B.C. Housing “Severely Unaffordable”

The 4th annual International Housing Affordability Survey has measured housing affordability in cities all over the world. Vancouver has a median housing price to median income multiple of 8.4 and Kelowna has a multiple of 8.5. 5.1 & Over is deemed “severely unaffordable. For housing to be considered affordable, the multiple must be 3.0 or lower. Assuming salaries don’t change much, that would mean the median house price in Vancouver would have to be $179,700 to be considered “affordable.” I’m not sure if that will happen but we’re going to have to see a decline eventually as the current levels are unsustainable.

Are Home Prices Peaking? um, yeah

This article asks that age-old question: Are home prices peaking? A recent report from Scotiabank says that each city needs to be evaluated on its merits, and that

Toronto, for instance, has seen a big rise in home prices over the past decade, but it’s happened fairly gradually, with prices going up by about 4% a year. The steady trend suggests that current prices are sustainable, at least for the short term. In comparison, the increases in Vancouver, Saskatoon, Calgary and Edmonton have been far larger and more sudden. “There is growing evidence of overvaluation in home prices in some parts of the country,” writes Adrienne Warren, a senior economist at Scotiabank. She adds that she anticipates a “cooling in both housing demand and price appreciation in the months ahead” across Canada.

A new report from Royal Bank says that “conditions in Saskatchewan, Alberta and British Columbia warrant caution.”

A professor from the University of Toronto says that:

The key factor for real estate forecasters to look at is affordability, which measures the percentage of our incomes that we spend on our homes. Affordability is vital, because when residents can no longer afford local homes, prices stop rising. A lack of affordability led to the 1990 housing bust in Toronto. At that time, the average Torontonian with a detached bungalow was spending just over 60% of his income on housing. Right now, Torontonians are spending about 45% of their incomes on housing.

And how affordable is housing in Vancouver right now?

 In Vancouver, owners of detached bungalows spend an incredible 71% of their incomes on housing.

Surely the 71% figure must be a percentage of after-tax income. If it were as a percentage of gross income, after income taxes are taken into account there would be virtually no money left for food for the average detached bungalow owner. Yep, home prices in Vancouver have peaked alright.

Why It’s Nice to Own Bonds

I have been checking my portfolio quite a bit lately (although it is getting a bit boring and the performance of my holdings has been predictably bad). The only part of my portfolio that has showed an increase in market value vs. book value were my two bond ETFs (Short-Term Bond Index ETF (XSB) and Real Return Bond Index ETF (XRB)). Makes me glad that 25% of my portfolio is made up of bonds. It helps me get through the night, so to speak. Even better is that it helps preserve capital during these bear markets and provides some holdings that are not so correlated with stocks for increased risk-adjusted return.

B.C. Isolated From Economic Storm?

If you want a laugh check out “B.C. isolated from economic storm, say analysts.” There is a bit of a mismatch between the headline and the article. None of the analysts quoted in the article actually say “B.C. is isolated from economic storm.” The dumbest quote award goes to Aron Gampel who apparently said “we have this commodity and construction boom of epic proportions which is keeping the western provinces essentially at full employment.” Who knows, maybe he was misquoted; maybe he meant it as a warning rather than a positive thing. To me it seems like a BAD thing that a huge chunk of our employment comes from the construction/housing sector bubble (which is about to crash). Here’s another good one: SFU business professor Lindsay Meredith “predicts some British Columbians will start belt-tightening” but then a few paragraphs later Meredith “sees no black clouds on B.C.’s economic horizon.” Overall, shoddy journalism. Unfortunately there is no author given.

Increased My XIC Position

After Canadian equities fell a lot on Monday (followed by some big losses the week before) I was curious to see how far out of balance my portfolio was. So I plugged my portfolio’s numbers into a spreadsheet I use to balance my portfolio (I would share that spreadsheet but it’s a bit hard to use). It turned out that Canadian equities were the furthest out of whack in percentage terms. The portion of Canadian equities in my portfolio was 20% less than what it started out as (and what I intend it to always be at). I checked out how much cash I had in my RRSP and it was about $1,700. I normally wait until I have $2,000 and just buy something as soon as I notice that my cash balance has exceeded that target. Anyways, I bought $1,700 worth of XIC when the TSX was down about 600 points and got lucky because the next day it was up again and now it’s up over 2.5%. It’s hard to say if this is market timing or not (when I was going to buy some XIC anyways as soon as I had over $2,000 in cash, which would be by February 1, 2008). The one thing I am disappointed about is the fact that I bought and ETF with less than $1,700 and paid a $19.99 commission. I had set a threshold for myself of $2,000 to help minimize transaction costs. In hindsight one could argue that the gains I made offset those costs, however, hindsight is 20/20, and on Monday no on could have predicted what was going to happen on Tuesday. How do I know this? Well everyone would be buying on Monday but they weren’t.

Should Jason Sell his Home and Rent Instead?

On MP Garth Turner’s blog, a recent post about housing entitled “Jim to Jason” has generated over 100 comments so far. Here is the question that was posed to Garth by a constituent Jason (Jim is a reference to finance minister Jim Flaherty from earlier in the article):

I live in a townhouse in your riding that I bought with 15% down three years ago (10 years at 5.15%)…my wife is staying at home to raise our two children. We live modestly and don’t over-consume. My gut feeling is to sell the house (and realize the 70K gain), rent for a year or two and then buy back into the market when prices have depressed. My wife thinks I’m crazy….is she right?

Here is Garth’s response:

To Jason I would say, simply, there is only one reasonable course of action, which is to list the house as soon as possible, hope a hungry buyer comes along, and pocket the seventy grand. Go and rent a similar home for (likely) a lower monthly cost, and wait for the inevitable winds to howl through. Odds are the house will be worth less in a year than it is now, and a seller’s market will have turned into the same buyer’s feast that currently exists to the south.

In fact, you might want to question the whole notion of home ownership for a while. Consider that you face large, non-deductible costs of land transfer tax, mortgage payments, property taxes, utilities, insurance, plus hefty commission when you sell, and the lost earning potential of the money you used as a down payment. The only way to break even if is a substantial capital gain can be realized.

Given all that, you can often improve your cash flow by renting, rather than owning. Plus, if you do own a home and the market turns, you’ll find real estate to be an illiquid investment. You can always sell a stock or mutual fund with a single phone call, while it can take months to unload a home, with its value falling every day. In fact, this is already happening in spades to more expensive homes in the region – months on market, and offers for $100,000 or more off the asking price.

By the time your neighbours understand what you have just realized, it will be too late to take action.

I don’t think Garth is saying that everyone whose home has increased in value should sell and rent instead. He’s basically just saying “No, you’re not crazy, if you feel like selling and renting a comparable place I support your decision. For the most part the comments seemed to involve telling Jason he shouldn’t sell and although there were some good arguments, most were not, and involved things that surely Jason has already thought about.

One commenter mentioned that “for folks who have little ones, slipping from rental to rental, should the owner have to sell, is very hard on young families.” True, although I would argue that in this case the transition to the new place should be easier given the fact that the wife stays at home to raise kids. But whatever, Jason can deal with these issues on his own he doesn’t need anyone telling him that the move will be hard on his family.

Another comment said:

When you consider what it would cost them in realtor fees, lawyer’s fees, moving costs, and house rentals, is uprooting the family worth the hassle? . . . Sure, he can sell the house and gamble on the market–like playing the stocks–only with his home. Jason’s wife has obviously made a commitment to stay home to raise the children. In the present situation, she knows where she stands. If Jason sells the house out from under her–trouble. Just my 2 cents.

True, Jason must consider the costs involved with selling the home and the costs involved in buying a home, should he wish to buy again in a few years. Here are some supportive comments for Jason:

Garth has given you very good advice, should you and your wife decide to sell, invest your money well, do not take chances, plain simple interest (GIC’s) always go up and during troubled times you will sleep well.

Renting,…you will find a nice place and your costs for shelter, will be defined allowing your wife to set a planned budget in place, then in a couple of years or so you can look for nice home that is ready set go that meets your needs not your wants. By this time you will have over 25% to put down beating that deadly government mortgage insurance costs. If you can stay without any strain on your family or regrets when things go south, then do it. . . Bon Chance, good luck…..for starters you were wise to ask….so me thinks you and your family will do just fine.

There are a lot of silly comments too…

One person wrote that “Jason, your house is a home for your family, not an investment.” First of all I think Jason realizes that and probably never intended on selling but in light of the increase in his home’s value, he is weighing his options. Secondly, how is a rental property less of a “home for your family?”

Another said “renting is simply paying some person’s mortgage for them! At least if this family stays put and rides it out, they are investing in their own equity every month.” If the house goes down in value over the next 2 years, all the equity that has gone into the house in those 2 years will have gone down in value. Also, of course renting might be paying the mortgage for someone else (or providing someone else with income) but it may also be providing you with more money every month to invest (if your rent is lower than your mortgage was) or to spend.

Yet another said “I can’t believe that you, Garth, would giving such an advice. Renting only makes others richer.” This is the biggest renting vs. owning fallacy out there. Someone backed up the comment with “renting means money out the window. While paying mortgage, most is interest, but some comes off the principle. Whereas rent is all gone.” C’mon people give your head a shake! In general, rent ≠ mortgage payment, mortgages make others richer too (banks), and rent does go out window (just like interest does) but you can invest the difference (between what a mortgage would be and what your rent is (if lower)).

One last comment: “Jason you have to choose whether your house is a home or an investment. It can’t be both.” I don’t really understand what that means, but I can only assume that what this person means is that by selling the home you will no longer have a home (because you’ve treated it as an investment and it can’t be both!) and that a rental is somehow not a home, and that selling a home and moving to a rental is somehow “investing”? I don’t get it…why are people making this so complicated? He’s not losing a home here, he’s just changing homes and pocketing $70k?!