British Columbia has the dubious honour of having Canada’s least affordable housing, according to RBC Economics.
But prospective buyers waiting “for the bubble to burst” could wait a long time, says Kelvin Neufeld, president-elect of the Fraser Valley Real Estate Board.
“There is no bubble,” said Neufeld on Wednesday.
Royal Bank of Canada (RY on TSX and NYSE) and its subsidiaries operate under the master brand name of RBC. RBC Economics Research provides analysis and forecasts of the economy and financial markets in Canada, the United States and key international markets.
A new report on housing issued last week by RBC indicates that B.C. is the least affordable province in Canada in which to purchase a home. However, the province’s housing affordability is expected to improve modestly in 2008, the report says.
Neufeld said he doesn’t see the market correcting itself in the dramatic manner experienced in the early 1980s.
Neufeld, a long-time Surrey realtor with Macdonald Realty Olympic, said he was selling subdivision homes in January, 1980, at $130,000. By November that year, homes in the same subdivision were selling at $350,000. In 1981 the real estate bubble did indeed burst, with interest rates reaching as high as 21 per cent later in the year.
“We are not experiencing anything like that today,” said Neufeld.
Neufeld says there is really no bad time to “put a roof over your head,” but advises that real estate is a long-term investment.
“I recall when I bought my first house in North Delta . . . (it was) $21,900.”
“I was a young man and my father-in-law told me I was a silly fool, prices couldn’t stay that high, and I was going to (lose everything) and take his daughter down with me.”
According to the latest RBC report, B.C.’s housing market moved into uncharted territory last year, as affordability deteriorated to its worst levels since the bank began tracking conditions back in 1985, said Derek Holt, assistant chief economist, RBC.
At the same time, a U.S. public policy firm, Demographia, has announced that homes in Vancouver, Abbotsford, Victoria and Kelowna are “severely unaffordable” and among the top most expensive housing markets in six countries surveyed.
“We expect affordability rates to see some modest improvements in 2008 as the province’s housing market reached a peak stress point late last year,” said Holt.
The RBC Affordability measure for British Columbia, which captures the proportion of pretax household income needed to service the costs of owning a home in the province, deteriorated across all housing segments as the detached bungalow moved to 67 per cent, the standard two-story home to 71 per cent, the standard townhouse to 50 per cent and the standard condo to 36 per cent.
Slower demand, coupled with a downward trend in the sales-to-listing ratio, has helped ease some of the upward pressures on B.C. home prices. As a result, price gains have started to level off, dropping from 18 per cent in 2006 to 12 per cent last year. An even softer rate of eight per cent is expected for 2008.
Neufeld says he is still finding sales are strong in the valley, where not only prospective home buyers are searching for housing, but businesses and industry are relocating.
The Canadian banking system is much stricter than the U.S. system, and Canada is not experiencing the sub-prime dilemma affecting both banks and mortgage holders there.
The Canadian scenario of 1980-1981 is not in evidence here either. Neufeld said.
In 1980, home prices skyrocketed almost overnight, then plunged as mortgage rates went through the roof, and the job market crashed.
“We were having huge inflation, then the government put the interest rates up (as high as) 21 per cent.”
Today, interest rates are in the range of about 5.8 per cent for a five-year term, he said.
And today, “immigration is still huge, and there are still jobs being created,” Neufeld said.
The Lower Mainland is also an attractive place to live for Canadians from across the country.
“What we find is, a lot of jobs are coming out here (from the Vancouver area to the Fraser Valley),” he said.
Neufeld said that he has encountered some young buyers who have clubbed together with another couple, or a group of friends buying, to make homes more affordable.
But mostly, younger or first-time buyers are taking advantage of a 40-year mortgage, over the traditional 25-year mortgage.
In some cases, that can cut the monthly payment by as much as several hundred dollars, he said.
Amortized over 40 years, these mortgages can still have a variable term, renegotiable at intervals, just as the 25-year mortgages are, he said.
In Vancouver, according to RBC, affordability deteriorated across all housing segments in 2007, but the pace slowed significantly mid-year. The combination of more modest house-price growth and improved income growth helped restrain the affordability deterioration. The city’s housing market remains robust, with annual price growth around 12 per cent and the sales-to-listing ratio skewed towards sellers.
However, with an increased supply of homes on the market helping to moderate price gains, Vancouver should see some affordability relief later in the year.
The Housing Affordability measure, which RBC has compiled since 1985, is based on the costs of owning a detached bungalow, a reasonable property benchmark for the housing market. Alternative housing types are also presented including a standard two-storey home, a standard townhouse and a standard condo.
The higher the reading, the more costly it is to afford a home. For example, an Affordability reading of 50 per cent means that homeownership costs, including mortgage payments, utilities and property taxes, take up 50 per cent of a typical household’s monthly pre-tax income.
The report also looked at mortgage carrying costs relative to incomes for a broader sampling of cities across the country, including Victoria.
For these smaller cities, RBC has used a narrower measure of housing affordability that only takes mortgage payments relative to income into account.
RBC’s Affordability measures for a detached bungalow for Canada’s largest cities are as follows: Vancouver, 72 per cent, Calgary, 46 per cent, Toronto, 46 per cent, Montreal, 37 per cent and Ottawa, 32 per cent.
According to the U.S. report by Demographia, high housing prices here are not the result of Vancouver being a desirable place to live.
According to Demographia, the reason housing prices are so high in the Vancouver area is because of artificial restrictions on the supply of land.
Urban growth boundaries, (in B.C., that’s the Agricultural Land Reserve) should be removed, according to Demographia.