William Stratas photo

SRO in T.O. on Sunday as Garth spoke.
He's in Winnipeg tomorrow. Reserve a seat here.

Are houses over-valued? How do you know?

Valuation has always been half scientific, half subjective. Whether it’s an ounce of gold at $1,000 US, or a share in RIM at $75 after Friday’s plunge – how do you know if something is fairly priced? Obviously millions of people got it wrong when they lost billions on dot.coms. The stocks were popular, wildly in demand, shooting higher – yet collapsed when investors saw they were fads, not businesses.

Or look at Nortel. Or GM. Or condos in New Smyrna Beach. Or a barrel of oil. Or a shack in North Van. At what point does an asset pose real intrinsic value, and where does it constitute a waiting disaster?

Since houses are primarily consumer products bought overwhelmingly by families for their own use, a worthy measure is tracking how much average income it takes, per city, to purchase the average house. This measure is a valid one since it factors in the intensely local nature of real estate markets, and also allows for geographical and regional differences in income.

In fact, it’s a measure which is used internationally, and forms the basis of a landmark report issued by Demographia last year contrasting housing in Canada, the US, Britain, Ireland, New Zealand and Australia. Simply, divide the average house costs in an area by the average household income to arrive at a factor.

According to Demographia, here are the benchmarks:

• Affordable – 3 times income, or less

• Moderately unaffordable – 3.1 to 4

• Seriously unaffordable – 4.1 to 5

• Severely unaffordable – 5.1 and over

So, how are we doing? How about in cities like Halifax (family income $75,500), Toronto ($71,000), Winnipeg ($66,400) or Vancouver ($68,700)?

Well, Halifax wins the affordability challenge with a rating of 3.2. Winnipeg is next at 3.44 – moderately unaffordable. Toronto staggers in at 5.47, which is now severely unaffordable, and Vancouver is off the fricking chart at 7.8 for the average of all residential properties and 10.6 for single-family homes.

Canada as a whole? The average income for “economic families of 2 persons or more”, according to StatsCan, is $70,300. The average house price, according to CREA, is $324,779. The multiple: 4.62, or seriously unaffordable.
And, troops, I will remind you this is with the lowest mortgage rates in the history of ever, and with national unemployment increasing in a trend not expected to crest until next year.

Conclusion: Without a giant leap in family income, this is an unsustainable situation. With an increase in mortgage rates, it is unsustainable. Without a full-blown recovery and inflationary increases in wages and salaries, it is unsustainable. With any increase in income or sales taxes, it is unsustainable.

Any further price increases, then, will simply hasten the inevitable.

All booms end badly.