Did you know in Canada, even this “burned out house, open to trespass” house is worth $ million?
For Vancouver, housing and income don’t add up
KERRY GOLD The Globe and Mail
It’s no secret that the rich investor class is buying up properties in cities around the world, including Vancouver.
In Manhattan, the super rich foreign class is driving a boom in luxury condo towers that is widening the gap. Places such as London, and Sydney are feeling the hard pinch of high real estate prices as well. But in those cities, considerable effort has been made to control rising prices and debt and deal with declining ownership.
In Vancouver, there’s an astonishing apathy to the very serious issue of inequality and affordability, says David Ley, a geography professor at the University of British Columbia who’s studying housing bubbles in various cities.
“I was in Sydney, Australia, about six weeks ago, and it’s bad there, but it’s quite a public issue there, too,” said Prof. Ley, author of the book Millionaire Migrants. “There’s a large number of government reports, special committees, and so on, that have been looking at the affordability question. It has a prominence in national debate, which doesn’t seem to happen here.
“Here, there is a flutter of interest every time the Royal Bank comes up with its update on affordability. There isn’t behind it that kind of public mobilization that would lead to government to do more.”
The theory has been brewing for some time that the Vancouver condo market is catering to this global investor class who park their money in cities that are desirable and safe.
We should be reaping the rewards of Vancouver’s status on the bestseller list of cities for global investment. So why doesn’t it feel as if we are? Vancouver has the feel of a city where only a few are at the top of the mountain while the rest are working hard on the climb.
Across the board, experts agree we lack data, such as records of foreign ownership, that we need to determine what is truly going on in Vancouver.
But if we look at the numbers we do have, things just don’t add up. For example, we have the highest average house price in the country, and yet average income is lower than most major Canadian centres.
If you look at the numbers, Vancouverites are simply too poor to afford real estate. In some areas, it’s astonishing that we even try.
The average income in Metro Vancouver in 2009, was only $41,176, according to Canada Revenue Agency statistics. In Vancouver proper, we are getting by on $43,911. However, Richmond residents are barely scraping by at $33,350 a year — the lowest average income in the region, followed by Burnaby, with an average of $34,961.
Only 0.56 per cent of British Columbians declared incomes higher than $250,000, says Andrew Romlo, executive director of Urban Futures, which studies demographics. That’s less than the proverbial 1 per cent that owns everything.
With the average selling price of a detached house in Vancouver at $1.116-million, the incomes do not jibe – even if we are the most indebted province, according to a recent TD Bank report. B.C.’s income-to-debt ratio is the highest, with Albertans a close second. But they’ve got lower house prices and high-paying jobs.
Judging from all the growth, the payoff should be money flowing into infrastructure, such as new transit and, especially, into job creation.
“It doesn’t make sense when you look at income numbers,” says researcher Andy Yan, who works for Bing Thom Architects. “We are not a wealthy city.”
But are we a poor city? We are a city in debt, and at the top end, money is obviously coming from elsewhere. The wealth is visible, but the means to it isn’t. We simply don’t have the tools to measure the flow of money, either.
Like several other experts, Mr. Yan doesn’t believe we are getting the proper return on the cost of all this growth.
“Isn’t this an opportunity to tap into the fact that we have a certain monopoly on climate, livability and civility, and we can take advantage of that?” he asks. “Yes, their $3-million condo is admission to the club, but shouldn’t we be modifying the locker fees?
“Why should we give that wealth out for free? There is a terrible economic history in this province where we give our wealth away. It’s tragic. Should we not rethink our city, given the economic change that’s going on?”
So far, the growth isn’t paying for itself. We are a city without an economic underpinning. We have no stock market, no head offices, the financial centre is elsewhere. Not so long ago, there was a Bank of British Columbia, recalls Thomas Hutton, a UBC professor who studied geography at Oxford University.
“It may well be that our niche is not as a head office or banking city,” says Prof. Hutton, who studies urban growth and development. “We’ll have foreign capital for the real estate market and some start-ups, and that will be it.”
It would seem a precarious balance, banking on the whims of the super rich, never mind the ever-looming prospect of an interest-rate hike. As to whether Vancouver is in a bubble, Prof. Ley doesn’t think that will be the situation any time soon. If a bubble is prices that are out of whack with incomes and labour-market trends, then we might have one, Prof. Ley says.
But the weirdness of Vancouver is that we are driven by investor capital flow, and have been for more than two decades.
“A case could be made that we do not have a bubble. However, should the conditions change, prices may not be sustainable,” he cautions.
Those conditions are cheap mortgages and that capital flow from foreign investors. And the capital flow probably won’t dry up, Prof. Ley says.
“The evidence is that Vancouver will continue to be a popular destination for this market, though there will be year-to-year variations.”
Meanwhile, there remains the question of jobs. People between 18 and 24 are already among the most indebted in Canada, according to the TD Bank report, released in February. Without jobs and affordable housing, why would they stay?
Prof. Ley says there are signs that they aren’t.
“We are seeing a number of people moving out. In the past 20 or 25 years, there has been a net loss of migrants from Metro Vancouver to other parts of Canada.
“A number of Vancouver residents are simply moving away. Obviously, there are different reasons for this. For some, it’s retirement driven, and for some it’s jobs driven. But for a number, it is housing.”
Some Vancouver workers have been priced right out of the country
There was a time when the typical upper middle-class family could afford a big house in the nice part of Vancouver, belong to the nearby country club and put the kids through private school.
When it became the norm to have to fork over $2-million-plus for a house on the west side, even professional wages couldn’t keep up.
At least one man has found a way to maintain the upper-middle-class dream without going into major debt to do so. Eric Murray is chief executive officer of growing clean-tech company Tantalus Systems, based in Burnaby, B.C. Mr. Murray, however, lives in Raleigh, N.C., where he owns a 3,500-square-foot house and puts his three kids through private school.
He is a Canadian, with several family members in Vancouver. But when his career trajectory sent him to Raleigh, he decided to stay put. Mr. Murray is one of a growing number of workers in the Lower Mainland who live in the U.S. You could call them cross-border jobbers.
“My father’s entire family is in Vancouver, so for our relationship, it would be great if I lived there,” he says in a phone interview. “But for me to pick up and move from Raleigh, where I have a fully wooded lot, and a very nice home, and I can send my kids to private school, this sort of stuff – to do that in Vancouver, I just can’t swing it economically. When we looked at this whole thing, we knew we would have to compromise on housing.
“Absolutely, I would live in Vancouver if I could afford it.”
Technology is the third-largest contributor to B.C.’s gross domestic product, says Bill Tam, president of the B.C. Technology Industry Association. He says there is demand for about 4,000 more employees in the industry, and the majority of qualified people come from the U.S.
“Especially in the Vancouver area, technology has been one of the faster growing industries,” he says. “So when companies have had to expand and recruit managers to come here from the U.S., some have relocated to places like Blaine, Wash., close enough to commute on a daily basis. That’s the level of creativity they’ve had to resort to.”
Others, he says, fly in from more distant U.S. locations, like Mr. Murray. Mr. Murray used to fly into Vancouver every other week. These days, he’s flying in every third week.
“When they come across and recognize the cost of housing is four to five times what they are accustomed to, they end up being commuters,” says Mr. Tam.
Sierra Wireless CEO Jason Cohenour, who was travelling and couldn’t be reached for comment, works in Burnaby and lives in the U.S. Tom Ligocki, CEO of Richmond-based Clevest, says he has several employees who live in a golf course community at Semiahmoo Resort, near Blaine. One of his engineers, Jeremy Westbrook, commutes from his home near Blaine to work in Richmond. It takes them about 30 to 40 minutes to make the drive.
“None of the folks in the U.S. want to move to Vancouver,” he says. “The simple example that I heard from one gentleman is that he did not want to move because he can have his $400,000 mansion in the U.S., versus getting a little home for $1-million in Vancouver.”
Mr. Ligocki has recently hired two employees from Philadelphia and another from Chicago, and they are all living in Blaine and working in Richmond.
Mr. Ligocki is an example of the Canadian entrepreneurial dream. He came from Europe and has lived in the Lower Mainland for 30 years, and he literally built his company out of his basement. He started with seven employees and six years later, he employs 121 people at his Richmond office. His greatest demand is for specialized marketing and sales people, as well as engineers.
“We serve the utility industry and there is a lot of expertise in the U.S.,” Mr. Ligocki explains.
His company developed the software that was used in the installation of the smart meters in Vancouver and Toronto. The software is being used by more than 125 utilities around the world, including China, a deal that won Prime Minister Stephen Harper’s support. However, Mr. Ligocki’s growing company is facing a major obstacle in finding skilled employees in Canada, and another obstacle in attracting American employees to put down roots in B.C. – because of unaffordable real estate.
“There’s no point in even talking about the Vancouver market. We are just talking to them about directly moving to the Semiahmoo resort,” he says, on the phone from a conference in New Orleans. “If you can’t bring them to Vancouver, that’s the only option we have.
“And they do certainly make very good wages,” he adds. “These are high-end experts that we are hiring.
“But all these folks are used to living in a house. They are used to American comforts, and they are well paid, and they can afford to have a nice luxury home wherever in the U.S.”
Like several companies in the tech industry in B.C., relatively new Tantalus Systems has seen substantial growth in the last few years. Employees have gone from 10 to 60, and the company is still growing. They’re targeting $20 million in revenues this year.
“That is the challenge – bringing in more people,” says Mr. Murray.
And although he does plan to return home to Vancouver one day, Mr. Murray is more concerned about younger entrepreneurs who want to make a living there.
“Back pedal me 15 years, with a full head of hair, just starting out, with kids. If I were living in Vancouver at the time, I would be thinking, ‘Do I start a business or do I start a family?’ You could do both but you’d have to make significant sacrifices.
“I get into this discussion all the time with guys. Vancouver is great. The mountains and ocean are super. I get that. I would love to live there. I have a lot of family there. But I don’t see how the economics would work for a young person trying to do both of those things, unless they had a similar opportunity in another really pretty place.
“And I have been in a bunch of different countries and there are other really pretty places out there.”
Mr. Tam says that the industry is having better luck attracting younger, more urban types who are content to live in condos. But if the American dream is a yard with a picket fence, the dream gets squashed at the Welcome to Vancouver sign. And consider that tech industry wages are 50 per cent higher than the B.C. average wage, says Mr. Tam.
“If there are challenges in this industry, imagine what it looks like for everybody else.”
Both Mr. Murray and Mr. Ligocki wish their employees would lay down roots in Canada. They’d also like to hire Canadians.
“Obviously we want the world to know that this is an exciting place to live,” says Mr. Ligocki. “And if you are able to attract employees that come here, it would be nice if these high net-worth individuals spent money in Vancouver instead of taking it back across the border.”
Adds Mr. Murray: “I personally am a big supporter of keeping things Canadian. But the bottom line is, you’ve got to get the right talent.”
KERRY GOLD Special to The Globe and Mail
I’m a regular blog reader and huge fan of your educational Greaterfool.ca blog. My wife and I live in BC (Vancouver) and are hitting our 30′s. We’ve been renting for almost a decade and are patiently waiting for the market to hit the bottom. While we’ve sat back for years renting (and saving), at the same time, noticing the local housing market balloon to unsustainable numbers, sometimes when I read about your ongoing ’real estate doom/gloom’ forecast (and albeit a ‘bang on’ forecast), the real $ 100 (plus HST) question is this: “Well, when is it the RIGHT time to BUY?” — Alex
It’s hard to tell how many people come here seeking that answer, as opposed to those merely infatuated with my swarthy magnetism. This blog is a daily column – it’s rolling history. So there are no answers, only guidance. I’m always amused at those critics who storm in and throw a 12-year-old comment in my face to prove I’m fallible. Like that was ever in doubt.
All we can do is peer at the swirl of events and trends around us, apply logic and experience, and plot a reasonable path. Should you buy real estate now? There are two answers to that.
The first depends on you. This is why the GreaterFool crack team of technical analysts, who couldn’t get a decent babe between them even if they flossed and dressed, came up with the Rule of 90. Simply put, deduct your age from 90 to determine what percentage of your net worth should be in your house. So a 30-year-old might reasonably have 60% in real estate and a 60-year-old just 30%.
The premise is simple. Don’t buy a house if you can’t afford one. Reduce real estate risk systematically as you get older. Make sure you always have diversification. And if you’re feeling horny in the middle of a house bloat, get a hot date instead. Or, in the case of a technical analyst, a puppy.
This brings us to the second answer, which is all about market conditions and the rolling history aspect of this pathetic blog. Real estate costs a stupid amount of money, or involves taking on life-altering debt. That’s why understanding where prices are going is critical, especially if you’re entering the market with scant resources (less than 20% down).
A case in point might be the Toronto condo scene. For two years I’ve been telling you to stay away (go back and read why). After the July 9th massacre, when F murdered long mortgages, gutted cash-backs and eviscerated debt ratios, it was simply too late. Anyone who bought after the summer of 2011, especially with 5% down, was screwed.
Even the latest numbers from the local real estate cartel confirm it. In the first two weeks of February condo sales in 416 tumbled 14.4% while prices dropped 8.4% from the same time a year earlier. Imagine what this means for the average $ 355,000 unit bought with the average 5% down. With closing costs (including CMHC premium and double land tax), the mortgage is $ 355,524, after the $ 17,750 down payment. But the current value of the unit is $ 29,820 less than last February. So, you end up owing $ 355,524 on something with a market value of $ 325,000, after spending $ 17,750 – plus monthly fees and a premium cable TV package with access to the Suicide Channel.
And to sell it you must pay another $ 16,000 in commission, plus a mortgage break fee. Total loss after a year: a minimum of $ 65,000, or 18% of the original condo price and 366% of your down payment. Did Mr. Lamb tell you about that?
Now here’s Aman Bhangu, a dude who must be an engineer because spreadsheets arouse him. Every month, he just told me, he plots the Teranet data and dives deep to uncover market trends. Last night he sent me the latest analysis. “The composite index is down 5 straight months,” Aman concludes. Among his key points:
Vancouver: down for 3 straight months, but it would have been down for SEVEN straight months had it not been for the minor upward blip in October. In total, prices have fallen over 5% from the highs and compared to the highest January sales pair since 2004 – which was in January 2004, sales pair volume is down 61%. Even versus an average January from 2004 onward, Vancouver sales pairs are down 44%.
Calgary: All this talk of a price resurgence in Calgary is rubbish. Calgary has declined for two straight months and has had sales pair volume decline in a straight line every month for 7 months (there has been no seasonal pick up just a downward trend). Prices are down 7.5% from their all time highs. Sure, prices are up 4.29% YoY, but since July prices are virtually flat. That 4.29% uptick took place at the start of the previous year and is old news.
Toronto: 4 months of price decline – off from the all time highs now – 37bps MoM decline. I thought Toronto would be worse for volume – this price decline is on higher than average seasonal volume. I’m expecting Toronto to be the last hold out in Canada for the price correction.
So, Alex, there ya go. If you can afford to buy a Van house in your thirties and still have a third of your assets elsewhere, go for it. But understand the place will likely be worth less in a year. If you have to throw everything you’ve got into a down payment, so real estate equals 100% of your net worth, then it’s kamikaze time. Is this really worth the risk? And don’t delude yourself the way so many people do, saying, ‘well, we’re going to live there for 30 years, so it’ll all work out.’
Trust me, you won’t. Those days are gone, along with patience.