Vancouver housing market: no logic

Internet game, Crack Shack or Mansion?, may be the best indicator of a city's out-of-control prices

Petr Pospisil, a frustrated Vancouver teacher, and his girlfriend Ola Rugula have scored a viral Internet hit with their homemade game Crack Shack or Mansion? The object of the exercise is to click through a series of house photos and decide if they are North American drug dens that police have seized and shut down, or if they’re Vancouver “mansions,” which is to say a house listed this April at over $1 million. Good luck spotting the difference.

“It’s scary. I couldn’t believe what I was finding,” Pospisil, who has resigned himself to renting, told Vancouver’s Province newspaper. “I have no hope of owning anything for now.” Vancouver’s housing market has roared back. Prices are at, or above, pre-recession levels. There are any number of reasons for this: a mini post-Olympic boom, fears that low mortgage rates will soon disappear and the desire to escape cost increases July 1, when the 12-per-cent HST, the combined federal-provincial sales tax, adds to the price of new homes and real estate fees.

Has the Vancouver market peaked? Good question—one that bores many a Vancouver dinner party, and one that preoccupies such Internet sites. One has brought the roller coaster metaphor to life, showing why Vancouver’s housing market isn’t for the faint of heart or weak of wallet. Back on the ground there are some real life lamentations at the Vancouver Real Estate Anecdote Archive. Not to get too technical, but if you look at the index of the Vancouver housing market, it looks an awful lot like the profile of the North Shore mountains.  There is a steady, rising slope, say from the years 2002 to 2005, which, if it were an elevation map, would correspond to the geographic mountainside location of West Vancouver and North Vancouver, two of the three most expensive areas to live in the Lower Mainland. The other is Vancouver’s west side. The index starts an insanely steep climb, starting in 2006 to the present. Again, if this were a map instead of a chart, you’d be clinging to the peaks of Cypress or Grouse mountains. One miscalculation, and you’ve a long way to fall.

And so it is with Greater Vancouver’s real estate market. People are indeed clinging by their fingernails as they try to meet their mortgage payments. The anecdote archive tells an all-too-typical story of a couple who bought a $1.2 million house with a $700,000 mortgage. The husband was laid off last month and the wife isn’t sure if her job is secure. Others like Pospisil despair of ever getting into the market. Certainly if you have to fall $700,000 into debt, why would you want to?

But in some parts of the Lower Mainland those sorts of mortgages are the price of admission. North Vancouver, the poor cousin of the three highest cost areas, had a benchmark price in March for a typical detached home of $927,122. A similar benchmark or typical house in neighbouring West Vancouver sold for $1,440,747. And in Vancouver’s west side it went for $1,656,986, according to the latest figures from the Greater Vancouver Real Estate Board. True, there was a dip in housing prices in late 2008 and much of 2009, but it was temporary, and relatively minor in nature. It was certainly not the burst housing bubble that many predicted, and still predict, will hit. By rights the housing prices should have peaked, but logic has long since left the market place.

The affordability index for Greater Vancouver looks particularly grim. Family incomes are static but housing costs aren’t. By one measure, the Demographic International Housing Affordability Survey, Vancouver is the most unaffordable city in Canada, and the 15th worst among 100 cities worldwide. Survey co-author, Hugh Pavletich of New Zealand, says ideally housing costs should not exceed three-times the family’s income, meaning an affordability index of three. Anything above 5.1 is ranked in the survey as “severely unaffordable.” Vancouver has an index of 6.6, which Pavletich called “bloody absurd.”

Canadian banks are also concerned, if a little more circumspect. Says RBC in a recent report on the Vancouver market: “Such poor affordability levels represents an element of risk that could weigh heavily on markets when interest rates start rising.”

Certainly Vancouverites have the least wiggle room. Already 68 per cent of their average disposable income is spent on housing costs. That compares to 44 per cent in Toronto, 35 per cent in Calgary and 36 per cent in Montreal. It’s a sure bet, in the wake of the epic housing meltdown in the U.S, that Canadian lenders today are taking a harder look at the finances of wannabe homeowners. But is that enough to prevent a burst bubble if inflation rises and interest rates jump?

The fact that the floor didn’t fall out of house values during the worst of the recession gives some hope that the market isn’t as over hyped as some fear. Most smart buyers are also relying on mortgage helpers. It’s a rare new home that isn’t built without a self-contained rental suite to provide some income. The occasional mom and pop marijuana grow-op isn’t unheard of either. Not quite a crack shack, but still a risky way to pay the bills. Real estate: Vancouver’s gateway drug.