Real Estate – Ugh
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 that ((perhaps I took my mom’s saying of “more education is never a bad thing” a little too literally?)). 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 salary ((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!)). 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 2007 ((the most recent number I came across)) 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 property ((where “benchmark” = a typical property in the region)) 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 opposite ((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)). 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 dealers ((the latter who, presumably, aren’t reporting their actual incomes, thus making the estimates of income lower than they should be)) 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 savings ((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)) and emergency savings ((‘cuz you never know when you might need it!)). 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!
Image Credits:
- First image: stock.xchng.
- Graph: VREAA
Footnotes:
Comments |117|
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Tags: Canada, finances, money, real estate, real estate bubble, student loans, Vancouver
One thing that I wonder about is how can some people afford two or more residences.
Also, for individuals on income assistance in BC, the most they can bring in per month without being clawed back by the government is, afaict, around $1,400 per month, less if you’re in a relationship. It seems to me that there are an awful lot of people on IA or have lesser income than that and it saddens me that they’ll never have any hope of owning a residence in this province.
Real Estate in most major Canadian cities *is* nuts. The only reasons we could afford to buy (since you’re wondering how anyone does it) are:
1. my husband got into the market before prices went crazy and made enough for a down payment on a 2nd place, and
2. we’re pretty well-paid DINKS (for now) who bought with 20% down and have paid down our mortgage aggressively over the past few years so when we go down to one income next year we won’t owe more than 3x our household income.
From what I saw of the bubble/crash in the 80’s, house prices dropped slightly, then stagnated for nearly a decade while salaries crept up to a place where mortgages were more affordable compared to household income. Thankfully, while they’ve been front and center in the news lately, the 5% down, 35/40-year mortgages are a vast minority in the number of mortgages held in Canada right now, so while some people certainly might find themselves underwater and/or unable to make payments, I don’t think they will be enough to bring down the market in a way we saw in the US.
Also, to Chris’ point – I don’t believe everyone, or even most people, should be able to own a house. It’s a very recent phenomenon that we believe everyone should own their own home. It certainly makes sense for a certain demographic, but not for everyone.
@Jen – This raises the question of what that “certain demographic” is that “should” get to own their own home? I’m well-educated, have a good job, am responsible with my money – but because I happened to be born into a family that wasn’t well-off and had to go into quite a bit of student debt to pursue my education, well, too bad, no house for me?
@Chris – At the level of income assistance in BC (or even those working minimum wage jobs), people can’t afford rent and food (see the Cost of Eating in BC report at http://www.dietitians.ca/resources/resourcesearch.asp?fn=view&contentid=1944), never mind *owning* a home.
I’m with you on the “Ugh”.
The graphs of salary and housing increases show the craziness of the changes in pricing. But do they show craziness of the actual prices? Maybe they just show that “things are different now” (that the current young generations lost in the birth year lottery), and that you can’t use the (old?) general rule of affordable housing?
The way I see it, the important calculation goes like this:
Every month we pay about $1000 in rent. If we bought a similar apartment, would we pay more or less “into somebody’s pocket” (bank fees and interests, taxes, repairs and maintenance, MINUS appreciation of the property) for the privilege of having our names on the deed?
So, Jan, would you pay more or less than $1000? My rent is $675 including utilities, so I’m pretty sure I couldn’t get a mortgage, taxes, repairs, utilities, etc. for less than that!
I hear ya. My husband and I both make decent salaries (especially him), but it’s still incredibly tough. We couldn’t do it at all if we didn’t rent out our basement suite and garage. All this for a very, very basic stucco box built in 1912 in East Van – and not even one of the good parts!
I don’t know what the house-owning demographic now is (especially for those who are still putting 20% down and amortizing at or under 25 years). It seems to be strongly biased toward those with two-income households at this point.
I’d also suggest you practically HAVE a mortgage now, only it’s on your education, rather than a dwelling. Not a good or bad thing, plenty of people choose to take on student loans (I did), especially those whose families can’t help with the burden of current fees for education.
Though knowing what I do now, I’d advocate that anyone who wants to pursue education do it without incurring loans. It’s possible, just maybe not in the timeframe a scholar is used to expecting.
One thing I’m learning (over and over again) in my own financial adventures is that I can have anything I want (within reason – I’m probably not going to have a luxury yacht any time soon), just not all at once.
@Jen – An undergraduate degree might be doable without loans if you spread it out more than four years and were fortunate enough to have a decent paying job, but to get a PhD took 11 years of solid school. I can’t imagine spreading it out any longer than that (and besides, there are time limits on how long you can take before they just kick you out, at least for grad school).
I definitely agree that having a two-income household seems to be almost a requirement to buy a place at this point (unless you make really, really good money). Again, sucks to be me – the single income earner!
@Cath – Isn’t it scary to know that you need the income from the renters to be able to afford your place though? I don’t know off hand what the vacancy rates are now, but I know when I was looking for a place to rent in February, owners (both in Vancouver and in the ‘burbs) were desperate for tenants – they were offering me places without having called any references or anything (whereas I’m used to tenants fighting for places!)
Yep – pretty terrifying! We’ve budgeted so that we’ll manage if we only have a tenant 10 months out of every year, and so far we’ve done much better than that (we’ve had 3 long-term tenants – one friend of my husband’s family, one friend of a friend who’s now a friend in her own right, and now one of my husband’s best friends from high school. So our experience is not exactly typical – we’ve never advertised it on the open market, so I don’t know how much demand there is).
This year’s been tough – my husband’s in the movie industry, and the Olympics hit it really hard for a few months (although he did get a few weeks of work building wheelchair ramps for the Olympic portacabins in Whistler). But things are getting less scary with each paycheque, and (barring injury) he has guaranteed employment through to May of next year. Phew!
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Real Estate – Ugh | Not To Be Trusted With Knives
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