Monday, August 9, 2010

Why Real Estate in BC, and Therefore Canada, is Fucked

I decided to read a few articles from my past post on magazine articles today. I cam upon "The End", by Michael Lewis in Portfolio magazine. This is a great article. I have read many articles on the financial collapse in the last few years. None of them have made any sense to me. This is a great article because it explains that things collapsed because none of this stuff made any sense to anybody. Which somehow makes me feel better.

Think about it. Think about past articles. Well, the market collapsed because banks repackaged sub-prime loans as AAA rated bonds and re-sold them, then, when the real estate market collapsed, they were worth nothing. That is as far as they would take it. Nobody would ever try to explain why that happened, how it happened or what it actually meant. Now I know it's because there is no answer to that question. There's no logical answer for why it happened. But nobody ever just came right out and said that.

So, on to why Canada is, as I said above, fucked. Page 3 or the article, maybe one third of the way down...

There’s a simple measure of sanity in housing prices: the ratio of median home price to income. Historically, it runs around 3 to 1; by late 2004, it had risen nationally to 4 to 1. “All these people were saying it was nearly as high in some other countries,” Zelman says. “But the problem wasn’t just that it was 4 to 1. In Los Angeles, it was 10 to 1, and in Miami, 8.5 to 1.

So, let's analyze where we're at. Start pulling data from places. Here, here, here.

Let's start with the City of Vancouver proper. Average January 2010 real estate price, $638,000. This includes, condos, townhouses, everything. Median family income (I would guess that the average would actually be substantially lower than that, as when you analyze other median/averages, the top end salaries pull the averages up), $80,127.

That's a ratio of 7.975. Worse, I don't think they are considering people owning shitty little condos when they consider a ratio of 3 to 1 as being healthy.

So, now, I hear you. Vancouver is crazy. The rest of British Columbia/Canada will be fine.

Average real estate price, British Columbia, $492,000. Median British Columbia household income, $65,780. Ratio, 7.479. It's hardly better. An entire province running ratios referred to as crazy for a swanky American major Metropolitan area. It's crazy.

Now, if you still aren't convinced, I referenced this page up above, but here it is again. Apologies if they've updated the data by the time you read this, but you can trust me that I'm telling the truth. Anyhow, look at the chart right at the top page. This is based on a 25% down payment and a 25 year mortgage, purchasing in what I must assume is Metro Vancouver based on the prices given.

2 story detached - Average Price $716,000 - Income to carry mortgage, $141, 600
Detached bungalow - Average Price $635,800 - Income to carry mortgage, $126,000
Townhouse - Average Price $476,300 - Income to carry mortgage, $94,500
Condo - Average Price $362,700 - Income to carry mortgage, $72,400

So, this is saying that if the average family manages to scrape together a down payment of $90,675, they'll have enough income to buy the average condominium or perhaps get in to the bottom of the townhouse market. Then, if they decide that they don't want it anymore, they'll be able to put the $1,154 they could get in the open market for rental income towards their $1,800 in monthly expenses (mortgage and property taxes) and make out like bandits!

This is crazy. This makes no sense. Even using these extremely generous mortgage guidelines there are not enough people to keep this going. There's too big of a spread in the statistics.

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