New Price-to-Income Estimates

By now, everyone is probably familiar with the annual Demographia Housing Affordability Survey. In last year’s report, Vancouver — with a house price to income ratio of 10.6 — had the second worst affordability behind only Hong Kong.

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But the numbers they used to arrive at that multiple are now a year old. How has the picture changed since then, and what is the current ratio? The median house price then was $704,800 and the median household income was $66,400.

According to the latest REBGV numbers, house prices in Greater Vancouver have increase 20.1% in the last year. And BC Stats reports that average earnings are up 3.8%.

Applying those increases to last year’s Demographia data, we can estimate that the new median house price is about $846,500, and median household income is now around $68,900.

If these numbers are accurate, then the median multiple for Vancouver is now 12.3 — higher than any US market at the peak of their bubble.

Demographia2007Chart

This is the new North American record for poor affordability. Congratulations Vancouver.

How Much More Proof Do We Need?

Last May I discovered that real estate prices in Metro Vancouver were now being driven by high-end home sales. The only logical conclusion seemed to be that foreign buying was now the primary driver of the Vancouver real estate bubble.

We now have hard data that proves the high-end is being bought by Mainland Chinese money.

In a recent six-month period about 70 per cent of all detached homes sold on Vancouver’s west side were purchased by Mainland China buyers, an academic case study shows.

Even more stunning, the study shows that of all self-declared occupations among owners — on homes worth an average $3.05 million — 36 per cent were housewives or students with little income.

How much more proof do we need before our politicians address the biggest issue in the decline of Vancouver?

Coincidence or Causation?

The latest RBC Housing Trends and Affordability report was released a few days ago. In it, they added a new graphic showing bungalow affordability for Vancouver, Toronto and Canada excluding Toronto and Vancouver.

As most of us know, foreign buyers have been most active in Vancouver and Toronto. As far as I can tell, there is very little foreign buying going on in other Canadian cities. Here is that graphic with a few notations added.

Canada Affordability

For the last few decades, Canadian housing markets have mostly moved in tandem. But over the last several years, there has been a clear break between the two markets where foreign buyers have been active and the rest of the country. Is it just a coincidence, or is foreign buying now driving the Vancouver and Toronto markets?

Free Market?

The most common argument I’ve heard against recent suggestions that we should tax real estate speculators and/or limit foreign buying goes something like this, “We shouldn’t make any changes to existing policy because that would be interfering with the free market.”

This argument is completely disingenuous. Very little about the current situation is the result of a free market.

Continue reading here.

Correctus Interruptus

A funny thing happened on the way to real estate sanity in Vancouver. Interest rates went up.

Canadian 10 Year Bond 1 Year Chart

Canadian 10 Year Bond 6 Month Chart

In the US, rising rates had the effect of cooling the market. Not so in real estate crazy Vancouver. It caused people to jump into the market before their rate-hold expired. After all, who cares if you overpay by hundreds of thousands? As long as you can save $150/month on your mortgage payment!

As a result of this latest round of buying activity, prices are once again increasing.

Vancouver House Price Index

Vancouver House Price Index

At some point in the future, housing prices in Vancouver will have to revert to fundamental value – that is a certainty. The current state of the market is simply unsustainable.

Vancouver Housing Affordability

Vancouver Housing Affordability

Canadian Price To Rent Ratios

Canadian Price To Rent Ratios

As is obvious from these charts, Vancouver housing prices have been ridiculously overvalued for at least six years. Over the past year, rising inventories, falling sales, tighter mortgage lending requirements and rising interest rates appeared to be the perfect conditions to finally cause the market to correct.

Unfortunately, the rise in rates seems to have put an end to the correction – at least for now. What happens in the short term is anyone’s guess. Is this the last gasp of air before the market goes under? Probably. Or is it the start of yet another few years of delaying the inevitable? Possibly. Either way, it doesn’t make sense to continue posting at this time.

When the market correction resumes, I might resume posting (if I’m still here). There’s a really nice city in the US that the wife and I are going to be visiting soon…