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Sep 27, 07
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Vancouver's big squeeze: Unreal estate
Just published today in the National Post…
Vancouver's big squeeze: Unreal estate Brian Hutchinson National Post Thursday, September 27, 2007 VANCOUVER - Rami Nader isn't asking for the moon. He'd simply like to purchase a modest house. Nothing fancy. Two storeys, 2,500 to 3,000 square feet, on a normal-sized lot, in a nice, middle-class neighbourhood. Mr. Nader, 32, and his pregnant wife Andrea, 30, are partial to North Vancouver, where they both work. It's where they are now looking for a townhouse. Not to purchase, but to rent. After months of hunting for a home of their own, they now realize they can't afford it. "We've essentially given up," says Mr. Nader, a psychologist in private practice. "It's very frustrating. We don't consider ourselves to be poor." They aren't; the Naders are debt free, and enjoy a healthy lifestyle in a city that boasts a strong economy, low unemployment, and one of the world's highest living standards. Their household income is well above the median in Vancouver, which was $56,200 in 2004, according to Statistics Canada. But one can't blame the Naders for feeling trapped. The problem -- the condundrum -- is that even with their relatively high household income and disciplined financial planning, the purchase of a house is well beyond their reach. The average price for a standard, two-storey house in metro Vancouver is now $726,000. A couple such as the Naders must earn about $150,000 a year combined -- almost three times the local median -- before a lending institution would even talk to them about a mortgage for an average house. That's assuming the Naders could first produce a 25% down payment of $181,500, a staggering amount for most. And even if they met those onerous conditions, they likely still would not qualify for a regular 25-year mortgage at a five-year fixed rate. Lenders are supposed to stick to the rule that no more than 32% of a borrower's gross annual income can go towards mortgage expenses. Mr. Nader says he has friends who spend more than that; bankers claim that's not possible. What is clear is that Vancouver is suffering from an unprecedented affordability gap. It led Forbes magazine to declare last month that real estate here is the second most over-priced in North America, after Los Angeles, and the sixth most overpriced on the planet. Forbes used a complicated "price-to-earnings" formula to make that determination. Canadian banks use simpler calculations to demonstrate the same thing. A recent flurry of analyses and reports show that rising house prices in this city are completely out of whack with local earning power, and are unsustainable. In its latest "housing affordability" report, issued this month, the Royal Bank of Canada found that ownership costs on a $590,000 home (the average price of a detached bungalow in Vancouver in the second quarter of 2007) would consume 70.7% of a "typical household's pre-tax income." The "affordability measure" on an averaged priced two-storey Vancouver house is even higher, at 73.3%. Median incomes lower than the Canadian average, house prices the highest: Something does not add up. "These are unchartered waters," admits RBC's assistant chief economist, DerekHolt. "Vancouver is definitely unique." It's not just average income owners who have been squeezed out of the Vancouver housing market. It's higher income earners, as well. Yet new home construction and the sale of existing housing stock is still exceptionally strong, and is expected to remain that way. "Supply is barely keeping up with demand," says Cameron Muir, chief economist with the British Columbia Real Estate Association, and a former economist with Canada Mortgage and Housing Corporation. "Somebody is still buying." But if it's not above average earners such as the Naders, then who? And how? Housing market analysts point out that financing is easier to obtain than ever, thanks in part to new, flexible lending instruments. There are long-term amortizations, low down payment offers, and even sub-prime mortgages, which have been blamed for the U.S. housing crash. But lending practices are still more conservative than in the United States and aren't likely to trigger a market collapse. On their own, they don't account for sales growth and skyrocketing prices. It has long been thought that Vancouver's jaw-dropping house prices are pushed ever higher by foreign buyers, who consider local real estate a bargain compared to cities such as Hong Kong, Shanghai, New York, and London. According to Kevin Lutz, an RBC mortgage specialist, foreigners have less impact on demand and prices than many believe. Americans and Europeans, he says, comprise "a niche market" focused primarily on high-end luxury condominiums in the downtown area, which they may consider merely as recreational properties. "Wealthy foreign house buyers come from two primary areas," explains Mr. Lutz. "One is China. The other is Iran." They prefer to pay for real estate with cash. They often move their family members to Vancouver and then return home, where they continue to work. There is another popular theory, that rising house prices are partly fuelled by crime. Real estate agents tend to dismiss such talk but business analysts say there may be something to it, noting that B.C.'s illegal marijuana industry is worth $4-billion to $7-billion a year. B.C. pot is grown indoors, often in large houses that serve exclusively as "grow ops." Methamphetamine labs are commonly found in suburban dwellings, as well. Drug dealers can pay in full with cash. In the event they can't, they sometimes turn to accommodating mortgage brokers to arrange bank loans. Last year, a Vancouver-area broker named Dahn Van Nguyen was sentenced to a year in prison after pleading guilty to six counts of fraud. Over an 18-month period, he wrote 900 phony mortgages worth more than $2-million. According to the RCMP, 10% of the mortgages he arranged were used to purchase houses later "confirmed as grow ops." The biggest factor behind Vancouver's seemingly illogical real estate market is the baby boomer population. It is large, and affluent. Boomers are using equity in houses they purchased decades ago to buy second homes, to invest in condominiums that they then rent out, and to help their children make down payments on their own "starter" homes. In Vancouver, that's also code for "condo." Mr. Nader went condo shopping three years ago, before he married. Even then, he thought prices too high. They have since jumped almost 50%. "I should have bought one when I had the chance," he admits. "At least I could have sold it later, and used the profit to help buy our house." The affordable dream house. The one he and his wife deserve, but can no longer even contemplate, as it does not exist. bhutchinsonatnationalpost.com |
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Sep 28, 07
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$56,200 combined household income will get you a maximum mortgage of $183,000. You can't buy in the lower mainland for that, let alone North Van.
I think if you're hating on this, you missed the point of the story, the discreprancy between the median income and house prices. Buying is not a situation where they're forced to settle for less, it's an impossibility. The average person that works cannot afford to buy a home in the area that they work. This will increasingly become the norm as more and more inheritence begets itself. If you recieve property, you propser. If you start with nothing, you turn to desperate measures. Too many people. To go on a tangent, you could probably correlate real estate prices in an area with the saturation of alternative money schemes (Growops, Gambling, Theft, Scams..). Is this good or bad, who knows? But it's interesting. |
