Vancouver's Affordability Problem
Housing affordability is a hot topic these days, especially in Greater Vancouver, where single-detached home prices have doubled in the last ten years, reaching $1.1 million in May 2015. Prices like that keep these homes out of the reach of most families, especially when incomes have only risen by 34% over the same time frame.
It’s a problem that affects the region and its inhabitants in myriad ways. The point of this article is to focus the discussion using facts and figures. This is not intended as a marketing piece and the views expressed here are not necessarily the opinions of Home Equity Solutions.
Zoning rules, limited land and a growing population are pushing up single-family prices in Vancouver much more so than foreign investors. This will continue to happen.
There is limited legislative space to make moves that will improve affordability. Such moves tend to raise the price of homes anyway.
Other actions intended to curb rising affordability problems (such as taxes on foreign ownership) would have the unwanted effect of lowering prices, which is realistically the only way single-family homes will become more affordable
We need to plan higher-density uses along existing and future transit sites (such as higher density uses along Cambie) and build transit infrastructure to better connect where people currently work to where lower density homes are still affordable.
First off, let’s settle on what we even mean when we say affordability.
How to Measure Affordability?
This isn’t as obvious as you might think. There are a few methods, each with their pros and cons:
House price to income ratio
This one is just as it sounds and paints by far the most dramatic picture. This is the measure that identifies Vancouver as the second least affordable market on the planet.
While this is not inaccurate, we would argue that it isn’t particularly applicable or even all that useful. When you buy a house, you don’t walk up with a briefcase full of money. Rather, you put up a down payment and agree to take on a stream of payments (mortgage payments). These mortgage payments are really what you can or can’t afford and are determined by both the purchase price and the prevailing interest rate. So, because the house price to income multiple does not take into account financing, we don’t feel it is an appropriate measure.
Monthly Mortgage Cost to Income Ratio
Because you will be paying your mortgage off for 2-3 decades, we would argue that how those mortgage payments compare to your income is the more appropriate measure. Looking at this measure shows affordability has actually been relatively stable in recent years, thanks to falling interest rates. In fact, condos have become more affordable, with the carrying costs rising more slowly than incomes.
There is a problem with this method, however. You have to get a mortgage before you can start making mortgage payments. So, if you want a single detached house, that means that you will have to put down 20% because CMHC wont insure homes over $1 million. With the average price in the Greater Vancouver area, that equates to $220,000.
Another method of calculating affordability is the rent ratio. Specifically, the cost of the house divided by annual rent (kind of like a cap rate). There are two issues with this measure when used in the context of affordability:
It is a better measure of investment return, rather than affordability
From a policy perspective, we should be more concerned with providing suitable housing, not necessarily ownership housing.
What Are People Proposing?
First of all, from a policy point of view, we have already done most of what we can to improve affordability in the short-term. The problem with these measures (such as increasing the amortization period) is that they also tend to raise the purchase price, thereby eroding some of their benefit. If we wanted to go this route, however, CMHC could lengthen the amortization period, or loosen some other lending guidelines, though the cure might be worse than the disease;
We could remove some taxes, such as the land transfer tax, but that would likely be offset by a tax increase elsewhere to recoup the lost revenue;
Interest rates are already at historic lows. While they likely won't be skyrocketing any time soon, they wont be helping affordability anymore either. In fact, when they begin to rise, affordability will only get worse.
You could try to impose a tax on vacant homes or foreign ownership, as many have proposed. This might help a bit, but the magnitude depends on how much these are really a factor.
Some Cold Truths
Single-family homes in the city of Vancouver are not getting any cheaper. The city is geographically limited and growth policies limit low-density development. As such, an ever-growing population is fighting over a dwindling supply of homes, which will continue to put upward pressure on prices;
Local policy makers have no real influence on income. As such, with minimal policy levers available, the only way for affordability to improve is for prices to fall
So What is to be Done?
This is really the crux of it, isn't it? How do we make housing more affordable?:
If we are going to take steps to improve access to appropriate housing options for residents, we need to have a sober look at what we can actually do. In our opinion, the solutions lies in a paradigm shift in how we think.
In conversations with friends and colleagues, I am often somewhat surprised at how reticent people can be to change. People that already live here don't often want new development - it's more people and more traffic. At the end of the day though, more people are coming and we need to allow new developments to house them that are along transit routes that can move them.
If we are to ensure healthy growth of the region in the decades to come, we must be willing to take the necessary steps today. These steps primarily involve zoning and transit. Essentially, we need to ensure that we put new developments along existing and future high-order transit and that we connect existing residential and commercial nodes.
We recently built a shiny new skytrain line from the airport straight to downtown. This is amazing, but a lot of it runs along a section of Cambie that is low density development. Much of this is being re-zoned now to allow for higher density development, but I am concerned that these plans are not ambitious enough. We should be putting apartments along a skytrain line, not townhomes. If we do not zone this properly now, it could be years before we get another good chance.
Lastly, (stay with me now) is planning proper transit. Road space is limited and we need to move people from where they live to where they work. Building proper transit makes communities more accessible. This also means that you can afford to buy a house for your family, but still commute to work without getting stuck on the number one.
This is all just my opinion. At the end of the day, I am only hoping to start a conversation