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What do you think is the right price to pay for a home in Vancouver?

May 30th, 2011 · 60 Comments

Lots of howling about the story I wrote on Bob Rennie’s recent analysis, saying that prices paid for the top homes were skewing people’s perception of average housing affordability.

Many people assumed he was spouting that off the top of his head, for nefarious reasons of his own and questioned my journalistic credibility for quoting him. It was Urban Futures that did the research for that, I’m told, and there are others looking at those numbers are coming to similar conclusions. (Also, for those who apparently didn’t notice, I also quoted Dale McClanaghan, a guy who is routinely commissioned by municipalities to take a close statistical look at their housing affordability problems, who agreed with the Rennie conclusions.)

I should point out, though, that the research appears to be focused on the unusual market of just the last year, where prices went up dramatically in Richmond and west-side Vancouver but stayed flat or even went down in other parts of the region. However, the average makes it look as though housing prices everywhere are shooting up in the past year.

Okay, all that aside, there was much vociferous response to that post, but I didn’t get a clear answer to one thing I was really wondering about: What would be a fair price to pay for a house/duplex/condo in west-side Vancouver, east-side Vancouver, Burnaby, Surrey, Coquitlam, etc.

As I said in the previous post, sometimes I feel as though we delusionally imagine we can live in Vancouver but have Saskatoon housing prices. I know that I personally feel that the right price to pay for a nice house on the east side (single-family, standard lot) should be, oh, $350,000 at the most. For the west side, hmm, maybe $650,000. (For the record, I also feel that I should be able to get a really great pair of shoes for no more than $50, have a nice meal out at a top-notch restaurant for $90, and fly to Europe for $600 round trip.)

Clearly, every day is a disappointment to me since 1984 is long gone. But what are prices that people think would be appropriate for a city of 2.3 million and growing, where it doesn’t snow in the winter?

Categories: Uncategorized

  • Max

    @ Sean #47

    The problem with today’s apartments – typically they are the size of a shoe box.

    I agree with you 100% that proper amenities need to be included in the planning process that are inclusive of families.

    The Oly Village is a pretty good example as there is the playground.

    However it seems most condo units are planned for people without kids.

  • IanS

    @jesse #48,

    Apologies, but I’m not following you.

    So, you are advocating gov’t intervention in the market? And, if I understand your post, you think that legislation limiting leverage (ie. requirement for more equity when purchasing?) and requiring mortgage insurance would help?

  • Ternes

    Jesse, Geller and other have pointed out plenty of ways that governments already use to help shape housing prices; I really don’t understand how market regulation could at all seem like a revolutionary idea in this day and age. That’s all I’m advocating really: more of the same, just more aggressively and more progressively than any current level of Canadian government is attempting at this time.

    I do have a question for Jesse though: why are you concerned only with investors in your calculation of housind demand? What about people buying to live? For many it’s simply a life goal, and making profit on the purchase is a secondary factor. And I’d like to think that a good portion of buyers in Van are still in this category and not investors.

    Also, even for investors, what about those looking to flip? If the raise in price is enough to offset the loss in revenue from rent, wouldn’t that also make our market attractive?

  • Bill

    @jesse #43

    “Bill, what the heck do you think government-underwritten CMHC mortgage insurance is? ”

    It is insurance, not a subsidy, and a profit is returned to the government every year. There is also a private insurer – Genworth – so there is competition to make sure the rates are competitive. If CMHC was not there, other insurers would be in the market.

    But you do raise a good example. CMHC had an impact on the housing market when they relaxed the amount of equity required and extended the length of the mortgage amortization period . This was a political decision to make housing more accessible when all it did was help to fuel housing price increases and they have now reversed that trend.

    But perhaps the best example of misguided government housing policy is Fannie Mae and Freddie Mac in the US which were creatures of government designed to get low income families into owing their own housing and set the stage for their housing bubble.

  • @IanS: “So, you are advocating gov’t intervention in the market?”

    Yes, but IMO it should be intervention that is counter-cyclical. Current intervention is pro-cyclical — promoting higher amounts of leverage when asset values are inflated via underwriting high LTV loans with no counterparty risk. This isn’t anything revolutionary — it is one of the proposals put forward by BoC governor Carney aimed at improving banking regulation to prevent future financial crises.

    @Bill: “If CMHC was not there, other insurers would be in the market.”

    Sorry but this is simply not the case. Why does the government underwrite CMHC and mortgage backed bonds at all? Why not free-float them? The answer is because the market ex government underwriting would revert closer to commercial lending rates due to counterparty risk premiums.

    In my view the government has no business underwriting mortgage insurance or loans for investors.

    @Ternes: “why are you concerned only with investors in your calculation of housing demand?”

    Well my suggestion is let’s answer why investors are willing to pay higher prices and accept lower yields, and leave the owner-occupied equation out of it, at least initially. The reason being that if investors suddenly balked at low yields, the prices will revert to where it makes sense for them to buy again because they make up such a large part of the market. In other words investors will eventually set the marginal price. I’m arguing that, as an investor, Vancouver is a bad deal right now compared to other cities on a cash flow basis, and there is little sign earnings (rents) are going to catch up any time soon. If I were an analyst looking at Vancouver as a stock, based solely on price and realistic earnings potential, I would recommend a sell.

    I’m not trying to sidestep the ownership issue, but I am trying to rationally scrutinize a specific and sizable part of the market that is concerned solely with financial returns.

  • IanS

    @Jesse #55,

    You write: “Yes, but IMO it [gov’t intervention] should be intervention that is counter-cyclical.”

    OK. Not disagreeing, but I’m curious as to what you propose or think might work.

    Do you think the two measures I think you cited, the requirement for more equity and mortgage insurance, will make that much of a difference? I suppose the former might curb speculation, to some extent, though I am doubtful that it would really affect the area of the market that’s taken off. IMO, the major effect would be to make it more difficult for first time buyers to get into the market at all.

  • Bill

    @jesse #55

    “Sorry but this is simply not the case. Why does the government underwrite CMHC and mortgage backed bonds at all? Why not free-float them? The answer is because the market ex government underwriting would revert closer to commercial lending rates due to counterparty risk premiums”

    I disagree. There is already a private mortgage insurer – Genworth – that underwrites about 1/3 as much as CMHC and they make money doing it. Look at the CMHC financial statements. They make money on mortgage insurance. There is no subsidy.

    “In my view the government has no business underwriting mortgage insurance or loans for investors.”

    On this we can agree. How, though, do you reconcile this statement with your expectation that government should do something to make housing affordable?

  • Declan

    “There is already a private mortgage insurer – Genworth – that underwrites about 1/3 as much as CMHC and they make money doing it. ”

    Genworth insured mortgages are 90% backed by government. They’ve also done very little business since the financial crisis, and have had a lot of trouble securitizing their mortgages.

    The last time Canada had a housing downturn, the private insurer at the time (MICC) folded and had to be bailed out.

    “Look at CMHC … There is no subsidy”

    If you really think that having a 100% government guarantee on your debt isn’t a subsidy, then I’m not sure how to convince you.

    Obviously CMHC will make money when the market is rising, the question is if that money will be enough to cover the down years. It’s like a company that offers flood insurance, if they’re not making a profit in years when there is no flood – look out!

  • @Declan is correct with the facts: Genworth has its loans underwritten by government guarantees. CMHC loans are fully government-backed. In the event CMHC cannot honour its obligations, the government will continue payments to MBS holders. That said, CMHC has some semblance of a buffer, but not for a severe correction, and counterparty risk is off the table. I think we will leave it at that and move on.

    @Bill: “How, though, do you reconcile this statement with your expectation that government should do something to make housing affordable?”

    I am advocating that the government remove much of its policies cited by @Declan. It may be counterintuitive but I think CMHC has a part to play in ensuring affordable housing construction — it certainly has done so successfully in its 50+ years of existence — but I think that must have limits. Why does the government need to get involved with loans over $500,000 for example? If someone is hard up affording property the government shouldn’t entitle them to these high prices through underwriting mortgage insurance. Even Vancouver (of all places) has accommodation for less than $500K, if you look and don’t mind buying a transit pass.

    So to answer your and @IanS’s related questions, I would advocate for removing government backed insurance on all investor loans, reinstalling a cap on government backed mortgage insurance at something around $500K, and requiring banks and insurers to carry larger capital reserves for mortgage loans made in markets where cap rates are historically low (and that would include Vancouver). One of Canada’s largest private lenders is backing away from Vancouver and concentrating on other markets precisely because its investors are holding their feet to the fire. Vancity, OTOH, appears to be aggressively marketing mortgages in Vancouver. Boggles the mind. As a hedge I’ve checked the deposit insurance agreement of BC credit unions, just in case. (I know, I’m probably paranoid.)

    Other policies that can potentially help property hoarding and speculative activity in land-constrained markets is significantly increasing residential property tax, and perhaps look seriously at @Michael Geller’s observations about civic-imposed development costs.

    Will any of these policies help with affordability? Nope. But if you believe Bob Rennie, affordability isn’t really the problem right now. I tend to agree — the real problem is high prices and large debt loads.

    Another interesting stat to track is looking at income-to-rent ratio. That is, how much is someone willing to pay to LIVE (not own) in Vancouver. By that measure, Vancouver is a pretty darn desirable place to live, but not so desirable as Sydney or Melbourne Australia.

  • Mike K

    MG #15
    If Shakespeare were alive today, he would have inserted your Boo-boo rant in his “Merchant of Vancouver” play.
    Kirk #30 said it best: “People like Michael Geller are pushing up the costs of housing by speculating on capital gains”