I am often asked, on my radio show, by people I meet and in online and social media comments, “How on earth is a regular person in Vancouver supposed to be able to afford to buy a home?”
It’s a question that is sometimes understandable, but also sometimes perplexing, as very often the person asking it is somebody who does own their home. Indeed, I know a number of very comfortable home owners who are absolutely furious about the whole thing. But… they managed to afford a home, right? (They’re talking about “other” people, I suppose.)
So I always ask those people, "Well, how did you afford it?"
The answer almost always begins with, "Oh, well, I was just lucky…" Then it tends to continue by falling into one of five categories:
- Inheritance: “... my grandparents died and left us their place in Langley, which when sold and divided between us was enough for a decent downpayment, so I could afford it. Just.”
- Pre-inheritance wealth transfer: “... Mom and Dad had tons of equity in their house, and when they downsized/remortgaged we were each given a big down payment. Otherwise I just couldn’t have afforded it.”
- Already had a home in the city: “... I bought a place quite a while ago, so I had enough equity in it to put down on a bigger place. Thank goodness I bought when I did!”
- Had less in terms of equity/savings, but enough when combined with a partner’s: “... I sold my little condo when my partner and I moved in together, plus my partner sold up too, and together that was enough equity for a good down payment. Otherwise we’d have never been able to afford this place.”
- Or, other pre-existing equity: “... I already had a place on the Island/back East from a while ago, so I sold that and it was enough for a down payment on a home here.”
You’ll see that there’s a theme in the above five answers – all five sets of people were in some way able to raise a big enough down payment to afford a home.
And is that "just lucky"? Well, sure, it’s fortunate for them. But those five scenarios cover a large proportion of people in this city. With around 50 per cent of Vancouverites already owning a property, 70 per cent if you include the whole of Greater Vancouver, and still more people falling into the first two categories – not owning yet, but with the means to raise a substantial down payment – it’s little wonder that so many people are so “lucky”.
And you also have to realize, there are massive amounts of equity held by locals in this city. The benchmark price of a typical Vancouver home may be just shy of a million bucks, but Manulife figures tell us that the typical mortgage balance held in Vancouver is a mere $259,000. And we are also told that there is $197 billion of clear-title equity in 193,000 homes in Metro Vancouver. So, plenty of equity to cash in on and spread around for future down payments.
But then, what about after the down payment – the monthly mortgage payments on those sky-high home prices? How can these folk on regular salaries afford those?
Here’s where it gets interesting (if you call interest rates interesting – and I do).
Because it’s all about our record-low interest rates, which are keeping the cost of servicing a mortgage down to roughly the same as 20 years ago, despite rising home prices. I’ve shared this math with readers before, but for those who missed it…
Let’s say, for the sake of easy math, that the price of a home, the one that you want to buy, has more than tripled in the past 20 years (a roughly accurate measure). In 1995 you’d have taken out a mortgage of $200,000 to buy that home, but today you have to take out $600,000. That’s a 200 per cent rise in the mortgage amount. With salaries increasing by an average of only, let’s say, 50-70 per cent in that time (a conservative estimate), that home seems impossible for the same person to afford now. Right?
Why? Because in that same time frame, interest rates have also decreased from around a typical 12 per cent five-year fixed rate in 1995 to today’s rate of about 2.6 per cent.
This means that in 1995, if you had a mortgage of $200,000 at 12 per cent, you’d pay $2,000 a month to service it. Today, if you have a mortgage of $600,000 on a 2.6 per cent rate, you’d pay about $2,700 a month – around 35 per cent more than 20 years ago. With salaries having risen easily more than 50 per cent in that time, it’s possible that it's actually more affordable, relatively speaking, for you to service that mortgage today, even though prices have more than tripled.
In fact, one of the (many) reasons our home prices are so high, is precisely because mortgage interest rates are so low – people will always buy at the top of what they can afford, and sellers will always exploit that. If interest rates go down (which they have), people can correspondingly afford more – so sellers will sell their homes for more. If rates were to go up, prices would have to correspondingly come down (although this would be a terrible idea for the economy, and for home owners, and is not to be recommended).
Therefore, if you accept that servicing a mortgage on a home is basically no more expensive than it has been in the past, the only problem today’s buyers have, compared with buyers 20 years ago, is coming up with that much bigger down payment. And we already know that plenty of people are “just lucky” enough to have that.
To be absolutely clear, I'm not saying that there is not an affordability issue in this city – for lots of people, of course there is. Because, unfortunately, not everybody is that "lucky" – and those are the people left out in the cold by this system. We therefore need much better solutions for people to get into homeownership, whether it’s much more substantial help for first-time buyers, affordable housing programs for low-income families, shared-ownership schemes or other initiatives.
It's time for our political leaders to focus their attentions on the unlucky ones.