It’s that time of year again – the time when “research” group Demographia brings out its annual affordability report announcing Vancouver is in the top three least-affordable real estate markets in the world, and most of the mainstream media reports these findings as facts to a trusting public. Just Google the news coverage to see what I mean.
Regular readers will have seen my opinions in the past on the quality of the Demographia survey in particular, so I won’t go into those now – for those interested in why I think this particular study is nonsense, click here or the link in “Related” above.
But it’s not just the Demographia index that I have a beef with. Even our major banks are guilty of using the affordability measures that are so basic that they become irrelevant – such as the RBC Affordability Index.
Now, before I get into this, I’d like to preface the below by explaining that I’m not saying Vancouver isn’t an expensive city – of course it is, and there are lots of things that should be done about this. But there are many, many expensive global cities out there, and we shouldn’t be negatively comparing ourselves against them using measures that don’t take into account some key, massively influential factors.
The main problem is this. In a city where there is a huge amount of private wealth, whether that is held by locals or residents from overseas, you cannot say housing affordability merely equates to the average house price versus local average incomes. It simply doesn’t work.
Why not? Because most people – even first-time buyers, and especially those further up the ladder – do not buy a home with only their income. They put down a down payment and then pay off their mortgage with their income. For many people, especially those selling a home, that down payment is substantial and the mortgage is relatively low compared with the purchase price.
Some people – the wealthy, of which we have many – don’t use their incomes at all. They simply buy a home with cash and don’t have any mortgage to pay off. These people might not even have an income – or a local income – but their home purchase still contributes to the average house price statistics. So, by RBC or Demographia’s measures, their income-to-home-price ratio is dire, and yet it’s not a problem for them to afford that home.
Like Eric Carlson, president of Anthem Properties, said last week: “A lot of people buying homes here have something that journalists and economists often ignore: wealth. If you buy a $5 million house, and you have a $2.5 million mortgage, and your income is zero, then your income-to-debt ratio is really not good. But if you have $150 million stashed away, it’s not a problem. This doesn’t get picked up in the doomsday analyses about the unsustainability of prices.” OK, so that may be a somewhat insensitive way of putting it – few of us have $150 million stashed away – but he makes a good point about the sustainability of prices.
But you might not even be rich. What about the retired person on a tiny CPP income, who has lived in a West Side house for 40 years and paid off the mortgage years ago? They, too, contribute to our city’s high prices by selling up for millions and buying another home with the proceeds (all cash). And yet their income is negligible.
And what about the retiring Baby Boomers who sell their detached house to free up a couple of million when downsizing to a smaller (but also pricey) home, and give $500K to each of their three Millennial children towards a starter home? In addition to the all-cash purchase of the Boomer parents’ lovely new condo, those three Millennials also contribute to our high average prices by each paying, say, $750K for their first homes – even if their (very average) incomes only allow them to service a $250K mortgage. That’s four high-priced home purchases, all made by people with low or average incomes. Just another example of house prices being propped up by something other than local salaries.
I could go on… What about people moving to the city and using cash from the sale of their former homes for large down payments? That’s what I did. Inheritance money, anyone? And so on… Sure, it sucks for those people who don’t have the benefit of wealth in their family, or any way to raise a down payment, because the prices are high, and those people are deserving of financial assistance. But the continued relative robustness of sales and home prices would suggest that many, many people are finding ways to tap into some form of wealth in order to buy those homes, one way or another.
All of the above is what’s happening all over Vancouver, every day (and that’s not even taking into consideration the incredibly low interest rates and other factors propping up the market). Whereas the same cannot necessarily be said for other global cities that are described as much more “affordable.” If they don’t have the same level of private wealth behind the scenes, of course their average house prices are lower. But that doesn’t necessarily mean that the average mortgage is similarly lower.
My point is this – if you’re trying to measure affordability, and trying to do it in a simple way, don’t compare average local house prices with local incomes. Compare the average local mortgage with local incomes. Even that measure is somewhat flawed, as it doesn’t take into consideration the different interest rates between countries, so it’s not useful for a global city-by-city ranking. But it’s a much better measure of what regular people are actually paying for housing costs out of those average local incomes.
And finally, please don’t confuse these widely reported “affordability” reports as simply being about how expensive real estate is – that’s an entirely different measure, and is about average price per square foot of home. And no, Vancouver is not the third most expensive real estate market in the world – not by a long shot.