Wednesday, March 21, 2007

First Time Buyer Affordability?

In light of the RBC report, and this article in the Sun today, I think a good discussion of affordability is prudent.
"For many, condos remain the only viable option to tap into the housing market as condo ownership costs require just 35.4% of local median household income compared to a whopping 73.5% required for a two-storey home." (RBC)
Their numbers are based on Vancouver prices, but our's here in Victoria are close enough to just bring them over.
"The final quarter of 2006, however, delivered some much needed affordability relief as a rising supply of homes on the market overpowered an already cooling pace of resale activity. The improvements were reported for the two-storey and detached bungalow segment, while condos and townhomes continued a fifth straight quarter of deteriorating affordability." (RBC)
So what does RBC say about income, average price, and affordability? Let's start with the price. RBC says that an average condo price is $273,313 for Q4 2006. What kind of income did RBC say you needed to get that mortgage? $60,444/year. And given the price, based on the percentage of your income, your mortgage would have consumed only 35.4% or fully 1/3rd.

So what does MLS have as the average price in Victoria for last year? The 6-month average for the last half of 2006 was $286,881. That's a difference of $13,568.

I could stop here, but I won't, because I think the RBC report is misleading us. Completely. The relationship between their numbers becomes more sketchy when you factor in their criteria for qualifying for a mortgage based on these numbers: 25% down and the remainder is amortized over 25 years. Or, if we use the MLS numbers, you would need to have $71,500 as a down payment to get your monthly mortgage payment down so that it only eats up 35% of your available resources. Know anyone who is able to save up 1.2 x gross earnings for a down payment while also saving for retirement, when the actual costs of your new home shouldn't exceed 3 x gross earnings when they refer to their own fundamentals.
"'Purchasers simply refuse to be priced out of the market, even though household income has not kept pace with housing appreciation,' Elton Ash, Re/Max's western vice-president said in a news release." (SUN)
Ah, the Sun. In an effort to create a balanced story, the Sun quotes from the RBC report and then backs up their findings with Re/Max experts:
"Vancouver first-time homebuyers continue to raid RRSPs, borrow money from family and take on mortgages that will take longer to pay off to get into the property market, the Re/Max real estate company reported today."
Apparently Victoria's first-time buyers do as well. Except they do it a little bit more than their peers in Vancouver. So what I want to know now is who is a first-time buyer? I like to think we are. We're youngish, early 30s, haven't owned before, make an above-average income, carry a bit of student debt, have a bit to put down, but certainly not close to 25%. So we're really not first-time buyers because we can't/won't buy in this market with these numbers.

My guess for the 'real' first-time buyer? No idea, but they have to be ignoring the fundamentals. And so does the bank, because if the average first time buyer is "borrowing money from family" doesn't that hurt their ability to cover the mortgage? No problem if your the bank though right? They have 25% equity into the place day of purchase, the family will be the first people to not get their money when finances become tight because there's less consequences to the debtor's credit there.

Your thoughts? Tomorrow we'll bring houses into the discussion.

UPDATE: thanks to Roger for this great find in the TC business section:
"Today is the grand opening of the VREB Barber Shop in Victoria BC. Will Shaveit, owner and hairstylist, welcomes all home sellers in the region to his new enterprise. A few customers arrived on opening day and were given a light trim haircut. Customers do not need an appointment but business is expected to pickup shortly.

Will gave the following statement to the press: "We saw an excellent opportunity in the Victoria region and look forward to serving many of you in the near future. Several new barbers will be joining us over the next few months and a brushcut specialist will be joining us later this summer."


greg said...

My personal favourite realtor speak in this era of unaffordability is when 80 year old homes in Fernwood priced at $400,000 are listed as "starter homes".

Anyone who can afford that kind of "starter" already started back when prices were in the 200s in the same area, or, back in 2002-2003.

If prices are going to revert back to the usual trend over time, they will either need to stay flat now for a decade, or the median will need to drop back into the $350,000 range.

Take your pick, but as long as inventory continues to outpace sales, I am opting for a retracement of the median back into the low 400 - high 300s over the next 3 years.

Nice blog, good job.

JMK said...

Hi Greg

If prices are going to revert back to the usual trend over time, they will either need to stay flat now for a decade, or the median will need to drop back into the $350,000 range.

Maybe I'm doing my math wrong, but I get three years. This is assuming a 6.1% average growth (which is what your graph shows from 1978 to 2001. If you include 2001-2006 it is almost 8%) and using 1997 as the anchor point (247k). A flatenning would have the price corrected by 2010 to 520k: 247*(1.061^13)=533k.

If by "usual trend" you mean just before the rise at 2001? That would be assuming the flat spell from 1993-2001 finally brought prices back to their proper value. You are correct, that would be the best time to buy, but you'll get to pay a lot of rent in the meantime, and I wouldn't call that the "usual trend".

JMK said...

Those affordability numbers are pretty dire. I wonder what "median household income" means when your population is so heavily skewed toward retirees? Their income is relatively low compared to their accumulated equity, so they can buy in at a far higher price than a FTB. My knee-jerk guess is that affordability is better in TO than here because their median incomes are higher, not that housing is much cheaper. Does RBC publish the underlying stats somewhere?

hhv said...

The only stats I have are the ones in the linked report. It should be a quick StatsCan search though.

I'll double check numbers tomorrow when I do houses.

greg said...


I'm not sure what you mean by the affordability tracking back into the historical range by remaining flat for 3 years, based on studying the price trend from 1997. Why pick 1997? Where do you get your 6% number for expected appreciation from?

If you look at housing over the years, it has tracked core inflation pretty closely until the last 6 years or so - and if you look at median incomes in Victoria in 2001, you will see they were higher a few years ago then they are now, after adjusting for inflation.

My point is that for housing to return to traditional levels of affordability it needs to track back down significantly to reach traditional ranges on the chart that held for more than 30 years!

Even in 2001 you can see this is largely the case - the average house price was around $250,00, while local median family income was around $58,500 - or about 4.275 earnings.

Median income was around $64,200 in 2004, when the average prices was around $400,000 - to reach a range of 6.2 times earnings.

Of course, as prices rose another hundred thousand or more in the next few years, there is no way household incomes kept pace.

Meaning of course the multiple of annual earnings is now worse.

Anecdotally, you could move it to around 8 to 9 times annual earnings.


Sorry for my earlier guesstimates on the stats, but as you can see, they were not far off.

Given the current prices, local family homes will have to reach about

Or to put it another way, local housing will not be as affordable as it was in 1997 until local family incomes reach about $121000/year before the affordability of current housing approaches what it was in 2001.

So I guess I will just say again, which is more likely, local incomes reaching that level in the next three years, or a retracement of the current highs down to more reasonable multiples?

On a second point, do I need to remind you that low income, house rich seniors can skew the numbers downwards for median incomes, but they do nothing to increase the actual number of local wage earners who can afford to buy - in fact, the effect is exactly the opposite.

Because of course they are buying at inflated values, as they have the equity in most cases to do so -

Are you implying that there are large numbers of local buyers who have not bought yet for whom the current market is "affordable"?

Go back and look at the chart on my site, you will note the last time prices increased anywhere near this amount was in the early 80s. It only took about 3 years for a significant retracement to occur.

Prices didn't stay flat in 95 either.

JMK said...

Hi Greg

Why pick 1997? Where do you get your 6% number for expected appreciation from?

6% comes from p0 = 63.7k in 1978, and reaches p=259k in 2001. This is not completely objective, but the time series only contains 2.5 cycles, so I chose to cut it off at 2 cycles. To get the percent increase you do:

p = p0(1+x)^n, where x is the percentage, and n the number of years. x = (p/p0)^(1/n)-1 = 6.3%.

Choosing 1997 is also subjective. It is in the middle of the last flat period. It also nicely passes through the middle of the latest rise. If you like, it is very easy to run these objectively to get a best-fit curve, but even then you still need to choose the time frame to do the fit over.

As to affordibility, I think we are saying the same thing. Equity-rich seniors make this market more expensive than local incomes would indicate.

I'm not trying to argue there won't be a slow down in prices, or even a moderate dip. For our part, we just decided to find a place that we could enjoy for the next little while, and not worry about market timing. If we see a 3%, drop like in 95, will that really help you buy a new house? Thats $15k on a $500k property. If you are really hoping for a 20% crash, I hope your job is very recession proof because the rest of the economy will sure be in the toilet at that point!

Roger said...

jmk said

Equity-rich seniors make this market more expensive than local incomes would indicate.

I have to disagree with this analysis. Victoria has a disproportionate ratio of seniors compared to other cities but not as large as you might believe. In any event, these folks are downsizing and the majority are not interested in buying two storey houses, duplexes, townhouses or fixer uppers. Most want a rancher in good condition or a condo which is close to shopping, bus routes etc. If you look at a lot of houses for sale in the Victoria core (Fairfield, James Bay, Rockland, Oak Bay) they are old and in need of work and constant repair. They do not appeal to seniors, in the majority of cases. They are being purchased by FTBs, professionals, investors, flippers.

hhv said...


I have to agree. This whole newlywed/nearly dead thing is a bit much for me. I've lived here almost 30 years. I left for 5 years during the 90's when the economy stunk and work was elsewhere. It's a different time now.

Many of my peers feel very encouraged by the job market here and have few plans on leaving. What does drive people away is the RE prices.

When we're discussing the high priced new condos, it makes sense that 'older' people are buying them. But I don't think of those as seniors. To me a senior is purchasing the $185K care-o-minium with 3 square-a-day and monthly fees of $1800.

I'd guess that many of those purchasing the upscale stuff ($400K+ condos and $800K+ homes) are still very much making money. They may be in an older demographic, and are likely generating income through different means than a wage paying job. I would hardly classify those people as retired or senior.

The 'work' that they do generally translates into the community's economy and leads to better pay and better jobs for those people that choose to stay here and open shop.

My fiance, who works for a big bank, is opening business accounts every day. These are generally to younger professionals (30-40).

I firmly believe this market has been hyper-inflated by people who have come here, bought for themselves, recognized a good investment opportunity (2-3 years ago) and bought a second or third as a holding property, and age has nothing to do with these decisions; it's a cashflow issue.

This spring/summer will be interesting. Will those people sell or hold? If they sell, this market corrects. There is no way that there are enough buyers to absorb the speculatively purchased units.

Vicguy said...

My fiance, who works for a big bank, is opening business accounts every day. These are generally to younger professionals (30-40).

Would alot of these business's be construction related ?
Hate to sound like the old fart saying "way back when" again, but alot of small businesses will bite the dust if we get a recession/and or market correction. This town is full of tightwads who will stop spending in a heartbeat once the tide turns. The seniors especially and they are a big enough part of the economy to have a serious effect on consumer spending. They may be well off, but they know when to shut off the taps and hunker down for a few years. Victoria may well become a victim of its own success. When they buyers stop,the builders stop, and so on as we know.
From the trades guys I come in contact with there is enough big projects for the big boys but when the residential builders slow or stop it could change the dynamics as they all start to undercut each other to stay alive.

JMK said...

They are being purchased by FTBs, professionals, investors, flippers.

I guess what metric you use to diagnose how overheated the market is will depend on what proportion of those folks you think are buying the most homes - overextended FTBs and amateur flippers or well-equitied professionals and investors.

I'm just trying to say the obvious - that median incomes in a region don't necessarily correlate with median house prices, particularly for places that people use for vacations and retirement. As an extreme example, I doubt housing prices in Tofino have anything to do with median incomes.

Vicguy said...

"I'm just trying to say the obvious - that median incomes in a region don't necessarily correlate with median house prices, particularly for places that people use for vacations and retirement."

This will put Victoria in a more vulnerable position for more rapid decline as people with bucks who are here for those puropose can influence prices much faster than the working class family who are buying cause their job is secure long term. We know Victoria has never been a city for that kind of secure job market,construction has always been shaky and average paying government jobs and low paying tourist related jobs have been the norm. Only the former may be home owners and at much cheaper prices, as the latter can't afford them ever at $8 an hour plus tips.
Victoria should be the canary in the coal mine for BC and I expect to see these next few months to tell the tale.