So lately I’ve been reading a fair bit about the real estate market. As a kid, I was brought up to believe that when you grow up, you buy a house – after all, it makes more sense for the money you spend on housing to go into an asset you will own, as opposed to going into someone else’s pocket, right? I was also brought up to believe that education was very important and so I spent the first eleven years of my adult life pursuing that1. And the idea of buying real estate never even entered into the realm of possibility in those years, as I barely had enough combining jobs, scholarships, bursaries, and student loans to get by, let alone even think about investing in anything. And since I graduated, my financial focus has mainly been on repaying my crushing student loan debt and trying to build some semblance of an RRSP/pension – and, in the last two years, putting money into my Tax-Free Savings Account. And though I’ve been pretty good at finding cheap rent, it’s always in the back of my mind that “you are putting money in someone else’s pocket!” Hence, the thinking about, and reading about, the real estate market.
I mean, I knew that the prices of homes in Vancouver are absolutely nuts, but when I started to read more about it, I was surprised to learn how truly, ridiculously, extremely nuts they are. A general rule for “affordable housing” is that your housing costs (including taxes and insurance) shouldn’t be more than 30% of your gross income. For example, if you make $50,000 per year, you shouldn’t spent more than $15,000 on your mortgage, property taxes, and insurance. Another way of looking at it is that, to be affordable, houses shouldn’t cost more than three times your annual salary2. Again, if you made $50K per year, your house shouldn’t cost more than $150K. And the thought of a $150K home anywhere near the Vancouver Lower Mainland is laughable. Even our shoebox-sized condos cost double that! Personally, I make more than $50K, especially when I have teaching gigs and contract work on top of my annual salary, and there’s no way I could find a home in this area that costs less than three times my annual income (and that’s not even counting my $1000/month student loans payments thrown into the mix).
And it’s not just me. Over on the Vancouver Real Estate Anecdote Archive blog (which I’ve been following for a little while), they posted a couple of graphs that illustrate the insanity of the market. This one illustrates exactly what I’m talking about:
Dashed lines = salaries (in % increase) and solid lines = home prices (also in % increase). It doesn’t take a statistician to see that home prices have shot up dramatically compared to income. According to Stats Canada, the median family income in Vancouver in 20073 was $66,330. That’s *family* income, not individual salaries. And according to the Real Estate Board of Greater Vancouver, the “benchmark” price for a property4 in Greater Vancouver is ~$577,000. The benchmark price for a detached home is just less than $800,000, and the benchmark price for an apartment is ~$386,000. So we are talking about nearly 9 times the median annual salary to buy a “typical” home, and 12 times to buy a typical detached house. Even to buy just an apartment, it’s almost 6 times the annual median salary – twice as much as an “affordable” home should cost. Ouch.
And it’s this crazy house price-to-salary ratio that have people talking about a housing bubble, poised to burst. The Canadian Centre for Policy Alternatives recently issued a report that Canada is in the middle of a housing bubble. Then the C.D. Howe Institute issued a report that says the opposite5. Though I’m not an economist by any stretch, I just look at these numbers and wonder how on earth people are buying houses? Of course, low interest rates on mortgages (using very low down payments) have allowed people to do it, and lots of people are saying that it is rich foreign investors and/or drug dealers6 who are buying up the over-priced real estate. But seriously, why would rich foreign investors continue to buy – and drive up the price of – Vancouver real estate when real estate in the US is so cheap? And once mortgage rates go up, won’t those people who could only afford their mortgages because the interest rates were rock bottom be in trouble? And if those same people put down only 5-10% as a down payment, and then prices drop by more than that (as is being predicted by some), won’t they owe more on the house than they could get even if they sold it?
As I have no interest in buying something that I can’t afford, especially given that the value of the “asset” in question could drop considerably (after all, it’s not putting money in your own pocket if the price of your house drops well below how much you owe on the mortgage), my plan is to continue to wait this thing out. I still have a fair way to go until my stupid student loans are paid off anyway, so I’ll just continue on my path of paying those down, balanced with putting some money aside in savings7 and emergency savings8. Of course, if my dad would just win the lottery like he keeps telling me he is going to, all of this wouldn’t matter!
- perhaps I took my mom’s saying of “more education is never a bad thing” a little too literally? [↩]
- I know I’ve heard this somewhere, but can’t seem to find a reliable source to link to on it. If someone out there has a good link – or if you think I’m totally mis-remembering it, hit me in the comments section! [↩]
- the most recent number I came across [↩]
- where “benchmark” = a typical property in the region [↩]
- I would have linked to the C.D. Howe report directly, but their website is down right now, so I’ve not been able to read the report myself, only the news reports about the report [↩]
- the latter who, presumably, aren’t reporting their actual incomes, thus making the estimates of income lower than they should be [↩]
- granted, it’s not like I’m making scads of money in my RRSPs and TFSAs, given how much the market sucks, but I’m doing OK, considering [↩]
- ‘cuz you never know when you might need it! [↩]