Enough Already

Posted by under Mortgage News

by Simon Giannini

I am sick and tired of it all. Constantly, and for the last 10 years, the media pounds us with sensational headlines, or reports about affordability levels, or household debt, or average prices, and it makes me want to scream!

Usually, the press release and all media stories have some sensational headline like “Run down home sells for record $1 Million in Toronto.” (Those of you living in San Francisco, New York or London feel free to post in the comments.)

What virtually all of these studies do is look at median or average prices, and compare them to the median or average income. This metric worked okay in the 20th century in most cities when bungalows on modest lots were the first homes of young families. It is becoming increasingly meaningless in the 21st century. Here’s why:

1. Average and median home prices are being driven up by the larger, mature demographic (think those over 50) who have equity and are now trading homes. Some are buying a nicer location, some are downsizing to a penthouse condo. Everyone has their own reason. Regardless, they are not taking out a $1 million mortgage on their $80,000 salary.

Average prices are also being driven up in some cities, like Vancouver, by an increase in “Luxury Market” sales. Over 700 homes priced at over $3 Million sold in Vancouver in 2011, nearly doubling the previous record of 375.

This luxury product is not about homes for younger families. Therefore, we should stop including it in analysis of housing market affordability for young families.

2. With number one said, we can still see that demand today is strong and growing in walkable, mature cities and neighbourhoods; the detached houses are often in highest demand (even when more modest priced homes exist). Because you can’t make more detached homes on lots in these mature areas, demand exceeds supply for this type of product. This drives up the average and median price of even fixer-upper, non-luxury product; increasingly only those trading an existing home or coming in with cash can purchase them. Families are buying in these neighbourhoods, but they are typically not first-time buyers; they have above average incomes and often equity from a condo or suburban home.

3. Points one and two above illustrate that detached bungalows are no longer typical first-time buyer product. When individuals, couples or families buy their first home in larger Canadian cities (and many cities around the world), increasingly it is more likely to be a townhouse or a condo. According to Realnet, In the Greater Toronto Area, 62% of homes sold in 2011 were high rise condos. And from watching House Hunters on HGTV this is also happening in many US cities as well.

Therefore a statement like “Toronto is the most unaffordable city” is not that helpful if we are concerned about the “affordability” of buying a decent home for young families. Measuring something that is not first time buyer product against the incomes of first time buyers is comparing apples to Yugos.

If we are truly interested in understanding the ability of individuals with average incomes to buy a home in the higher priced, metro areas, then at minimum we need to look at townhomes and condos instead of detached homes. Ideally you also remove the product coveted by the multi-millionaire club from the analysis. Suddenly the income needed to get into the market looks more familiar to most of us — $50,000 for Metro Vancouver, $38,000 in Greater Toronto according to this study.

Flashy headlines about Toronto, Vancouver and other cities being unaffordable get the publisher of the reports and newspaper articles attention–this is why they publish them. Also it’s much easier to calculate median price and median income, and harder to do real housing market analysis.

What worries me is that politicians, policy makers and lobby groups are using this mis-information. I fear for the results. So banks and others, please move your thinking into the 21st century!

First Time Buyers: you can now lock in a fixed mortgage rate for a 10 Year Term for less than 4%. Any concerns about rate changes affecting you are out the window, AND, you can own for the same as rent. Your excuses are now gone. Anyone who has the ability to buy instead of renting and doesn’t today, is in my humble opinion NUTS.

Investors: rents are on the rise, and costs ( mortgage interest rates) are dropping. In business terms expenses are down, and revenues guaranteed to rise. Any questions?

About the Author

Simon Giannini is a Broker with Royal LePage Signature in Toronto, Ontario. Simon is also the Author of “Everything You Wanted To Know About Real Estate But Were Afraid To Ask”, “Buy Low, Sell High”, and “Get Rid Of Your Customers”. Simon has over 25 years experience, and is a sought after speaker and trainer for the real estate and mortgage industry. You can check out his BLOG at : www.TheRealEstateCentre.com

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