It’s Vancouver’s greatest economic export: telling everyone outside of Vancouver how great it is to live here. It’s even on our license plate (“the greatest place on earth”). No – we’re not arrogant, we just live in a delusional rainy day reality.
The definition of a real estate bubble is when the price of an asset rises above what local incomes can afford. It’s that simple. If the locals can’t afford it – then an asset is over priced. How do we gauge if something is too expensive?
Easy – we have historical real estate valuations that are based on the incomes of local residents. The historical national average over a very long period of time is approximately three times income to one. What does this mean in English and not finance talk? It means that if you and your partner make a combined income of $100,000 per year, then the house you should be buying is about $300,000.
This isn’t an exact science – but that sounds about right for affordability doesn’t it? This way you can pay your mortgage, save for your kids college, perhaps take a vacation every year or two, and save for a rainy day.
So here’s the magic question – if the rest of Canadian families are making $100,000 per year and buying $300,000 houses, how much do pay at the greatest place on earth?
Well, let me assure you we’re not making any more money: Vancouver is not a great place for young couples to get ahead (think Calgary, Fort Mac, or Toronto if you want to live somewhere and make good coin). So if a Vancouver couple is making $100,000, the average home they are purchasing is $900,000. These aren’t exact numbers, but give or take $100,000 in either direction and you’re probably about bang on. So what are the implications to this?
If you believe in putting down a 25 per cent down payment you’d have to first save about $225,000 to just for your down payment. That’s nearly the cost of a $300,000 house that everyone else in the country is paying. Comparatively speaking, your mortgage is $450,000 higher with living in Vancouver than somewhere else in the country.
That, ladies and gentlemen, is pure insanity.
Never mind the increased mortgage cost, the real cost is what you pay in interest for borrowing that insane amount of money.
I whipped out my trusty mortgage rate calculator (never leave home without it) and believe with a historical 5% interest rate (with a 25 year mortgage), the amount of interest a Vancouver resident will pay in real dollars is $508,794 (http://www.calcmymortgage.
I hope you love living in the greatest place on earth is worth giving your retirement, college kids savings, and your first born child to the bank, because that’s basically what it’s costing. The average Vancouver family could literally own three homes if they lived somewhere else.
So now that we’ve already figured out that its completely unaffordable to live in this city, let’s try to determine why.
The Limited Land Argument
From a geographic perspective, Vancouver is unlike most American (and Canadian) cities in the sense that we are surrounded by mountains, water and the international border with the United states. This creates a limited space for the region to build housing for its residents.
It’s simple, Vancouver is not a city that can just perpetually build out in every direction (like Calgary), which means we all get stuffed in next to each other as prices continue to escalate. Despite the limited land argument, this is not the main reason why the average Vancouver home is more than twice the national average.
The Foreign Money Argument
Metro Vancouver is touted as one of the most “ethnically diverse” places to live in the world. There’s no argument there, this must be one of the only places in North America where you can live a comfortable lifestyle and never have to speak a word of English.
This has caused Vancouver to be a hot bed of foreign ownership and investment in our real estate, and this is the key reason why Vancouver real estate prices are so high. How you say? Let’s dissect further.
I never really understood why foreigners want to live in Vancouver so much. I mean, why Vancouver over any other city. You would think they would want to live somewhere else like Seattle, Toronto or Montreal. What makes us so special?
There are already well established immigrant communities in Vancouver. Don’t believe me? I would challenge you to hang out in Richmond for the day and take a poll of how many people speak English versus a foreign language. It makes perfect sense – if you wanted to buy real estate outside your own country, you’d buy the next best thing and that’s exactly what Vancouver offers this wealthy foreign contingent.
You need a lot of money to buy real estate in Vancouver, right? The people that can afford to still buy in Vancouver are not exactly middle class, they’re business owners, professionals, and basically already very wealthy in their own country. To these people it doesn’t matter if a Vancouver home costs $500,000, $600,000 or a million dollars.
They’re recession proof, this is the key argument that every real estate analyst (that’s calling for a Vancouver housing crash) is missing. The local residents are simply completely priced out of the market, they’re not buying locally or at all. Ask any realtor (selling houses and not condos) how many of his/her sales are to foreign versus local money. I did a poll in of three realtors in Burnaby and each told me greater then 90 per cent are offshore or only live for a portion of the year.
If you are a wealthy Hong Kong or Mainland Chinese businessman worth millions of dollars, do you think it matters if the Vancouver real estate market crashes? Of course not, they’re investing in Vancouver real estate with cash. They don’t need Canadian mortgages and they wouldn’t qualify anyways, they don’t have any Canadian income.
Their money is made somewhere else – so they just pay cash. If you’re worth millions of dollars, do you think you will care if your $1 million dollar house declined in value by 20%? No – of course you don’t. That’s precisely why the Vancouver market is not in for a housing crash.
Could we see some sort of “correction” of 10 – 20 percent? Sure we could – I wouldn’t say a 1 million dollar box in the sky condo that declined to $800,000 a “huge real estate crash.”
It certainly would be a decline in price – but it’s not exactly going to change the game and make real estate affordable in this city.
How We’re Different then the American Real Estate Crash
- Wealthy offshore investors purchase homes in cash (not credit). Therefore less leverage making the market more stable.
- Local residents mortgage themselves up with real estate they can’t afford, but they’ll get by through renting out the basement, spare upstairs bedroom, and eating canned soup.
- There’s no real trigger for a crash as “thousands of owners flood the market with listings” because the majority of Vancouver real estate are all long term holders and not flippers.
- American mortgages are different than Canadian mortgages with respect to the fact that in the United States, you can literally just mail the bank the keys to your place and move out. In Canada, when you default on your mortgage they come after the mortgage owner’s personal assets.
How the Government Can Actually Be Useful Here
Living in a place where foreign investors and non-residents are buying up all the affordable real estate is nothing new. There are similar situations all around the world where this is happening.
Think about it – if you were worth millions of dollars and lived in a developing or politically oppressed country, wouldn’t you want to store your cash in a delightfully, economically and politically stable jurisdiction? You have no idea what the government will do next month never mind the next 50 years. This is what the Government can do:
- Start collecting statistics on local real estate. I know it’s crazy – for all of the unnecessary stuff that government does, they haven’t even mandated that proper statistics start being collected for who buys and owns real estate (arguably our most precious asset as a country).
- Consider implementing foreign ownership rules in a phased approach over time. Why is it that whenever a foreign government wants to buy a big natural resource or technology company, it becomes mainstream news and it’s subject to a “net benefit test.” But when the same thing happends to individual residents (i.e. real estate being purchased en masse, severely disrupting the equilibrium of a local market), it’s ok and no one does anything. I personally do not care if BHP wants to purchase Potash – where do politician’s think the natural resources are going to go? England? I won’t babble too much about this because that’s a separate opinion article.
The Canadian Government needs to get serious about this foreign ownership of our real estate. Residents need to start standing up and protesting our land being sold to the highest bidder in another country who doesn’t truly plan to live here.
Other countries have implemented foreign ownership rules successfully, most notably Sydney, Australia. Our real estate and home prices are not an investment, they are a home.
It is not good for our society to live in a place where homes are expected to increase $30,000 per year.