Housing is not immune to the laws of supply and demand. When people won’t or can’t buy, prices come down
Harvey Enchin
Sun
When the cost of owning a two-storey detached home in Vancouver consumes 78.2 per cent of pre-tax median income, you know something has to crack.
That’s the figure RBC Financial Group assigned to its housing affordability index for the second quarter published late last month. No other city even came close; Toronto registered 50.1 per cent.
According to RBC’s housing affordability report, the expenses of owning a detached bungalow in Vancouver would absorb 68.2 per cent of median income, a standard townhouse 49.7 per cent and a standard condominium 34.2 per cent.
RBC determined that the qualifying income to buy the average home in Vancouver — that is, the minimum annual income used by lenders to measure the ability of a lender to make mortgage payments — was $124,688. Vancouver’s median income is $54,912.
The average monthly mortgage payment in Vancouver was $2,322 in September, the highest in 12 years. The gross debt service ratio as calculated by the Canadian Institute of Mortgage Brokers and Lenders was 50.5 per cent, up from an average of 37.7 per cent over the period 1997-2002.
Derek Holt, RBC’s assistant chief economist, called Vancouver’s housing market “unsustainable,” echoing a sentiment the TD Bank had expressed three weeks earlier. TD’s deputy chief economist Craig Alexander said then that Vancouver was “vulnerable to significant moderation”
Cameron Muir, senior market analyst for Canada Mortgage and Housing Corp., weighed in with his own prediction: “It would not be a surprise to see house prices fall by a few percentage points a year for a number of years until incomes and affordability grow to pick up demand.”
Recent signs of softening may not be surprising but they are welcome relief for beleaguered buyers waiting for a break. Residential sales volume dropped nearly 25 per cent last month to 2,519 units from 3,344 in September 2005 while the number of listings climbed to 5,115 from 4,590, a gain of 11.4 per cent.
According the Multiple Listing Service, the average price for a single family home in Greater Vancouver was $741,644 in September, a drop of just one percentage point from the average August price. But that statistic doesn’t capture the decline in asking prices, as sellers come to the realization that they have missed the peak and the tide is turning in favour of the buy side.
Housing is not immune to the laws of supply and demand. If prices rise to the point that people won’t or can’t buy, prices come down.
Of course, there is little reason to doubt that Vancouver will continue to be the most expensive real estate market in the country and even less to assume that prices will return to the levels of five or 10 years ago. As long as interest rates remain at historically low levels, jobs are plentiful and the population grows, there will be a demand for housing.
At the end of September, Royal Lepage Real Estate Services was still citing “frenzied levels of activity and double-digit price gains” with year-over-year price increases of 17.2 per cent for the average bungalow, 13.8 per cent for the standard two-storey house and 13.3 per cent for the average condo.
But, in the third quarter, the numbers told a different story. The price of a two-storey house rose only 0.2 per cent, the price for detached bungalows slipped 0.5 per cent and condos were down 0.7 per cent.
Deflation of the housing bubble in the United States has fuelled speculation that Canada would follow suit, but the dynamics of each market are quite distinct. U.S. homebuyers tend to be more highly leveraged than Canadians and use the equity in their homes to finance consumer spending to a greater extent than do Canadian homeowners. To bet on similar price behaviour in both countries would be a long shot.
Although some analysts argue that the housing market in Vancouver is a bubble that will burst, more see a moderate correction that will bring incomes and prices back to equilibrium and restrain future increases to something closer to the rate of inflation.
Whether this is good or bad depends on which side of the market you’re on. In the meantime, a typical two-storey house on Vancouver’s west side will still set you back a cool $1 million.
© The Vancouver Sun 2006