Friday, June 15, 2007

Housing (non) Affordability

I read the RBC Housing Affordability Study for June this morning and I am mystified as to how affordability improved in Vancouver as mortgage rates went up and prices of homes went up.

From the RBC Affordability Study

British Columbia — Demand shifts to condos
"Solid income gains outstripped softer house price growth in the first quarter to make way for another slight improvement in affordability for two-storey homes in the province. The improvement is welcome relief for prospective buyers attempting to tap into the already high-priced property market. Affordability slipped in the remaining three home segments as prices continued to move higher. British Columbia’s market is unique among the western provinces because it appears to have already reached a saturation point. The pricey housing market, particularly for stand-alone homes, has already priced out many prospective homeowners. In reaction, the focus has shifted to the condo market, which has become the only affordable homeownership option for many. Looking ahead, the increased supply of homes on the market will further restrain price growth."

Aah, there we go - "solid income gains" - did you get a raise because I sure didn't?! Oh, and wait, affordability improved only in two storey homes but deteriorated significantly in townhomes and condos. Now it makes more sense.

Lets have a look at qualifying gross incomes for different housing types in Vancouver as per the mohican mortgage calculator.



Posted 5 year mortgage rates have risen approximately 0.85% in the past two months so as an example I did a calculation of what price decrease would be necessary to keep payments the same at the new mortgage rate compared to the old rate.

For example, a $500,000 mortgage at 5.3% rate with at 25 year amortization has a payment of $3011. Now the rate is 5.9% and the payment is $3191 for an increase of $180 per month. If payments were to stay constant the mortgage amount would need to decrease to $471,800 for a 5.6% drop in amount.

17 comments:

mohican said...

My favorite quote from the RBC study is "However, even a levelling off in affordability conditions still leaves Vancouver as the extreme outlier in the country with 70% of household income still required to service basic homeownership costs."

Wu'kong said...

The monthly property tax rate seems low. Here in Burnaby it's about .5% of assessed value which puts it around $300 for $711K.

Wu'kong said...

Also, that's including the basic home owners grant, i.e., for someone living in the house.

jesse said...

"for an increase of $180 per month."

That is $2160 per year, or about 2% of pretax income, for a bungalow.

Warren said...

That is $2160 per year, or about 2% of pretax income, for a bungalow.

And lots of people received a higher than 2% raise this year. So, if prices are even, houses are theoretically more affordable.

Clarke said...

"However, even a levelling off in affordability conditions still leaves Vancouver as the extreme outlier in the country with 70% of household income still required to service basic homeownership costs."

One would hope it does not take too much "outside the box" thinking to realize how terribly messed up the market is right now.

Deliverator said...

I think it's pretty clear that there is a LOT of unreported income in the Lower Mainland.

M- said...

I was looking at Ottawa properties on MLS tonight.

For about the same price as an entry-level crackshack on a main road on the westside (~700K), in Ottawa there are penthouse suites in apartment towers for sale. They don't worry so much about square footage there-- for that kind of money, you get 1700-3000 sq.ft. in a penthouse.

Or for the same price, you can get an executive home on acreage.

Yes, the pricing's nuts here...

patriotz said...

I think it's pretty clear that there is a LOT of unreported income in the Lower Mainland.

Then why aren't rents higher? Do only homeowners have unreported income?

vineland said...

It is probably people who are 'moving up' in the market that benefit from the slight increase in affordablity. They can port their old mortgage, so their interest rates don't creep up and they get a slightly better deal.

Piggly Wiggly said...

For the past couple of years I've tracked housing prices in PEI. I like to take the "value" of my 540 sguare foot condo and translate it to what I could get there.

It's amazing.

Of course, the second part of the exercise is to find a job in PEI. It would be difficult, but not impossible, to do.

In the end, laziness prevails and I stay put.

Patiently Waiting said...

piggly wiggly, did you see yesterday's Vancouver Sun story about the young woman from Coquitlam. She sold her house and quit a decent job, bought a new house in Hamilton ON for 135K (IIRC), and is going there with her children without a new job lined up. Her rationale is she can have the same kind of lifestyle in Hamilton even if she was earning $8/hr. Good for her. Takes guts as it appears she is a single parent and her family is all here.

Deliverator said...

Then why aren't rents higher? Do only homeowners have unreported income?

For the most part, I would say "Yes." I doubt most homeowners renting out suites are reporting the income.

jesse said...

"I doubt most homeowners renting out suites are reporting the income."

Most banks in Vancouver area will account for illegal suites in the amount of mortage you can qualify for. This means that someone with family income of $90K per year before tax has an effective grey income around $105K per year.

The 70% affordability number is overstated for part of the SFH market due to suites but keep in mind

1) Not all SFHs have suites.
2) Some mortgages already have rental suites built in when qualifying (stated income).
3) Rental income must be discounted due to vacancy, delinquency, damage, and other issues.
4) Properties with suite (or "suite potential") have somewhat priced in the rental income into the asking price.

Deliverator said...

1) Not all SFHs have suites.
2) Some mortgages already have rental suites built in when qualifying (stated income).
3) Rental income must be discounted due to vacancy, delinquency, damage, and other issues.
4) Properties with suite (or "suite potential") have somewhat priced in the rental income into the asking price.


True, but people don't tend to look at the whole investment picture, but rather at what they can afford.

To a couple making $130k/y looking at a $700k mortgage on a house with a rental suite (assuming they have equity in a previous house, or a large downpayment), the monthly payments of $4,600 for mortgage and taxes come to around 60% of their take-home pay (~45% gross). That's a bit hard to swallow. But throw in a renter at $1000/month (often tax-free), and that figure become a much more palatable ~50% of take-home or ~33% of gross. Right in line with what banks say one can spend on a mortgage.

None of this takes into account the fact that interest rates have bottomed out and long-term bond yields are rising, indicating inflation and higher mortgage rates in the future.

jesse said...

"~50% of take-home or ~33% of gross. Right in line with what banks say one can spend on a mortgage."

Too right. Banks know the deal, which is why they will lend out seemingly crazy sums relative to income if the house has a suite.

Houses are still affordable for above average family incomes but two incomes and renters are often required? Risky.

freako said...

"And lots of people received a higher than 2% raise this year. So, if prices are even, houses are theoretically more affordable. "

Well, in theory, all the non-housing expenses would have risen by inflation, or roughly 2%.