Friday, September 21, 2007

Mortgage Payments are BIG and TD Economics is smoking something!

Well I thought it was about time to revisit how much the average Vancouver area home buyer must earn to afford to purchase different types of fairly average accomodations. This calculator assumes a 32% ratio for all housing costs - this has typically been the criteria for CMHC backed mortgages in Canada. Click on the chart to enlarge it.





It is shocking to me to consider that a household must earn nearly $60,000 per year in order to afford the average condo in the Fraser Valley. That is even with an insane 40 year amortization mortgage. And I thought condos were supposed to be affordable for first time buyers and low income earners - phsssssh - so passe - only high income earners, loan application liars and ever-so-prescient real estate speculators can afford the basic condominium now. My former condo was affordable when I bought it but it sure wasn't when I sold it.

Go to the CMHC site and do the calculation for your situation. Tell us what you find. Is rent cheaper than the monthly payment? By how much? Or if you already own your home, would you be able to afford to buy it today with your current income if you had to.


UPDATE:

In the category - what are you smoking - another bank releases a milque-toast economic report on how Canada's housing market is undergoing a soft landing. I'd like to see the TD Economics department relocated to downtown Vancouver and we could see those poor economists struggle under the burden of a crushing mortgage payment double what they pay in Toronto for a similar property. Here are the comments about the Vancouver market that defy logic:


Vancouver – A balanced market within sight


Existing home prices are expected to post a 12% gain from last year. TD Economics forecasts that this softening in price growth will continue into 2008, where the yearly average resale home price gain is expected to come in at 7%. Okay brilliant TD economist, how much did wages rise or interest rates fall? Wages were up approx. 3% and interest rates rose thus making houses more unaffordable than ever. How exactly will we sustain another 7% rise in prices?

What lies beneath this outlook? We have profit goals as a bank for next year and the profits hinge on us reaching our lending goals so we were reluctant to release the real analysis that we did because we wanted to keep our job. Oops . . . I mean . . . First, a higher number of existing homes listed for sale. This dampens new home demand and helps ease relative demand pressures for existing homes. As more homeowners look to lock in price gains from recent years, listings are expected to continue feeding supply more than enough to meet demand.

The second main driver behind our forecast for softer price growth lies on the demand side: affordability. Not only is affordability poor on a level basis, it has been deteriorating significantly in the last couple of years.
Hmmmm . . . . really - you don't say!? Typical mortgage carrying costs for a median-priced home in Vancouver required close to 10 percentage points more of the median market household income in 2006 than it did a year earlier. I guess no more food for junior and we are going to have to drive that old Honda for another 10 years. As the lagged effect of this significant deterioration works through the system, it will continue to dampen demand going forward.

Whereas sales might increase at most 2-3% from last year, new listings are expected to increase by twice as much in per cent terms. After exhibiting the characteristics of a strong seller’s market since the turn of the decade, Vancouver’s market is heading back towards more balanced conditions (see textbox for discussion of overall market balance measure). Indeed, the demand-supply ratio for Vancouver’s housing market is inching towards the balanced market range of 0.4-0.6. So how exactly will demand (sales) going to increase when you just said it would decrease? I don't understand.

On the new home market front, housing starts continue to downshift after having peaked in 2004. However, the number of starts should remain lofty throughout the forecast horizon. A lean inventory of completed but unabsorbed units, along with high construction costs, have helped continue an upward trend in new home price growth that is six years long and still running. Extrapolation at its finest - prices have gone up so they will continue to go up. Brilliant!

Residential construction continues to face challenges like a shortage of skilled trades, high land prices, and increasing competition for resources from the non-residential sector. This is illustrated by the recent increase in building permits that has not been accompanied by rising starts to match. In other words, builders have purchased permits, but have not broken ground. Unless sufficient resources can be made available to catch up with building intentions, this is likely to put continued upward pressure on new home prices and to further erode an already strained new home affordability. This is why framers and guys who pour concrete without high school education make more money than well educated financial planners who manage millions of dollars of other people's money! I'm not bitter!

In terms of resale home price growth, Vancouver was the first western market to cool from its peak of 20%. Thankfully, the easing from such a break-neck pace of growth is proceeding gradually. Demand remains well supported by a pace of job creation that only Alberta has been able to outmatch. But Vancouver’s job market is also less vulnerable to downside risks tied to the volatile resources sector, and employment growth is expected to outpace the Canadian average by 2.5 times. Therefore, we are expecting the market to remain relatively tight. But as the supply of homes continues to grow, while demand softens as a result of eroding affordability, price growth should head back down towards a more sustainable pace. Yes we have robust employment in Starbucks baristas, retail, tourism, and yes, of course, construction employment. All of which are low paid, non-house-affording jobs except for the construction employment. And how exactly is our employment not directly tied to the volatile resource sector? Isn't the BC economy 'resource based' like cutting trees and digging up rocks?


TD Economics - you get the mohican what are you smoking award - hooray.

34 comments:

WoodenHorse said...

230K household income for a detached in Vancouver. So you've have to be earning 4X the median to buy that. I wonder what percentile that would put you in.

WoodenHorse said...

Just saw the update.

This is the same crap that Banks and the NAR were pumping out about CA and FL in 2006. I remember TD producing some rather Bearish reports in the past, oh well...guess they fired that guy.

mohican said...

You are right woodenhorse - Carl Gomez produced some of the best analysis on the Canadian housing market ever done and he left TD / was fired - I don't know.

I expect that, if he left, it was over 'philosophical differences' and he works for the Bentall Group now.

freako said...

I like this new Mohican who says what he really feels. Not that there was anything wrong with the old Mohican.

This report, like many others, seem to view a series of economic factors as simple gas pedals. Low unemployment, double digit appreciation. Low rates, double digit appreciation. Strong economy, double digit appreciation.

This is folly, of course, because it ignores the concept of relative value. If past appreciation was in excess of what is fundamentally supportable, down she will go. Well not according to these knuckleheads who only see two speeds, normal appreciation and double digit appreciation. Let's file this one away for a good laugh in the future. Are they really this dense?

Clarke said...

Well, according to the CHMC, we can comfortably afford a Fraser Valley Townhouse. Granted, I have always been a bit leary of the 32% of gross income, as this tends to work out to close to 50% of net income.

Moving on to the TD article, there are so many non sequiturs one wonders if someone did break out the bong prior to and during the writing. It is just really bad. I guess the next time I see someone crashed out in the alley downtown with a needle still stuck in their arm, I may assume it is a TD economist on break.

BearClaw said...

Crunching numbers just shows that you don't want a house badly enough. Don't be an economic terrorist.

talus said...

Crunching numbers just shows that you don't want a house badly enough.

Maybe your user name should be Bear-baiting?


Bear-baiting was popular in England until the nineteenth century. A post would be set in the ground towards the edge of the pit and the bear chained to it, either by the leg or neck. A number of well-trained hunting dogs would then be set on it, being replaced as they tired or were wounded or killed.

http://en.wikipedia.org/wiki/Bear-baiting

freako said...

Granted, I have always been a bit leary of the 32% of gross income, as this tends to work out to close to 50% of net income.


As we discussed earlier, CMHC now goes to 44% if no other debt and good credit. I am sure that many recent buyers sit in the 40%+ range. And that is why I think that we lots of subprime, even if isn't in the literal sense.

freako said...

Maybe your user name should be Bear-baiting?

Not totally sure, but I think BC was being sarcastic.

Warren said...

I purchased my first apartment at around the CHMC max at the time (which was still about 33%), and it was tough going for the first few years. I was naive, but lucky on timing. I got better jobs and my income went up, making it easier to make payments, but I don't think a lot of people know what they are getting into. It all depends on your relative income as well, when you are talking about 33% of gross, which can be 50% of net, what is that other 66%?

Why do all of these reports completely ignore rent? Its like landlords and cashflow investors are non-existent in their world. I've been to places like San Fran, NYC, London, where I am amazed at the price of RE, but then I'm amazed at the rents too. As to where that money comes from, I'm not so sure.. but its there. Rents here indicate that same money is not available in the GVRD.

freako said...

I purchased my first apartment at around the CHMC max at the time (which was still about 33%), and it was tough going for the first few years.

Here is a big factor that needs to be considered: Buying at the CMHC max in a high inflation environment is short term pain. Buying at the CMHC max in a low inflation environment is long term pain. Add the fact that you are hemmed in by low rates. Should inflation pick up, long rates will go up and you will get whacked at renewal time.

This situation is unprecedented, but many are totally unaware. They still go by old axioms such as "why pay your landlords mortgage". These have been deservedly been ripped apart on internet forums, but in mainstream society they still hold sway.

freako said...

On the topic of Carl Gomez, he is the one and only housing analyst who has ever applied basic fundamental analysis to the Vancouver market. You know the analysis that you learn in first year finance. It was in his last report, and the section on Vancouver is definitely worth a read. Prices have gone up since, of course, but that just makes his analysis even more valid.

As I have argued many times in the past, RE suffers from the fact that unlike other asset classes, there are no research analysts with either the competence or the incentive to see what really is going on. Tragic if you ask me. That is why there is so little proper analsyis in the MSM, and so much by bloggers, many of which have a financial background. If we look to the U.S. that is exactly where a spade was called a spade. The backpedalling among those who should know better (Greenspan etc) would be comical if it wasn't so tragic.

What RE really lacks that equities have, is buy side analysts. The sell side is a crooked industry. Look at the U.S. investment bankers. They did it during the tech boom, and they did it during the housing boom.

Finally, RE also lacks the equivalent of a value investor who actually SELLS when prices get out of line. Cashflow investors don't.

WoodenHorse said...

This report, like many others, seem to view a series of economic factors as simple gas pedals. Low unemployment, double digit appreciation. Low rates, double digit appreciation. Strong economy, double digit appreciation.

This is folly, of course, because it ignores the concept of relative value.


Freako, I totally agree. I can see in my minds eye myself and one of this analysts walking into the local corner store and candy bars are $1000 apeice. I turn to the analyst "Why are these priced at $1000?", he answers " Low unemployment, double digit appreciation. Low rates, double digit appreciation. Strong economy, double digit appreciation." The concept of value has simply left the building.

beta said...

This is the same crap that Banks and the NAR were pumping out about CA and FL in 2006.

And the result will be the same here, merely time delayed. They just don't want to stampede the cattle.

johnnyrent said...

Well said, Beta

My experience is that economists' perspectives are most accurate from the rear view mirror. In that same vein, they are much more adept at back-peddling, than they are at projecting.

No person in the pubic eye wants to be seen to negatively affect the herd mentality, until after the herd starts to run in the opposite direction.

We won't get anything but optimistic pap from these fellows until well after the train has left the station.

jesse said...

Here is one of Gomez's final reports at TD, for the record.

Paul said...

When will this market gasp its last bullish breaths?

Any ideas/guesses? Everything seem to be moving along just fine. Although we seem to be brewing the perfect storm for a collapse.

How long can it go on??????

freako said...

Gomez quote from Jesse's link:

For example, while Vancouver’s housing market remains quite tight, the elevated level of its irrational exuberance indicator suggests that inflation-adjusted prices are actually growing faster than what underlying supply and demand conditions would warrant.

Now that is calling a spade a spade. I truly he left because he got promoted (now VP of reasearch at Bentall), not because he was pushed out.

More:

Why potential homebuyers would choose to do so when it is considerably cheaper to rent a comparable property is hard to reconcile, but many may be doing so with the belief that if they did not “they would be priced out of the market forever.” Such a fear is an inherent feature of all speculative bubbles.

All these points and more were very nicely hammered out in VHB's post and comments. It is almost as if Carl was a reader. I think history will prove these arguments on the money.

wizardofozziejurock said...

I'm not so sure everything's moving along just fine as far as the bulls are concerned. Anyone who's tracked my posts knows I've never attempted to call a top or make a prediction...but my anecdotals are indicating a slowdown.

I can't give all the details, but I'm close to 5 separate transactions at the current time, both on the sell side and buy side covering Vancouver and Burnaby, and I just got the update on all of them over the past few days.

In 3 of them, the buyer is in the driver's seat. In the fourth, there are no buyers after many months and multiple price reductions. In the fifth, it's been taken off the market due to no offers.

It's a small sample to be sure, but it sure surprised me.

patriotz said...

My experience is that economists' perspectives are most accurate from the rear view mirror. In that same vein, they are much more adept at back-peddling, than they are at projecting.

You are describing a shill, not a real economist, who is engaged in objective inquiry. Real economists such as Shiller and Krugman are interested in reality, not pleasing a paymaster, and they called the US bubble pretty accurately. As have disinterested investors and financiers such as Warren Buffett, or bloggers like Calculated Risk and Mish.

And rest assured that the very same organizations who hire shills like Lereah to bamboozle the public also have real economists working for them to tell them the real story. Just like the Soviet elite had their own objective media for internal consumption, while the masses were fed lies.

No person in the pubic eye wants to be seen to negatively affect the herd mentality, until after the herd starts to run in the opposite direction.

You've got it backwards. It's the herd that doesn't want to hear anything negative. In every bubble there have always been objective analysts doing their best to point out that the emperor has no clothes. But it's hard to get the message out when there is no financially interested party paying for it. And anyway, people just won't listen even when they do hear the message.

beta said...

You've got it backwards. It's the herd that doesn't want to hear anything negative.

Both processes are at work: Cassandras go unheard, and messengers don't want to get blamed for a subsequent downturn.

markoz said...
This comment has been removed by the author.
markoz said...

The depressing thing about today's astronomical prices is that even if there is a 40% correction they will still be unaffordable. I went for a walk on the weekend and stopped by an open house in my neighbourhood at 46th and Ontario. A 68 year old house, 2000 sq ft, with 2 grungy suites downstairs. The suites weren't even vacuumed and had crap on the floor. The kitchen was small and last updated in the early 80's. The lot was about 5000 sq ft where most Vancouver lots are 4000. Asking price? $1,080,000! As I left I said to the realtor, "It's a lovely, modest little starter home - for someone with a million dollars." He patted me on the back and thanked me for being a good sport.

Sam said...

so, a crappy house for a million dollars in a country where apparently the top 5% of earners (news article today) earn $89,000. Add to this the fact that the same percentile in the US earn $165,000 (and now the math is made way easier for us in comparing these), and with LOWER prices in the US and dropping, you really have to shake your head.

Sam said...

maybe a 60% drop in price on the above would make sense!!

FUDGEBOYZ said...

I am taking microeconomics this semester.
I asked my professor her opinion about the real estate market. Both she and her husband have PHD's and quite above average income. She said to me that She and her husband were finding it difficult to purchase a home. She said prices are too high, yet she is going to buy anyways. She says prices will only go up in Vancouver. She says she is tired of renting. Is this market ever gonna cool.

markoz said...

This is the house I was talking about. It says it is 2400 sq ft. It seemed smaller to me. Only one bathroom!
http://www.jeffbenna.com/ActiveListings.php/Details/157/#viewdetail

patriotz said...

Cassandras go unheard, and messengers don't want to get blamed for a subsequent downturn.

Disagree, the messengers know that the bears will always blame them, but that doesn't stop them. I mean the truly objective ones I cited previously.

There are many more people in a position to know that a serious downturn is inevitable, but who keep their mouths shut to avoid displeasing their paymasters or the voters. Greenspan is an excellent example. And locally, who thinks Gordon or Michael Campbell, or Michael Walker, are buying right now?

Clarke said...

"maybe a 60% drop in price on the above would make sense!!"

Well Sam, be careful what you wish for.....

Regarding your economics professor, I would not say my experience is representative, but the majority of business professors I knew never held any real jobs except doing consulting work (do not get me started on what I think of consultants), and most would be unable to successfully run a hot dog stand. I wish I was kidding.

Then again, to repeat ad nauseum, I work in the financial sector with lots of smart, shrewd business types, and lots of them have either recently bought houses, or "investment properties", and many are convinced that RE only ever goes up.

I could very well be completely wrong, but to paraphrase the Buddha, determining the truth is not a matter of relying on popular opinion.

patriotz said...

Both she and her husband have PHD's and quite above average income

Sounds like the professor couple in Pomona, California (Inland Empire) who wrote a report last year saying that prices would keep going up. Read it and laugh.

Note that they said that their own area, San Bernardino, was undervalued. I love the smell of burnt toast in the morning.

freako said...

I scanned that article, Patriotz. Quite funny. They take a long term view WITHOUT a risk factor and decide that a houses are undervalued.

That would be like suggesting that the stock market is undervalued anytime you expect long run returns to beat riskfree savings, which is of course always. Using that logic, 1982 was a great time to buy housing. What they are proposing is somewhat analogous to investing money, jumping in a time machine and travelling far into the future, liquidate, and bring the cash back home to present time. Yeah right. I wonder if they stick by their analysis as their home depreciates.

beta said...

There are many more people in a position to know that a serious downturn is inevitable, but who keep their mouths shut to avoid displeasing their paymasters or the voters. Greenspan is an excellent example.

Yes, this is precisely what I am referring to when I wrote "messengers don't want to get blamed for a subsequent downturn" -- Greenspan is such a messenger. You repeatedly disagree with myself and Johnnyrent, then write virtually the same thing in different words. I don't think you understood what we meant.

JMK said...

They take a long term view WITHOUT a risk factor and decide that a houses are undervalued.

Fair enough. What is the risk factor for housing ( I imagine it depends on the market, so I suppose Vancouver's would be interesting) and how strongly does it impact the calculation?

Note they compared against investing in the stock market, which has a higher risk factor. However, they went 75% leveraged on housing, so I assume that changes the calculation as well.

realist said...

I heard that the author of the TD document lives in Oakville. His particular neighbourhood has gone from 220k homes to over 600k in the last 7 years.

On top of that working for a bank allows for some extermely generous mortgage rates. Im sure thats not the only property bank analysts invest in.

I think self interest is at work here a bit.

Since the dotcom bust, analysts have had to disclose their self interest when publishing or reporting on stocks... its time to force the real estate industry and its analysts to do the same.

My wife and I make over 200k per year and rent in the GTA. We will be buying our first house this year ... in Sarasota Florida.