Betting on 'market correction'? Home prices would have to plunge 55 per cent to fit average family income.
Let's deal with some key misunderstandings.
Think the falling real estate market is going to solve B.C.'s housing affordability problems? Think again: Home prices would have to plunge 55 per cent before ordinary families will be able to buy homes in this market. And if real estate sinks that low, so will family incomes.
Think falling home prices will lead to lower rents? Think again: Kelowna, Victoria and Vancouver boast rental vacancy rates of roughly 0.3 per cent.
Think empty condos, more housing, or government programs are going to close the gap between what ordinary homes cost and what ordinary families can afford? Well, read on.
Myth #1: The market correction will restore affordability
Like any good urban legend, there is a kernel of truth at the heart of this popular myth.
The truth is that there really are tens of thousands of potential homebuyers sitting on the sidelines, hoping for home prices to fall within their grasp. The myth is that home prices can fall far enough to close the gap for ordinary families.
Metro Vancouver home prices declined 10.9 per cent in 2009, according to the Real Estate Board of Greater Vancouver.
And British Columbia home prices are forecast to drop another 13 per cent this year, according to the B.C. Real Estate Association. That would lower the average price of a B.C. home to about $396,600.
But that's still roughly $138,500 more than an ordinary family can afford.
As The Tyee reported in part one of this series, a median family living in the Vancouver region can afford to borrow enough money to buy a $258,000 home.
Metro Vancouver home prices would have to plunge 55 per cent from the May 2008 benchmark peak of $568,411 in order for a typical family to buy one.
Not even the hardest hit regions of the United States have suffered an across-the-board drop in housing prices of 55 per cent. In California, for example, home prices appear to be bottoming out at about 40 per cent below the peak.
And in a province where one out of every 10 workers earns a living in the construction industry, a 55 per cent drop in housing prices would likely drive family incomes down even further, thereby widening the gap.
Myth #2: As home prices fall, so will rents
Kelowna and Victoria boast the lowest rental vacancy rates in Canada. Vacancies averaged 0.3 per cent in both markets, according to a survey by the Canada Mortgage and Housing Corporation.
Vancouver finished close on their heels in the October 2008 survey. Of roughly 54,000 market-rental apartments in Vancouver, a mere 160 units were available.
As long as demand for rental apartments continues to outstrip supply by such a large margin, B.C. rents will continue to rise without any relationship to unit costs.
In the short term, the loss of home equity reduces the likelihood that homeowners will build laneway housing or convert basements until rental suites. Many simply no longer have access to the funds to initiate such improvements.
Compounding matters, the rapid rise of rental rates -- coupled with a sea of anecdotal reports -- suggest that B.C. landlords have found numerous ways to evade the rent controls inserted into B.C.'s Residential Tenancy Act.
Myth #3: Empty condos will loosen up the rental market
One out of every four condominiums in Vancouver is rented, according to CMHC figures.
And it's a good thing, too. Because those roughly 17,000 rental condos -- most of which are owned and rented out my mom-and-pop investors -- have accounted for nearly all the new rental stock added to Vancouver during the past decade.
But rental condos are unlikely to solve Vancouver's rental affordability problems. In fact, most fetch higher than average rents.
In Vancouver, the average rents for condo units are 32 to 48 per cent higher than for comparably sized market-rental units, according to October 2008 CMHC figures. Rented condo units tend to be newer than the purpose-built rental stock, with higher-end finishes and fixtures, and more building amenities.
Even at those rates, many small investors have been renting their investment condos for less than the total of their mortgage, strata fees, taxes, maintenance and management costs. As the real estate market rose, annual appreciation more than offset operating losses. But as the market falls, many may seek to raise rents in order to break even.
Myth #4: Build more homes and prices will drop
This is the supply-and-demand argument so often cited by those on the right. It holds that as new homes are added to the market, older and less desirable homes become more affordable.
But if simply building more homes were the solution, then B.C. in general -- and Vancouver in particular -- would rank among the more affordable places in Canada. There have been about 35,000 new homes started per year for each of the past three years in British Columbia, with about 20,000 of those in Vancouver.
Much of the B.C. housing market simply remains so out of balance that market forces of supply and demand simply do not function.
In Vancouver, for example, old houses tend to fetch higher prices than new ones. This is in large part because Vancouver valuations are based primarily on land area, and only secondarily on the structure. Throughout much of B.C., however, there is a greater demand for older houses with heritage features such as stained glass or detailed cabinetry. Likewise, apartments from the 1960s and 1970s often fetch as much or more than newer units, because many are larger and closer to the ground floor.
Myth #5: The government needs to subsidize more housing
This argument may be as popular among left-leaning Canadians as the supply-side argument is among conservatives. It holds that if only the federal government would get back into building co-ops and other forms of subsidized housing, then the relative affordability of the 1960s and 1970s would return.
Here again, part of this argument is true: Numerous studies have found that traditional government-run housing remains the most cost effective way to deliver shelter to the poorest and most vulnerable among us. There is no financial incentive for a P3 to serve the homeless, the mentally ill, or the other roughly 20 per cent of British Columbians living close to or below the poverty line. So for these people, social housing is a necessity.
But as part one of this series made clear, housing remains out of reach for millions of middle-class Canadians earning median incomes. There is simply no way any government could afford to build homes for the majority of its residents.
For example, there are 493,995 rental households in B.C. Assuming that only half of those earn something close to median incomes, and that the gap between what these families earn and the price of an entry-level home is only $200,000, then the cost of providing housing to just this province would exceed $50 billion.
More realistically, governments must focus on housing the poorest among us, while at the same time providing incentives for the financial and development communities to provide more cost-effective housing for ordinary Canadians.
Next on Tuesday: How a nonprofit developer in Toronto closes the gap.
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