Thursday, August 13, 2009

The Smell Test

Think about house prices in Vancouver for long enough and the price tags we discuss in our fair city don't seem to shock us after a while. Go away for a bit and return and you find that our real estate market is like a bad smell that you didn't notice when you were in the room but when you come back it seems intolerable.
Thinking about houses in Vancouver, where average household incomes are in the $60,000 / year range, I like to imagine who might live in that $1,000,000 house, recognizing that with a 10% down payment it still takes a $175,000 / year income to qualify for the mortgage. It might be a 'rich' foreigner or a successful lawyer or doctor or business owner. When I see pictures from listings like this one, I think that I may not be so delusional after all to think that most of the people who buy homes in Vancouver may not be able to actually afford them. Shocking, I know.

Keep in mind that this house with a near $1,000,000 price tag neighbours a commercial building and is metres away from the insanely busy Oak Street. Not exactly where I picture a successful lawyer, doctor or business owner living. The other pictures shed some light on who may live there and what kind of lifestyle they can afford. I've got nothing against having some old furniture in the den but this stuff is hideous and hardly what I think of when I think of a $1,000,000 house. Yuck.
Anyway, things just seem to be a little smellier than normal lately.


Unknown said...

cheap asians. sorry, had to be said.

M- said...

"Not exactly where I picture a successful lawyer, doctor or business owner living."

Of course not! That's where you can expect to see two!

(as in, it takes a professional couple to afford that!)

jesse said...

A property like this contains a doctor, a part-time teacher, two kids, two foreign exchange students, a construction worker in one basement suite and a young family of three in the other. That's 10 people on a 55 foot lot. Hope they have multiple hot water tanks.

Add up the net income: $500 for the 1 br, $700 for the 2br, $600 for the students and we're at $1800 net, not accounting for anyone's time of course. That supports a $400,000 mortgage. The doctor and teacher net well into the $200K range and $1MM all of a sudden doesn't seem too unreasonable.

Heck, even two teachers with help from the parents and equity from their recently sold condo can get most of the way to $1MM at current mortgage rates, with the supplementary income from rentals.

At this point calling it a SFH is perhaps a bit optimistic. If it is truly an SFH, whoever lives there is paying a huge premium compared to what the land and structure are capable of supporting.

It doesn't justify high prices but often we forget to what lengths some will go to own land in Vancouver though when rates go higher no amount of exchange students will be able to compensate.

markoz said...

We rent a house that was previously owned by a very nice Asian couple. When we came to view the place the new owner was there as well as the couple. I almost walked because the linoleum and carpets were very old and damaged and the bathrooms were moldy. The stove was old and missing buttons with scotch tape over where they used to be. The new owner promised to redo the lino and paint. I had just asked the gf to move in and didn't want her to think I was getting cold feet so I acquiesced since she decreed "It's perfect!"

The previous owner had very little in the way of furniture (i.e. no chest of drawers, just a couple of folding chairs in the bedroom to throw clothes on) and the furniture that was there was of poor quality. There was a cheap round melamine dining table in the middle of the living room facing a big screen TV. Carpets were ripped and, although the windows had permanent bars that couldn't be opened from inside or outside, there was only one smoke detector (that made a feeble dying noise when I replaced it with 5 new ones). Half the light bulbs in the place were burned out. I got the distinct impression the mortgage was killing the guy even though he had lived there 7 years.

I majored in Asian studies in undergrad and can understand why many Asians are obsessed with RE. In the old days, if you rented land you might perish in times of famine. That is certainly not true today, but I imagine that at some point it is hard-wired into the culture. My own mother is English, another race obsessed with RE. Not sure what the cultural underpinning for that is, but it is no less real.

If others are willing to sell their soul for a piece of Van RE, you have to be willing to put your own soul on offer or be very, very wealthy. Or you can rent...

jesse said...

While I am sure there are certain cultural aspects that affect how one views real estate as a long-term investment, it seems odd prices weren't astronomical 10 years ago.

It's also worth noting this last spring and summer have seen prices rise all around the world. It isn't just a Vancouver phenomenon. Capital assets rising when incomes are falling just doesn't smell bad, it stinks.

Anonymous said...
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markoz said...

I agree Jesse. There has to be more than a cultural proclivity to generate these sorts of sales in this sort of economy (though it does add fuel to the fire).

I posted on another site that while prices have doubled (here) since 2002, incomes didn't, nor did population. That is an oversimplification but it underscores the point. Many western governments feel home ownership is "good" and promote it, as our governments have since the '80s. Building houses creates jobs both directly and indirectly. Unfortunately, that promotion of home ownership has generally been in the form of allowing purchasers to access greater and greater amounts of debt. That leads to huge price inflation. It will stop when our governments run out of ways to lure FTBs into massive debt.

The recent super low interest rates have helped absorb a substantial amount of the inventory that was hanging on in 2008 and that means price declines going forward will likely be slower than they otherwise would have been.

Where it stops, I don't know...

patriotz said...

A cultural proclivity towards owning RE leads to bigger and more frequent bubbles. It does not lead to prices being permanently out of whack with fundamentals - that is impossible.

For example compare Germany, where there is no cultural bias toward owning RE and renters are respected and have many legal rights - and where taxation and lending policies discourage speculation, with the UK. Bubbles in the UK have inevitably led to busts, including the current one. And note the UK is more densely populated than Germany.

Anyone who thinks a substantial Chinese population (or a shortage of land) can keep prices out whack indefinitely need only look at Hong Kong's 50% price bust in the late 90's, or at many markets in mainland China today.

trotter said...
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