70% of after-tax income
0.1% of income earners $376,750* – This house would take up 23% of after tax income
0.01% of income earners $1.413 mil – This house would take up 6% of after- tax income

This is assuming all of these people have $310K for closing. This is assuming they are buying the average house of $1.4 mil. I think we all know what kind of house $1.4 mil gets on the West Side and even on the East side nowadays.

So the conclusion – Even the 1%ers are realistically priced out of the average Van detached home. Only the 0.1% and and above can really afford to buy.

Put another way – 99% of people are priced out. As families combined lets assume 95% are priced out.

So to all you bulls out there, please answer the questions: Is this a healthy market? Is this a market with any upside left?

I think we all know the answer.

Vancouver Housing Myths

Crabman pointed out this article in BIV: Conference torpedoes Vancouver housing myths

Metro Vancouver housing is affordable. The market is stable. There is no glut of new condominiums looming. And foreign investors are not driving sales and prices higher.

I believe those are not the myths being exploded, but meant to be statements of fact at the beginning of the article. As for the ‘affordability’ issue, the cities top condo salesman says simply omit SFH and disregard the top 20% of the market and things don’t look so bad.

Rennie said media and pundits concentrate on the average price of single-family detached houses in the City of Vancouver, which consistently average in the million- dollar range, with condominiums north of $440,000. But, he said, such higher-end sales represent only 20% of the overall market.

For the remaining 80% of buyers, the average detached house is around $670,000 and the average condominium is $316,000, Rennie said.

But there seems to be some question about how that math works out. Crabman claims to have done the math and come up with a different result:

There are also 383 houses listed over $670k in East Van. When I removed the most expensive 20% of listings, the median price of the bottom 80% was $1,088,000.

And on the west side, the median price for the “cheaper” 80% of listings was $2,888,888.

But even if Crabman is mistaken and Rennie has the math correct, there’s this:

Of course, once you also exclude the top 20% of incomes, $670,000 is anything but affordable.

 

 

How much lost on a 2009 condo purchase?

Previously we highlighted b5baxters comment on the 19 months that have elapsed since Vancouver home prices have peaked (according to the REBGV home price index)

Of course there are a lot of variables in the housing market, so lets look just at condos, which Crabman has ever so helpfully run the numbers on:

I calculated the bottom line if someone bought a benchmark condo 4 years ago with a 10% DP and a 4% 30-yr mortgage. I took into account all carrying costs, rent savings and principal pay down. I also assumed rent, prop tax and condo fees increased 4%/year.

Oct 2009:
Benchmark price: $380,975
Mortgage balance: $342,878
Equity: $38,098 (10%)
Est. Rent: $1,100
Mortgage: $1,637
Condo Fees: $200
Prop tax: $89
Monthly loss: $826 (extra costs of owning vs. renting)

Oct 2013:
Benchmark price: $365,600
Mortgage balance: $317,253
Equity: $48,347 (13.2%)
Est. Rent: $1,287
Mortgage: $1,637
Condo Fees: $234
Prop tax: $104
Monthly loss: $688

Over those 4 years, equity only increased $10,249. But the extra monthly costs of ownership over that same period were $45,498, so the owner would have saved $35,249 by renting.

So it looks like the current ‘ownership premium’ for someone who bought a Vancouver condo in 2009 is just over $35k.  Anybody see any problems with those numbers?

Canada house price crash a certainty

Happy day after the new mortgage rules come into effect!

Even before these rules were announced we saw a ‘softening’ in the Vancouver real estate market.

Prices have drifted down as of late and sales are at an all-time-low and inventory keeps growing.

..Yet there are still those that believe ‘it’s different here’.

We saw housing bubbles grow all around the world and pop one by one, but we went through the same steps of pumping up cheap credit to build the house of cards higher.

Check out this post on Alphahunt about Why a Crash in Canadian House Prices is Certain.

What’s amplified our current RE cycle is that credit was steadily made cheaper & easier throughout the boom period – and especially when the RE market suffered in 2008. After finally waking up and seeing the monster they helped create, the Gov’t is making lending rules stricter. Lending practices should not have been made so loose to begin with. And their meddling in 2008 only delayed the inevitable bust.

Today, we’re still at extreme unaffordability and there is no such thing as a ‘soft landing’ or ‘small correction’ for Vancouver RE. Any asset that has seen a price rise of at least two standard deviations above long-term valuation ratios has always mean reverted. If the Vancouver RE market did not return to the normal multiple of income and rent, it will be the first time in history. You can’t binge drink and avoid the hangover. Timing the start of the hangover is always challenging, but what we know with high probability is that there will be a hangover.