The question is triggered by two recent news releases from Scotia bank and the Royal Bank of Canada. Royal Bank qualifies their explanation of affordability with many rules, conditions and measures such as: size – the ’standard’ residence, types of taxes, and household income versus family income.

Explanations loaded with conditions, make understanding ‘affordability’ equivalent to finding the pea under the thimble almost impossible.

Can You Find the Pea in RBC?

RBC Economics says affordability measures show the proportion of median pre-tax household income required to service the cost of mortgage payments (principal and interest), property taxes and utilities on a detached bungalow, a standard two-storey home, a standard town house and a standard condo (excluding maintenance fees).

The qualifier ’standard’ is meant to distinguish between an average dwelling and an ‘executive’ or ‘luxury’ version. In terms of square footage, a standard condo has an inside floor area of 900 square feet, a town house 1,000 square feet, a bungalow 1,200 square feet and a standard two-storey 1,500 square feet. The measures are based on a 25% down payment and a 25-year mortgage loan at a five-year fixed rate and are estimated on a quarterly basis for each province and for Montreal, Toronto, Ottawa, Calgary and Vancouver metropolitan areas.

The measures use household income rather than family income to account for the growing number of unattached individuals in the housing market. The measure is based on quarterly estimates of this annual income,created by annualizing and weighting average weekly earnings by province and by urban area. (Median household income is used instead of the arithmetic mean to avoid distortions caused by extreme values at either end of the income distribution scale. The median represents the value below and above which lie an equal number of observations.

The housing affordability measure is based on gross household income estimates and, therefore, does not show the impact of various provincial property tax credits, which can alter relative levels of affordability. The higher the measure, the more difficult it is to afford a house. For example, an affordability measure of 50% means that home ownership costs, including mortgage payments, utilities and property taxes, take up 50% of a typical household’s pre-tax income.

Qualifying income is the minimum annual income used by lenders to measure the ability of a borrower to make mortgage payments. Typically, no more than 32% of a borrower’s gross annual income should go to “mortgage expenses” — principal, interest, property taxes and heating costs (plus maintenance fees for condos).

An affordability measure compares payments to income. It evaluates the carrying cost of home purchases using variables like interest rates at a particular point in time without strictly addressing the fair value of the asset itself. Affordability is often just an interest rate play.

Frick or Frack

According to the The McCaughey Centre from Australia -”There is no accepted definition of housing affordability.” Based on this, the discussion herein could stop. Assumed is that this is a down-under view?

In contrast, the US Government says that “the generally accepted definition of affordability is for a household to pay no more than 30 percent of its annual income on housing.” Americans always cut to the chase by taking a position! U.S. annual income remains unclear. Is that after Uncle Sam takes a few peas out of your pocket or before?

From the source of all knowledge, Wikipedia says that “housing costs…generally include taxes and insurance for owners, and usually include utility costs.

These definitions seem in one form or another directed at income – net or gross, taxes – provincial,state,national, municipal, or property with some mention of utilities. Few incorporate the ongoing costs that ownership entails.

What about everything else? What about maintenance, mowing the lawn, fixing the roof, the sidewalks, drainage and paint. These too are things that are part of the cost of affording a home. Simple things like buying a ladder so that you can wash the windows. If these simple things are not taken into account you could according to Scotiabank, be lessening the “fair market value” of your home by allowing the property or structures to deteriorate. Can you afford to not maintain the home and as such why shouldn’t this be factored into the affordability formula? It seems remiss to not have all the pieces to the home ownership puzzle.

Consider This BUT Not That!

When buying a Vancouver home it’s good to have a complete picture of costs. Seeing elements included or excluded in these bank definitions of affordability leaves ‘grey matter’ in discomfort. From this authors perspective these cost elements are all part of the home ownership package that must be reviewed and taken into account – none should be excluded.

By not taking these ‘other’ costs into the formula, the bank economist’s generate affordability numbers that leave many unprepared for the real picture. Their words-of-analysis as written, are to some extent, an imaginary dream. Buying a home in Vancouver? Check, make sure there will be enough peas in your pocket to pay for those things these formulas don’t mention. If your budget is limited, first talk to your homeowner friends and your REALTOR before proceeding – you don’t need surprise costs. They may render your home ownership dream a nightmare – one that finds you hiding under a thimble.

*Disclaimer: Reports Courtesy of RBC and Scotiabank

Derek Holt and Karen Cordes economists with the Scotiabank Group have compiled an enlightening report entitled ‘Is There a Canadian Housing Bubble?‘ Meaty in its reading, Holt and Cordes’ evaluation of the Canadian Real Estate Market stands beyond the scope of this post.

With due respect to Holt,Cordes and Scotia Group, this author provides a synopsis while offering the entire report for your consideration.

More charts in Full Report

Highlights:

How Rich is the Market?

“Canadian house prices are rich no matter how one looks at it, but they are likely to become richer yet before material risks emerge later next year and beyond.”

A: Doesn’t Matter Which Scale – It’s Heavy

Affordability.

• Only compares present home ownership
• does not address fair value of the asset

History Perspective – Chart 1

• Current vs past house prices
• average price more than double in this decade

US versus Canada – Chart 2

• equalizes the picture
• no matter the view, house prices are high –
• up 86% this decade

Adjusting the Field – Chart 3

• compares house prices to broader economy prices –
• 70% rise this decade

Price to Rent – Chart 4

• shows own vs rent at all time high but they say:
• “Note that one should only pay attention to the trends in this chart. We’re comparing prices to the rental component of CPI, so the level of the measure means nothing.”

Price to Income – Chart 5

• at all time high but, they say:
• “it is somewhat analogous to a carrying cost calculation but not one that is skewed by emergency low levels of interest rates as standard affordability calculations.”

Nobody Missed the Party – Chart 6

• Toronto and Vancouver 1/5 of Canadian market but, they say:
• Regardless, all Provinces have experienced a strong pace of price gains since house prices started to rise at the beginning of the decade

B: Volume

Sales//Supply – Chart 7

• “high resale prices is a combination of a sharp, concentrated sales recovery alongside tight supply conditions”

Renovations- Chart 8

• “It was high before Federal incentives kicked in, but they have probably helped insulate against other down-sides in keeping the volume of spending elevated”

Inventory – Chart 9

• “new monthly listings depressed, the total stock of listed properties in relation to current selling rates is also very low”

5 Things but only “Once in a Century”

1. No Expiration

• “Canadian housing stimulus programs are not structured like they are in other countries in that they relatively lack expiration dates.”

2. Liberalized Mortgages

• “brings into the market people at an earlier stage than would otherwise be the case, and purchasing more expensive than average properties”

3. Rising Interest Rates

• “Low interest rates are driving healthy affordability right now,but this effect will wane in the next 2-4 years”

4. No Supply

• “likely to respond and ratchet higher on both listings and new home construction next year”

5. Over and Out

• “long past the point at which strength can be attributed to unleashed pent-up demand from last Fall”
• “surprise is that prices didn’t stay down”

Canadian Mortgage Market Changing

What we Have

• “off cycle compared to other countries”
• “stronger banks”
• “prudent regulations”
• “good management”
• “strong structure”

Since 2006

• material innovation
• significant impact
• thin mortgage data

Amortization

• “it was 25 or bust until three years ago when 30, 35, and 40 year amortizations became available. Now, after just three years, 18% of outstandings are over 25 yrs. 10% are 35-40 years.”

Equity Withdrawal

• “18% of Canadians withdrew equity from their homes over the past year. The average amount was $41k, and the total was $46 billion. 52% of those withdrawing equity used some for debt consolidation, 40% used some for renos, 13% used some for purchases/education, 16% for investments, and 9% for other reasons like consumption”

Terms

• “often unrecognized, fixed in Canada is not like fixed in the US”
• “US borrowers have relatively juicy rates for the long haul”

Other Things

• survey low balls the subprime share of the market
• forms of innovation are nothing close to the mistake of mass-marketing what were at best niche products like Ninja mortgages

US vs Canadian Mortgage – the Differences

• “night and day apart”
• “Canada’s subprime market is small – isn’t anywhere near as exposed”
• “isn’t even really subprime per se. Canada’s subprime market is more like the U.S. near-prime market”
• “Canada never had the zero-rate teasers that existed in the U.S.”
• “Canada’s mortgage equity withdrawal market is much smaller”
• deductible – “vastly different incentives to leverage oneself in the two markets”
• “innovation was needed in Canada, but has been relatively more conservative”
• investor mortgages – magnitude of the exposure in Canada is far less significant
• funding model is completely different
• majority of the securitized totals have been done through the CMHC
• Canadian financial institutions are not as reliant upon short-term lines
• Canada MBS investors do not face the same heavily leveraged investor risks
• Canadian banks continue to apply prudent underwriting standards
• Appraisal standards are generally higher in Canada
• Canada provides recourse to lenders unlike the U.S.

How Much is Yours?

• Canadian household debt relative to incomes is high by the country’s own historical norms
• no doubt that the consumer bankruptcy picture is deteriorating in Canada and so are mortgage delinquencies
• remain far lower than that experienced in other major markets

BoC Implications

• Canadian price index – “total owned accommodation accounts for about 16%.”
• According to the ‘Shelter table’ – “Replacement cost on its own accounts for a small 3-4% of the total CPI basket, and aligns most closely with new home prices.”
• “resale prices do not directly show up in the consumer price index.”
• “it is not at all inconceivable that the pace of house price gains will come to slow in any event for reasons” [noted above]
• Dollar value “more important influences on imported components of the CPI basket than housing.”
• “BoC candid in acknowledging a strong domestic economy, against which is weighed the fully offsetting influences of a strong Canadian dollar”
• “BoC’s latest projections have housing flat-lined on a contribution to GDP growth basis in 2010 and 2011 such that their clearly communicated concern thus far has been that housing strength won’t last.”
• “BoC has little reason to be concerned as yet – little concern over credit growth in Canada”

*Disclaimer: All information, quotes, graphs Courtesy Scotiabank Group. All trademarks are the property of Scotiabank
** Full Scotia Group Report
***CBC Report
HAT TIP: Many Thanks to a LOYAL READER (you know who you are) for forwarding this Scotia Group Report. Couldn’t have done it without you.

East Mt. Pleasant 30 and 60 Days

Vancouver’s Mt. Pleasant, East Side Detached real estate during the current past 30 day period Oct. 25 – Nov. 23 2009 compared to the previous 30 days Sept. 24, – Oct. 23, 2009 period recorded Total Listings dropping from 43 to 36. Sales dropped from 9 to 5. Sold Average prices increased from $762,666 to $765,800 with Median Sold prices recording a drop from $780,000 to $724,500.

Encompassed within the 36 Active Listings 5 reduced their price.

Contrary

These numbers, the average solds, seem to support random REALTOR reports of multiple offers in specific neighbourhoods. The Median Sold price does however, suggest a different story that appears to be following the path of recent neighbourhood posts. Simply, median sales price and Total Listings are sluggish.

Seven days remain in this month of November. With caution in these words, if the conversations with both east and west side REALTORS bear fruit, (pun intended), we may be experiencing an overall slowing in the market.

Numbers

FOR SALE

EXPIRED

SOLD

HIGH/LOW

Wishes

Numbers are strange things. As a reflection of a market during a short period they can misdirect. In particular averages are easily skewed. Noticed in other neighbourhoods, the 30 and 60 day numbers, say there is a change afoot. Added is that in the past week some REALTORS have voiced opinion admitting a sense of a market slowing. Their optimism may be self serving. As we approach the holiday season, they may be hoping for a break in this market’s pace. However, if in fact the conversations do bear fruit, November may be the month in which they get their wish.

*Disclaimer: Statistics Courtesy REBGV. While believed to be accurate they are not guaranteed. Numbers provided may vary as they are dynamically posted by the REBGV.

Knowing

At first blush it’s difficult to determine when a season begins and ends. Changes in our Vancouver real estate market seem similar. Watching, you look for signs, you listen and seek opinion wide and far as you try to determine if the change is real – a trend, on which to base conclusion.

Adjusting

Noticed are a number of publications replacing rhetoric with balanced observation. Just days ago our own Vancouver Sun proferred a piece entitled “Homes are a place to live first, a source of wealth second.”

Seasons

Crocus are portents of seasons change. The context of the article may be equal in measure. The words, though not new, like this flower of spring – suggest a change.

It’s Almost All Downhill

Vancouver’s West Side Detached real estate during the current past 30 day period Oct. 21 to Nov. 20, 2009 compared to the previous 30 days, Sept. 21 – Oct. 20, 2009 period saw Total Listings take a drop from 700 to 617.

In parallel with the east side, sales dropped from 188 to 108. Average Sold prices dropped from Sept/Oct’s $1,762,382 to Oct/Nov’s $1,648,971. Median Sold Price increased from Sept/Oct’s $1,550,000 to Oct/Nov’s $1,567,500.

Expired listings in Oct/Nov settled at 30 – down from Sept/Oct’s 33. Price reductions for Oct/Nov rang the bell at 95.

Numbers

FOR SALE

EXPIRED

SOLD

HIGH/LOW

What’s Goin On?

Sales down, prices down, listings down – makes you wonder what’s going on. Is the 09 Vancouver Real Estate Rush slowing? Has that magic thing called affordability reared it’s head or is the Vancouver real estate west side market just catching it’s breath?

*Disclaimer: Statistics Courtesy REBGV. While believed to be accurate they are not guaranteed. **Numbers provided may vary as they are dynamically posted by the REBGV.

East Side 30 and 60 Days

Vancouver’s East Side Detached real estate during the current past 30 day period Oct 20 – Nov 19 2009 compared to the previous 30 days Sept 20 – Oct 19, 2009 period recorded Total Listings dropping from 742 to 659. Sales dropped from 208 to 132. Sold Average prices dropped in concert from $764,189 to $750,413. Median Sold prices matched this dropping down from $742,500 to $729,000.

Encompassed within the 498 Active Listings 26 reduced their price.

Contrary

The numbers above fly in the face of agents reporting multiple offers with higher that asking sales prices. A feasible explanation may be that within certain areas, in particular the Fraser neighbourhood, the market remains exceptional and is an anomaly in the overall east side market.

Numbers

FOR SALE

EXPIRED

SOLD

HIGH/LOW

Pocket Real Estate Outlook

Numbers are strange things. As a reflection of a market during a short period they can misdirect. The 30 and 60 day numbers above say there is a change afoot for the east side. Yet, street talk about certain neighbourhoods suggest a different more positive outlook. The conversations conclude that east side neighbourhoods bordering or near to the west side are continuing to draw multiple offers and accordingly, higher prices than asked. Nothing new here – real estate is all about location. The numbers above and your home’s location, will determine if there will be more or less money in your pocket when you sell.

*Disclaimer: Statistics Courtesy REBGV. While believed to be accurate they are not guaranteed./>

**Numbers provided may vary as they are dynamically posted by the REBGV.

This author admittedly suggests that it’s obtuse speculation that Jerry Lee Lewis was a Vancouver real estate bear. However, if he had been and barring the intended essence of his song, some of his lyrics might well describe the current state of Vancouver Real Estate when he wrote ‘Whole Lotta Shakin’ Goin’ On”!

Everything is Shaking

CBC reported that British Columbia real estate had some ground shaking news in the last 24 hours.

Whole Lotta Shakes

How many shakes are there? Let’s look at the number of earth shaking events that occur on our coast. From Earthquakes Canada here is a 1 day list of geologic events in B.C.:

1. Date Time Lat. Long. Depth Mag. F Region
2. 2009/11/17 20:15:00 51.88N 131.93W 20.0* 3.6ML 152 km S of Sandspit,BC
3. 2009/11/17 19:30:55 51.85N 131.80W 20.0* 2.9ML 155 km S of Sandspit,BC
4. 2009/11/17 19:04:11 51.87N 131.74W 20.0* 4.7ML 154 km S of Sandspit,BC
5. 2009/11/17 16:40:09 51.96N 131.20W 20.0* 3.0ML 149 km SSE of Sandspit,BC
6. 2009/11/17 16:36:45 51.79N 131.78W 20.0* 3.7ML 162 km S of Sandspit,BC
7. 2009/11/17 16:26:21 51.84N 131.63W 20.0* 4.6ML 157 km S of Sandspit,BC
8. 2009/11/17 15:54:27 51.91N 131.83W 20.0* 3.8ML 149 km S of Sandspit,BC
9. 2009/11/17 15:37:38 51.81N 131.95W 20.0* 5.5ML 160 km S of Sandspit,BC
10. 2009/11/17 15:30:40 51.77N 131.88W 20.0* 6.5Mw F 164 km S of Sandspit,BC. Felt
11. 2009/11/17 12:35:25 48.30N 122.65W 23.0 2.0ML 54 km E of Victoria,BC
12. 2009/11/17 08:03:38 50.47N 130.12W 10.0* 3.4Mw 192 km W of Pt. Hardy,BC
13. 2009/11/17 04:50:24 49.33N 128.23W 10.0* 2.8Mw 159 km W of Gold R.,BC
14. 2009/11/17 04:00:46 49.73N 126.98W 33.0 1.8ML 63 km W of Gold R.,BC
15. 2009/11/17 02:09:06 51.36N 131.17W 10.0* 3.4Mw 215 km SSE of Sandspit,BC

That’s one day – and, only on the west coast! According to Earthquake Canada there were in excess of three hundred in all of Canada in the last 30 days.

Shakers of the Past

Amongst us are those who suggested that the Vancouver Real Estate Market has been on shaky ground for some time. Bear types, sadly, the few who are left, did in the past, warn us that shifts in Vancouver real estate’s tectonic plates would happen. Fair to say, they suggested that the local market’s decline would experience equal catastrophic subduction.

Chicken Little

For at least 24 months and perhaps more, many bubble/bear blogs have chimed in with equal strength. For the most part, they weren’t Chicken Little talking about the sky falling but, as understood, the words written were more pointed. They knew that earthquakes are a certainty but, like earth science geologists, the bears shared the same problem – neither can tell exactly when the ‘Shakin’ will begin.

True Spirits

Unfailingly, they chanted in rhythmic blog cadence. They knew that at some point in time, given that current real estate and interest rate market continued, there would be personal financial houses that would slip off their foundations and crumble when the shaking started.

New Kids on the Block

In what seems to be a taking up of the bears cause, there appears to be a number of high powered individuals now wearing bear suits. Dressed they have come to the stage humming a tune clearly emulating Jerry’s bearish lyrics. Of interest, they have gathered in unison as if they were preparing for an audition.

BC Bear

November 17/09 – Cameron Muir the Chief Economist of the British Columbia Real Estate Association, the economic sage and champion of Real Estate in B.C., who on cue declares that ‘home sales are expected to moderate in the coming months as pent-up demand dissipates and eroding affordability begins”.

Carrick-teristically

November 17/09 Rob Carrick, the intrepid financial colonist for the Globe and Mail, says “there is growing concern” that “the homes being snapped up today could become unmanageably expensive when mortgage rates rise”.

Defending his interpretation of the tune, Mr. Carrick points to Michael Gregory the senior economist for BMO Nesbitt Burns, who according to Carrick says: “The Bank of Canada has been very clear on this,” – “ladies and gentlemen, rates are abnormally low and in the future they’re going to be higher. So be careful.”

Persisting in lyrical interpretation, Carrick points to Scotia Capital’s statement “that the risk posed by rising mortgage payments is compounded by the growing preference for 30- and 35-year amortization periods rather than the traditional 25 years, and by a trend to small down payments. On the cusp of a big run-up in mortgage rates, people are borrowing more and taking longer to pay what they owe.”

Irrational

November 12/09 Tony Wong from Your Home.ca brought forward the Billboard Chart Topper in this group of Jerry Lee Lewis wannabees.

According to Wong, Peter Aceto, the CEO of ING Direct, growled ‘Direct’-ly saying “low interest rates have caused some Canadians to act “irrationally” in the housing market, potentially taking on too much debt that could lead to economic difficulties down the road.”

Can You Feel the Beat

Are their renditions making your earth move? Are you sensing the deep tremble that shakes your bones? Are their lyrics leaving you with that ‘ear worm’ feeling that won’t let Jerry’s ‘Whole Lotta Shakin’ tune out of your mind.

What can you do to stop that ‘ear worm’? Hint: – the answer is not earth shaking.

Some Help

Thanks to Rob Carrick, here’s his carefully measured advice that is amongst the best:

Five ways to prepare for higher mortgage rates:

1. If you’re buying, don’t borrow as much as lenders will allow you to have.
2. If you have a variable-rate mortgage, where costs rise along with your lender’s prime rate, set your payments higher than they need to be to create a cushion to absorb rate increases.
3. Make a lump-sum payment on your mortgage or increase your regular payments.
4. Find out what your mortgage balance will be on renewal and use an online mortgage calculator to project what your payments could be if you were to renew at higher rates.
5. Remember that higher mortgage costs will limit your ability to carry other debts.

B.C.’s Real Estate Market

Commenting on British Columbia’s real estate market, Cameron Muir, BCREA’s Chief Economist says in the November 17/09 missive that -“Despite a lackluster economy, low mortgage interest rates have induced many potential buyers into the market. However, the recent phenomenal pace of home sales is expected to moderate in the coming months as pent-up demand dissipates and eroding affordability begins to impact the purchasing power of households.”

What was that?

Did you witness a morphing, a transformation? Was that Muir suggesting caution in your home buying venture? Leaves you to wonder if in the months ahead when walking in the vicinity of the BCREA headquarters in the 700 block of Georgia street, that you stay alert – watch for bear scat!

Other Changes

This morning at 4:30, the Mackey’s – life long clients, brought into this world a little bear of their own. His name – Nathanial. Mom and cub are fine. A big ’shout out’ of congratulations to you both.

*Disclaimer: Information Courtesy BCREA. While believed to be accurate it is not guaranteed.

When the topic of discussion is about Vancouver homes, heard are words such as Adequate, Suitable and Affordable. Considering the current real estate rush in Vancouver, the latter occupies the largest portion of discussion.

Often found, these words appear in newspapers, web posts, television and radio. The assumption is that everybody knows what they mean.

Browsing through the Canada Mortgage and Housing site resulted in a definition for each.

Adequate

• According the current residents – adequate housing does not require any major repairs.

If you are buying, make sure you get an inspection. You may find that some people consider a leaky basement a feature. In their eyes it is an indoor swimming pool.

Suitable

This one is a little tricky as it incorporates something called the National Occupancy Standard (NOS). Accordingly it claims that based on the NOS requirements there should be:

• one bedroom for each co-habiting adult couple
• one bedroom for each unattached household member 18 and over
• one bedroom for same-sex children under 18
• opposite sex children under 18 should have separate bedrooms
• opposite sex children 5 or under can share a bedroom

Affordable

When buying will you meet this standard – housing that costs less than 30 percent of before-tax household income.

Don’t forget – the 30% includes:

• mortgage payments (principal and interest)
• condo fees
• heating
• electricity
• water
• other municipal services

4th

According to CMHC, between 2001 and 2006, Vancouver placed 4th on the ’shelter-cost-to-income’ affordable housing survey – derived from the Census of Metropolitan Areas.

Based on this year’s Vancouver Market activity it is doubtful that Vancouver still ranks 4th.

*Disclaimer: From CMHC’s Recent Trends in Housing #7

An adventurous sailing journey across Georgia straight found us safe harbor at Sylva Bay on Gabriola Island. Discovered on that cold October day were Kayaks waiting for riders.