Friday, October 26, 2007

Affordable-living

I've said before that I believe that information we get for free from someone who makes a living off of selling something should be taken with a grain of salt, especially when it comes couched as "advice."

I have a lot of respect for the accounting profession. Sure, they were partly responsible for some of the dot.com mess in the US and Nortel in Canada, but those are largely isolated incidents and aren't reflective of what kind of service an accountant can give an individual or family on a financial planning level.

The Institute of Chartered Accountants of BC released a recommendation during the recent BC budget consultations. It contains the most recent income and affordable-living stats for BCers.

Here's what they had to say:
Real personal disposable income per capita is the amount of income available after taxes and net of inflation. It illustrates changes in potential purchasing power and savings.

Financial vulnerability is measured by total debt (both personal and mortgage) calculated as a ratio to personal disposable income.

Cost of living is expressed as the percentage of household expenditure spent on basic shelter and reflects the trend in actual household purchasing power.

As a place in which to LIVE, BC enjoyed a decreasing crime rate and decreasing cost of living, increasing disposable income, and high government health care spending. At the same time, however, personal debt continued to grow (largely as a result of high housing prices).

There are, however, areas in which BC still needs improvement: disposable income ($23,339); personal debt (1.24); and cost of living, as expressed by the percentage of household income spent on shelter (20.2%).

When comparing 2005 with 2004, disposable income in BC grew by 1.5%, bettering the Canadian average growth rate of 0.9%. (MY ADD: we're still below national average; Alberta and Ontario beat us by 4.1% and 0.2%; and our disposable income to debt ratios almost twice that of the national average).

BC’s real per capita disposable income rate was 3% below the national average in 2005.

BC’s higher disposable income gain is attributed to the 10.3% cut in real direct taxes (MY ADD: not income growth!)

Financial vulnerability is measured by total debt (both personal and mortgage) calculated as a ratio to personal disposable income. BC’s debt to personal disposable income ratio rose by 6% last year (the highest increase in our comparison), reaching a record high of 1.24 and leading our comparison for the tenth consecutive year. This increase was primarily due to increased mortgage debt, which rose by 11.7% in 2005.

Vancouver is the least affordable city in Canada and the 15th most expensive city in the world. Owning an average home requires 42.1% of British Columbians’ (not Vancouver, that's BC-wide) median pre-tax household income. Not surprisingly, mortgages comprise 75% of BC’s total debt.

BC’s cost of living in 2004, as expressed by the percentage of total household spending on shelter, was 20.2%, comparable to Ontario’s rate of 20.5%. This is not surprising given that both provinces have the highest housing prices in the country. (While housing prices in BC are 25% higher than in Ontario, other costs, including taxes, water, fuel, and electricity are lower in BC). (MY ADD: That ratio must be dragged down by real rents).

BC has less post-secondary educated citizen's than Alberta, Ontario and is below the national average.

BC’s wages, adjusted for inflation, decreased by 0.5% between 2004 and 2005, dropping to $21.05 per hour as a result of strong growth in the wholesale and retail trade sectors, which typically pay lower wages. (MY ADD: that number, based on a 40 hour work-week and 52 weeks/year = $43, 784 gross annual average income).

The number of British Columbians working in construction trades grew by 16.7%
in 2005, which led to an increase of 4.1% in average hourly earnings in this sector from January to November 2005.
You can read the full report here. So much for wage inflation being the reason why housing prices are so high. I'm surprised that the COL ratio is so low. This is perhaps because I'm not an accountant or economist and don't understand the stats they used to come up with that. Or it's perhaps indicative of the fact that real rents are considerably lower than mortgage payments and thus drag the 42.1% ratio down to 20.2%? What do you think?

30 comments:

Anonymous said...

IT CAN'T HAPPEN HERE! Stats are lies and more lies. Today's Toronto Star:


TheStar.com | Business | Subprime losses cast doubt on our banks



Oct 25, 2007 06:45 AM
James Daw
Business columnist

Owning Canadian bank stocks has, for many years, been better than money in the bank: Many times better, until this year.

After four years of rapid gains, shares of the big-five banks are all down in price compared with where they started the year. Even healthy quarterly dividends could not offset the loss in value suffered on most bank stocks.

Investors are now on edge to see the year-end profit figures. Banks will wrap up their fiscal year next week, on Halloween. There’s some risk the contents of their loot bags will be smaller than investors would like.

Some banks may record losses on their holdings in asset-backed securities in the wake of the meltdown of the subprime mortgage market in the United States. Analyst Brad Smith of Blackmont Capital warned yesterday that the Canadian Imperial Bank of Commerce could be hit the hardest.

The experience with bank stocks this year serves as a reminder that it’s not easy to pick stock-market winners in the short term. Even the most knowledgeable investors have trouble picking the good and bad times to buy or hold.

One major investor entered 2007 with doubts about the performance of bank stocks: Caisse de dépôt et placement du Québec.

The huge manager of Quebec pension funds owned a sprinkling of bank stocks from around the world, according to its annual report. Here at home, though, Caisse had no direct holdings in the Bank of Montreal, whose shares have fallen about 12 per cent this year, and none of the Royal Bank of Canada, the most highly valued bank.

Caisse did own all the Canadian banks indirectly through an investment product that tracks the performance of the top 60 stocks in the country. (The banks now account for about 15 per cent of the value of the broader S&P/TSX composite index.)

But the fund manager’s only substantial direct holding in Canadian banks was in Toronto Dominion Bank, at about $470 million, and CIBC, at about $123 million. It held larger holdings than CIBC in the U.S. bank holding companies Wachovia Corp. and Citigroup Inc., and in the Royal Bank of Scotland.

Lucie Frenière, a spokesperson for Caisse, said the fund manager does not discuss when or why it buys and sells particular stocks for fear of disturbing the market.

So we won’t know until the next annual report if the Caisse continued to have big bets on the same Canadian and foreign bank stocks as it did at the end of last year.

If it did hold those same stocks at the end of September, it would have suffered nine-month losses from 9 per cent to 16 per cent on the three foreign banks. A double-digit return on TD shares and a small return on CIBC shares would have since been reduced or eliminated.

David Tiley, who works with a team of value seekers at Mackenzie Cundill Investment Management in Vancouver, said this week “we don’t own Canadian banks, and have not for a couple of years.”

“It’s related first and foremost to valuation,” said Tiley. “Earnings are closer to a peak than a trough, so you are taking a risk.

“Over the last five or six years, the banks have taken on more leverage (lending more in relation to their shareholders’ equity). A small writedown (such as taking a loss on asset-backed securities) can have a dramatic impact on shareholder equity.”

Other analysts see buying opportunities among the big-five banks, but the majority whose recommendations are tracked by Bloomberg are not urging clients to buy Royal Bank, TD, or Bank of Montreal. Only CIBC and Scotiabank have more buy recommendations than other less enthusiastic recommendations.

James Daw, CFP, can be reached at jdaw@thestar.ca or at 416-945-8633

JMK said...

(MY ADD: That ratio must be dragged down by real rents).

And by anyone who has had a mortgage longer than 15 years or so. Mortgage payments don't go up with inflation, wages do.

vg said...

"Mortgage payments don't go up with inflation, wages do."

really jmk ? what about that five or more years when hardly anyone got a wage increase from the late 90's til early 2000's or got a wage rollback or got privatized and their wages cut by 40% or more and lost benfits on top of that while inflation rates kept moving up an average of 2% ? oh right, you didnt' live in Canada then so how would you remember ?

JMK said...

really jmk ?

Yes,VG, really.

If you don't believe me, the CAW has produced a nice chart: here (pdf). (Their point is that wages should go up faster than inflation, and lament that they have stagnated, but that is another story).

I don't doubt you that some sectors and industries have suffered roll-backs etc. But on the whole wages have risen with inflation.

hhv said...

jmk,

the quote on that chart states: "wages have not kept up with inflation"

regardless, we can cherry pick where wages have gone up, or gone down, it doesn't matter. Incomes do not justify current RE prices in BC.

JMK said...

HHV,

The quote on that chart really states:

Wages have not quite kept up with inflation since 1985

The operative word being "quite". Real wages dropped by less than 5% over that time period, and most of that was 1985-1986.

I don't call a 20 year national trend "cherry picking".

The original point is that you have a reasonable expectation of your wage rising and your mortgage staying the same, so your cost of living drops over time. No doubt as VG says, this isn't true for all individuals, but on average it is a good bet.

Anonymous said...

If Vancouver is the 15th most expensive city in the world where does that leave Victoria? What number are we?

2nd - I just realised why people who live in Vancouver are calling it a world class city when it does not even have an opera house. They are associating expensive with class. If it is expensive it must be world class. They have not figured out it does not always work like that.

Anonymous said...

If Vancouver is the 15th most expensive city in the world where does that leave Victoria? What number are we?

2nd - I just realised why people who live in Vancouver are calling it a world class city when it does not even have an opera house. They are associating expensive with class. If it is expensive it must be world class. They have not figured out it does not always work like that.

jesse said...

"Their point is that wages should go up faster than inflation, and lament that they have stagnated, but that is another story."

Nope. Wages go up if net contribution increases. CAW better pull up their britches if they want larger wage gains.

vg said...

boy you have those charts always ready at hand,too bad 75 cents an hour is about the same as nothing if you live in reality and lived in the BC work enviroment at the time but you seem to say you lived in the US back then so I don't think you have a clue what was going on here. CAW is a national union and doesnt reflect the true enviroment,better go dig up another hand picked chart.

vg said...

Just when you thought the credit tightening stories were putting a noose around any loose lending in the US here's one off the Sacremento Blog that makes you see that this is still one never ending train wreck in motion:


"Sure the credit crunch does take people out of the market. Many people could only qualify on sub prime neg am loans and now they won't be able to.

I'll likely repeat this story a few times, but I just applied for my loan a couple of weeks ago. OVER THE PHONE, I applied and was approved for a $400,000 loan...on STATED INCOME.

I should also mention that my FICO is below 700.

My credit report is clean and I don't have any debts, but still, they didn't even verify how much I currently have in my accounts.

My rate is 6.375%.

I'm only putting 10% down. It amazes me that I was able to get a loan so easily with ZERO documentation. They didn't even ask for a bank statement - they asked for a utility bill to verify that I live at the address I claimed.

To take it a step further, the lender never even checked a photo ID (the title company did when I went to sign all the documents).

I'm a fairly solid risk for a lender, but it shocks me to see that the so-called 'tightening of qualifying standards' is anything but.

Even though I'm glad I got the loan, the fact that it was so easy for someone to walk in and get money is cause for concern."

Thursday, October 25, 2007 5:12:00 AM

---------------------------------

and a second post by the same poster:

I got a 30-year fixed rate, but the fact that this was all approved and funded with nothing more than a quick credit check and having my address verified with a utility bill is cause for concern, because I'm not the only beneficiary of such lax treatment.

I forgot to add earlier that, although my credit report looks clean, I had some nastiness back in 2001-2002 and took a hit. I was then pretty deep in credit card debt until September 2005. I've been completely clean and debt-free for 2 years, but as you know, it takes a long time to repair a credit score.

The lender never even batted an eye or questioned anything at all. I found that odd, but a broker I spoke to last week stated that most lenders only care about seeing a 2-year clean credit history and no history of foreclosures. He said that he's still getting approvals for people with credit scores in the 480-500 range.

I should add that I'm pleased that the process was not problematic for me and that I secured a decent fixed rate. I don't mean to sound unappreciative, but I do want lenders to perform their due diligence in deciding what sort of loans to qualify people for.

patriotz said...

The purchase price of housing should not be included in cost of living figures.

Buying a house is an investment. From that investment you get a yield (the value of the accommodation which you would otherwise have to pay rent for), and a capital gain or capital loss down the road.

Historically people have bought houses because the yield (either from renting out or from living in) exceeded the cost of borrowing money. As is the case for all investments.

Right now people are buying houses with ridiculously low yield, on unfounded hopes that capital gains in the future will make up for this deficiency, when the fundamentals point to a capital loss. This is called a "bubble".

If people choose to make bad investments, whether buying a house today or Nortel in 2000, that's their choice, their problem and it has nothing to do with the cost of living.

The market price of accommodation is the market rent, which of course should be included in the cost of living, and which in fact has not grown in real terms for many years.

JMK said...

Right now people are buying houses with ridiculously low yield, on unfounded hopes that capital gains in the future will make up for this deficiency, when the fundamentals point to a capital loss. This is called a "bubble".

I didn't buy with unfounded hopes of future capital gains, and I obviously calculated the yields differently than you because I do not call a 3% yield after tax and after inflation "ridiculously low". I suspect the other people who are willing to buy are making the same calculations I am (or their financial advisors are).

Anonymous said...

(MY ADD: That ratio must be dragged down by real rents).

I live in Victoria and rents are rising fast here. Four years ago I lived in a gorgeous two-bedroom apartment for $800. Now $800 is the price of my one-bedroom. My guess is because the rental market is really tight and because people with huge mortgages want more from their "mortgage helper" suites.

vg said...

" I suspect the other people who are willing to buy are making the same calculations I am (or their financial advisors are)."


Highly unlikely,most new buyers don't even have a financial advisor cause they have nothing to invest if they are maxing out all on a FTB home/condo based on average Victoria wages. Any financial advisor worth his salt would say you are nuts to buy real estate the past year unless you won the lottery.

vg said...

I do not call a 3% yield after tax and after inflation "ridiculously low".

I would,risk versus reward with prices at all time highs and affordability totally insane for a measly 3% when the downside risk could be 20% just for starters ? I say your math is ass backwards but it's your money not mine.

Roger said...

HHV - My request for a topic

I have been following the posts for the last couple of weeks and am curious about the patience of Victoria buyers. HHV, you mentioned that you are pre-approved with 90 days to go on your mortgage rate so you are still considering buying in the near future. I wonder how many others are close to squeezing the trigger if there is any drop in prices.

So here is my topic - How far must prices drop from the current median price before you will buy?

I believe that if folks will buy after a meagre 5-10% drop we will only see the market dip for a short time and then take off again. If buyers are patient and wait for further price drops we could see a snowball effect.

JMK - Nice to see you posting again. We need a counterbalance to the bear only discussion.

vg said...

roger,

good to see you back, it seems like the Albertans are having no problem waiting to buy with reductions all over the place. Since we have seen many 5-10% reductions already just on listing prices then I believe the catalyst will be how many "have to sells" lower their prices over the next couple of months. It doesn't take many sales to set the price level lower if sales are down 25% in one month.

October numbers should be interesting, I'm calling for further declines in sales and a price reduction,nothing goes up forever when buying volume is on the decline.

Roger said...

VG,

I have seen a lot of price reductions as well on the Private Client Service that a realtor sends me.

My question to HHV and others is how low does the VREB published median price have to go before they jump in. Too many "early birds" will spoil the fun!!

happy4 said...

I'm staying out of the housing market for a good 5 years until all this nonsense is over with. I agree that if potential buyers are thinking that prices will drop dramatically in Spring, they may be in for an unpleasant surprise - and jumping into the still too deep end could have a rebound effect on the market. It's all about buyer psychology at this point as it's no longer a seller's market. Buyers need to hold tough and start calling the shots.

I can plunk 120k+ into savings with the disposable income I have handy while paying affordable rent, rather than lose that to the 1st 5 years of mortgage interest and acrue maybe 30k or equity in a house that may or may not increase in value.

Anonymous said...

I still think that it will be 6 months or more before we see a real correction in housing prices here.

Even if the numbers are off in October, the VREB will dismiss it as being the start of the slow season for sales (which is true). It won't be until March or April where continued weakness will be acknowledged.

Any lowering of housing prices takes about 12-18 months to set in. Home owners don't start feeling the impact until they need to renew mortgages or lines of credit and see what the bank thinks their property is really worth! It is at that point that the "lack of wealth effect" kicks in and we start to see other economic ripples and a further depressing of prices.

With the Canadian dollar at $1.04 it must be crushing the luxury condo sales. Wealthy Canadians I know are rushing now to buy property in the US instead of here and the 25-50% added to the sticker price since Americans placed their deposits 1-3 years ago must really hurt.

Anonymous said...

Well,
Just heard from a realtor friend that 2 different sellers who refused good offers on their homes , just accepted LOWER offers because the houses just sat there after the first, higher (and early) offers were refused.

The sellers had thought they would get more moula if they waited a bit. Is this an indication of the coming change?

Anonymous said...

what even is a 'fair' price in our current market??? BC assessed values? All I see are listing prices significantly over these provincial assessments - getting the seller to drop to BC assessed price is a real stretch in my view. There are homes out there priced $200k-$300k over assessed, although not many of them seem to be moving.

vg said...

"The sellers had thought they would get more moula if they waited a bit. Is this an indication of the coming change?"

Yes,this is the psychological wake up call the sellers need if they are serious about selling. Shows how out of touch the sellers are with the real world of affordability for the average income earner.

If Canadians will line up for hours to go to the US to save a few bucks on milk and gas then sooner or later they had to wake up and say no to gouging house prices for tens of thousands.

I really don't think this will take til spring,didn't make a difference in the US last winter. Seasonal slowdowns will be an excuse for sure but with all those over 90 day listings that will be stacking up then we have the perfect storm. Just wait til the derivavtives bomb goes off in the US,it will effect us bigtime.

vg said...

Merrill Lynch may have to take another $4 billion loss and rumours out there that it may put them under,that would be massive.... and more cockroaches to come by the sounds of things.


Is Merrill the tip of the iceberg?

With the outlook, and balance sheets, so murky, it is no wonder that investors are shooting first and asking questions later. As the sagacious Warren Buffett put it this week, one of the lessons they are now learning is that “not only can you not turn a toad into a prince by kissing it, but you also cannot turn a toad into a prince by repackaging it.”


http://www.economist.com/finance/displaystory.cfm?story_id=10048962

vg said...

A 'pretty ugly' quarter for Canadian retailers

FUNDS REPORTER


Hedge fund manager Brandon Osten is growing concerned about how the strong Canadian dollar will hurt the profit of domestic companies, and warns that certain sectors will feel more pain.

"I just don't know how much longer our economy can sustain a dollar that is above par [versus the U.S. greenback]," said the president of Toronto-based Venator Capital Management Ltd.

The manufacturers relying on foreign sales and resource companies - with mines or other assets outside of Canada - are being hit hard by the surging loonie, Mr. Osten said in an interview.

But "I think that the fourth quarter is also going to be pretty ugly for retailers," as Canadians buy goods like books, electronics and sporting goods from U.S. companies over the Internet, or clothing while vacationing south of the border, he predicted.


http://www.reportonbusiness.com/servlet/story/RTGAM.20071024.wrbestbets1024/BNStory/SpecialEvents2/home

Scottsdale az real estate said...

Great Article!

Roger said...

Scottsdale

I went to your website and found this article: http://tinyurl.com/232x9p

This article shows what will happen (falling prices) in the Victoria condo market where we have lots of builders and a lot of new product becoming available in the coming months.

We do not have large numbers of houses being built so price drops will not be happening as fast but the collapsing condo market will have a spillover effect.

Scottsdale - can you comment on whether you are seeing Canadian buyers shopping for real estate in your area? With the strong Cdn. dollar Albertans may be looking south of the border and bypassing world class Victoria.

Anonymous said...

Arizona looks pretty good. But could not do it -married with children- and my spouse will not leave Victoria.

I would also have a hard time learning to put "Ehh" at the beining of my sentences rather than at the end.

Anonymous said...

regarding the earlier question about relative patience of future buyers, I am looking at about a 5-year wait before I will be keen to buy. I expect 20-50% real price drops before I will get excited.