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Falling Apart?

This just in:  Vancouver has been ranked fourth on the world’s list of least affordable cities.  This is well ahead of cities like Manhattan, San Francisco, London, Paris, and Hong Kong.  As most rational people know, the city’s thundering real estate market has been bolstered by rampant speculation and constant construction of new condominiums.. but salaries, and the city’s economic development, have not kept pace.

The survey quoted in the article cites research indicating that the cost of housing in Vancouver is massively disproportionate to median salaries earned by its residents, specifically when compared to other cities around the world.  The median house price in Vancouver as of the time of the survey is 8.4 times the median income — 8.4 years’ average income to purchase a house, compared to the average median in Canada: 3.5.

What this tells you is that the fundamentals that support high real-estate prices are simply not there in Vancouver.  People just don’t earn enough income to sustain this market at such lofty prices whereas in cities like New York and San Francisco, where real estate prices are indeed higher, median incomes are substantially higher and thus can support high prices.

Vancouver is plagued by a number of problems that keep the salaries of its citizens low:

  1. Affordable commerical real estate is hard to come by in the city — leading in some cases to a perverse reverse-commute where urbanites must schlep out to the suburbs to their workplaces — but more importantly this discourages companies from locating here.
  2. Most large cities with expensive downtown cores operate as financial centres — the aforementioned London, Hong Kong, and New York spring to mind.  Vancouver does not, except for our storied love affair with ponzi schemes.  Without the sustaining flow of capital through our city there is highly limited opportunity for local investment.
  3. We’re still a bunch of tree-cutting, pickaxe-wielding hicks.  And BC’s resource industries, the bread and butter of Vancouver for more than 150 years, are weak thanks to everything from the US softwood lumber tarriffs to Kyoto to a number of key mining company collapses.  Our province has failed to diversify its economic base substantially away from resource businesses.
  4. The advanced industries like software and aerospace that keep California sizzlin’ have failed to grow in scale in this city.  Investment in this area is weak, with very little private investment and weak government support (nearly all of the Venture Capital in Vancouver is government-derived).  We did however blow >$500 million on a handful of useless fast ferries, though.  Two notable exceptions are alternative energy and biotech.  For now, at least, they are humming along.
  5. The film industry, which we in BC have courted for decades, is a fickle bride.  Since productions are built for each project and torn down when completed with little long-term planning, unfavourable economic winds mean that producers can pull up stakes and shoot in South Carolina, Mexico, or wherever they can cost-optimize.  In any case, the profits are retained in New York and LA… like a Mumbai call centre, we’re just an outsourcer.
  6. Drugs, and by “drugs” I mean the cultivation and distribution of marijuana, constitutes probably the largest industry in BC and it flies completely under the regulatory / taxation radar.  Conservative estimates peg this at between $5Bn and $7Bn per year.  These people have a hard time getting mortgages.  They also tend to be undesireable tenants, since they tend to get arrested/shot at/sent into hiding — that is if they don’t blow up their penthouse with a meth lab.
  7. Our transportation infrastructure is pathetic, particularly when compared with major metropolitan areas (of which Vancouver is now one) such as Boston, Montreal, Toronto, New York, London, Tokyo, and others.  If we wish to become a center of commerce then we need to be able to move people around better.  Skytrain is a laughing stock and the West Coast Express, which goes to a handful of proximate suburbs from the downtown core twice a day each way, doesn’t even merit comparison with the British Urban Railway system.  Our highways (such as they are) subject people to multi-hour commutes to travel 20km.  We have failed, failed, FAILED to build infrastructure and it will continue to haunt the city for decades to come.

For those of us in the technology industry, certainly during this housing price spike, Vancouver seems an illogical place to locate our startups or ply our trades in information technology.  While the average condo price can be as high as 2x-2.5x the price of a comparable condo in Toronto or Montreal, our salary variance is just 103.5% the national average, versus 104.2% for Toronto and 103.9% for Montreal (this according to the 2009 Robert Half Salary Guide for Technology Professionals).  While we spend more to live here in Lotus Land, we sure don’t make up for it in income.

Comparing Income to Housing Prices

Comparing Income to Housing Prices

So how high is too high?  Right now we are finding out.

If you were blindsided by the Vancouver Real Estate crash then you were clearly in a profound state of self-delusion.  Evidently that list of deluded fools includes our civic leaders who played russian roulette with the city’s finances, underwriting the now disastrous Olympic Village project in which the taxpayers stand to lose as much as $750 Million.  Still, even amid the free-falling values, Realtors and Developers are outright lying to you… inviting you to join in their deathmatch with catch phrases like “don’t wait too long” and “strong fundamentals“.  Where have we heard that before?  Oh right, it was John McCain, about the US Economy in September – days before it collapsed.  Oops.

UPDATE: In a passionate article, former mayor Sam Sullivan says the Olympic Village is not a clusterf*ck.

Speculators and developers will beg to differ (they’re invested in fostering positive vibes) but remember:  they’re betting with your money, not their own.  Condos down the street from ours were forced into liquidation at 40% off, and there have been stories of other developers dumping their inventory at similar price cuts.  This is the beginning of a trend, not a sign of the bottom, so if you’re foolishly lining up to jump in at this point, you get what you deserve.

Not until a software engineer making $60K-$70K per year can buy a 1-Bedroom apartment in the city will the fundamentals be aligned and the market be stabilized.  This means mortgage + maintenance of less than $1500 per month using the 30% rule.  On a 25-year mortgage that probably means this 1BR apartment has to be less than $200K.  If the research that started this article can be believed, we should expect an adjustment of as much as 60% across the board to bring Vancouver back to the Canadian mean.

So in other words, wait ’til the bottom really drops out, Vancouverites..

And then we can start figuring out why no one in this city (not even the property developers, after 2007) makes any real money.