Mail call

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Outpriced in Leaside, outgunned on Vancouver Island

My mailbag is full, overflowing, as the penny drops with more and more people that real estate is a commodity like ever other. It goes up. It comes down. It is subject to supply and demand and investor confidence. It required buckets of debt to finance. It requires a greater fool to pass on to. Buying, ultimately, is far easier than selling. And, all booms end badly.

Over the coming days I will share with you some of the thoughtful things readers have to say, and try to answer a few questions. Feel free to participate. We’re all in this together. — Garth

Hello Mr. Turner,
I saw your live (Globe and Mail) chat earlier today. I did post a question but I guess there wasn’t time for it to show up. If you have the time I was wondering if you could answer a query for me. I currently live in a downtown Toronto condo and am looking to move into a house soon, probably in 2009. We originally started looking at the Davisville and Leaside areas. However, the prices seemed to have skyrocketed in the past couple of years (is that due to the 40 year amoritizations?) and we’re starting to rethink our location and maybe going to the Bayview-Sheppard which is a little cheaper and newer (the new part is a big thing for my wife). These areas a high demand areas (at least that’s what it looks like to me). How would a housing downturn hit that area versus an area that’s in less demand? Do you think that those areas are way overpriced and that we should avoid them?

For starters, Leaside and Davisville, being neighbourhoods in the geographic centre of Toronto, with ready transit access, have always been demand areas. I bought a home in Leaside in 1995 for $540,000, which just changed hands for $1.3 million. It’s on a 30-foot lot, with no garage and a driveway so narrow the car door scrapes on the neighbours’ decorative stones when you exit the vehicle. The backyard has zero privacy and the street is cluttered with construction vehicles as bungs are torn down for McMansions.

But, for some reason, people think it’s worth putting their entire financial futures on the line to live there, and that the houses will be worth $2 million in another five years – which is absurd. The answer to your question is simple: Buy within your means. Get pre-authorized for a mortgage (25-year am), add in your cash down payment, and shop in the price range. If that takes you further afield, so be it. I hear people on the edge of the city, or in the burbs, even have running water and the Internet. — Garth

Mr. Turner,
I look forward to reading your latest book about the housing situation in Canada. I enjoy your columns. Just a couple of observations I have made that I have never heard anyone
address about the future of housing affordability in our country.

Looking back to the post-war times until now, many other factors have contributed to the affordability of housing that go beyond mere interest rates and wages compared to home prices. Mostly overlooked, these factors will undoubtedly become more important as household income cannot keep up with housing prices.

Just go through the decades and examine some well-documented factors (income, prices, rates). Then inject some equally important, but ignored social factors. The average personal income has increase by about 3 to 4% in the last 40 years. The average home price where I live (Victoria) has increased by 8% or so per year. Basically, it wouldn’t take long before the prices caused affordability to be out of reach and decrease home prices. In the 1980’s women streamed into the workforce and increased household income to the levels we are at now (women starting at basic wages early on and attained professional wages over time). I remember how stressful things were in the 1970’s for most people when household income was dependent on a single person in a vast majority of situations.

I think these social factors play the biggest role today and moving forward. The west coast of Canada is a very good indicator of where things will head in the future for most Canadians. How far are regular people willing to change their lifestyle to buy a house? This is the biggest factor. Where will the added household income come from in the future to accommodate the increases of 8%?

Vancouver and Victoria are good examples of how far. My wife is a professional and our household income is $120,000. We could barely get into the housing market in our area last May. We have no children. Friends who did not buy houses 10 years ago or longer who decided to have kids first find it very difficult to transition to home ownership at this stage. We have a rental suite and are contemplating rooming students. Friends out east do not understand how we could rent our basement out. But, many people do in Victoria.

Into the future, where will the additional household income come from to justify 8% increases over the next 40 years? No where. Our household may have reached it’s maximum income. If our household income increases by regular rates (3.5%) over the next 20 years, our income will be $240,000. If our home increases at traditional rates (8%), it will be worth $2,800,000. By any standard, we could not afford that home in 20
years with that income and that price. We probably cannot do much more to increase our overall income.

What will happen- prices will flatten over time. Probably closer to household income (3.5%). Creative financing may come into play (50 year mortgages). I think people are in for a shock in different parts of Canada. The social aspects are serious. It’s a matter of necessity. If you want a house in the future, the wife will not only have to work, but
also have a good income; families will be smaller; additional means of income will be implemented (suites, boarding, extra jobs); and other things that make life interesting will be lessened (extra cars, vacations, boats, etc). Few if any people I know out west have summer vacations or toys. Our friends out east run the gamut from those with a single income, to those with summer homes, boats, third cars, expensive hobbies, etc. Not for long. Few if any of our friends out west have wives who stay home. It is quickly becoming an eastern phenomenon.

Anyway, the point I was making is that the future is happening right now in BC. People have had to change and accept means that people in other parts of the country have not yet contemplated.

Anyone expecting their house to increase by the traditional 7 or 8% into the future may need to find somewhere else to put their money. Household equity may be a real problem for Canadians in general. When the increase in equity (8%) is at or above the rate one pays for a mortgage (5%), the investment is sound at the very least, as it is now. When the increase is at the rate I mentioned (3.5%) and the interest rate on the mortgage is higher (6.5%), there might be problems if a person also adds 40 years to the equation. Overall, baby-boomers future wealth may be a lot less than they expect.

Cheers
Rodney

You have articulated well some of the factors which make a housing correction inevitable. When families cannot afford homes in their own communities, and when those cities are relatively small like Victoria (it ain’t Hong Kong or London, after all), then the future is known.

Whether the real estate industry likes it or not, supply and demand are still the determinants of price, once buyer insanity is stripped away. You have just accelerated the process. — Garth

2 comments ↓

#1 Drachen on 03.19.08 at 3:38 pm

Buyer insanity doesn’t even need to end. Look at Vancouver right now, 6 major condo projects have gone belly up since the beginning of the year. The consumer confidence is still here but the weak link in the chain appears to be the banks who are getting a more reluctant to loan money. While the BOC has lowered rates twice the actual average interest for a new mortgage has gone UP!

It’s similar in a way, but not as severe yet as what’s happening in Miami, many major banks have simply blacklisted some or all of the condo projects in development there and will not give a mortgage on them under any conditions.

#2 Al on 03.20.08 at 12:48 am

Garth, I ready the book in 2 days. I couldn’t agree with you more.
I’m sure you won’t hear many Realtors telling you this, but I firmly believe we are in for more than just a slight correction.
Looking at a clients property search page, I couldn’t help but notice nearly a dozen price adjustments come through just today.
We now have nearly 3500 active listings on the Victoria board, and I’m scared to look at how many of those are simply holes in the ground, or worse yet, buildings that have stopped construction all together.
The insanity has to end sometime, and that time is soon approaching.