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

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.

Adrian Hamilton 09 August 2002

The idea that a pre-emptive strike could save the world a heap of trouble isn’t entirely idle. Think, if Genghis Khan could have been taken out when he was still the leader of just a band and not the whole Mongol race, Europe and Asia would have been saved several million dead and the destruction of much of its civilisation. Remove Napoleon from the scene on his return from his ill-fated Egyptian foray and Europe would have been a different place.

The last century doesn’t provide such good examples, of course. To have “changed regime” in Berlin in the early Thirties would have meant overturning a democratically elected leader in Hitler. As for the efforts by the allies to stop the course of the Russian revolution with troops after 1918, the results were disastrous despite having well-armed local allies.

Nonetheless George Bush has done something in the last week to set out the parameters to pre-emptive action. “We owe it,” he put it in Maine last weekend, “to the future of civilisation not to allow the world’s worst leaders to develop and deploy and therefore blackmail free countries with the world’s worst weapons.” And he went on to define such enemies of the people as regimes intent on building up weapons of mass destruction, oblivious of international law and UN resolutions, governments who imprisoned their opponents without trial and who could not claim democratic legitimacy at home.

Significantly, nowhere in the series of speeches he made this week did Mr Bush actually name these rogue regimes. But it is pretty clear reading the descriptions whom he must have meant. The government which is spending by far the most on weapons of mass destruction, and is now planning to raise its budget by an increase greater than the total defence spending of Europe, is, of course, based in Washington. Not only is it building an arsenal the like of which the world has never seen, it has unilaterally withdrawn from the treaties designed to limit the spread of nuclear weapons, and has refused to accept any kind of international monitoring of its chemical or nuclear weapons facilities.

It has a government in power without the legitimacy of a democratic majority, in the hands of a coterie from a single part of the country and clearly aiming at a dynasty of rule. Its rhetoric is one of violent aggression against anyone seen as its enemies. It opponents are locked up without trial or the right to habeas corpus.

Of course there are those who say the country’s threats are greatly exaggerated and the rhetoric of world mastery must not be confused with a real intention of using its weaponry in defiance of international law. True, it has a has a history of interfering with and invading its neighbours – Panama, Grenada, Haiti et al. But since the long and debilitating war in Vietnam, it has kept largely to its own region.

Of course it has a peculiarly obnoxious regime, ready to poison its own people with corrupt capitalism and deregulated pollution. But give it time, and pressure from the outside world, and it will pay up its UN dues, rejoin the nuclear proliferation pacts and the Kyoto treaty and start behaving as a responsible member of the community again.

Against this, the hard men of the right would say that time is exactly what the world does not have on its side. Washington has showed itself determined to enforce its hegemony, come what may. It has shown itself ready to use weapons of aerial bombardment that make no discrimination between combatants and civilians, to show precious little remorse when it is guilty of “mistakes”.

It is no friend of democracy, having announced its refusal to deal with the only two elected leaders of the Islamic world – Khatami in Iran and Yasser Arafat in Palestine, the latter the only Arab leader ever elected with western observers checking the process. The country has armed and succoured state terrorism and assassination by the Israelis. It has installed the worst sort of warlord gangsters in Afghanistan and, according to “intelligence”, been party to upsetting (albeit briefly) the elected president of Venezuela. The world cannot afford to await its next move.

The problem remains the practicalities. Whereas in Afghanistan the allies could rely on a local opposition force on the ground, no such scenario can be relied on in this case. The Spanish speaking minority in the south might be induced to rise up. There could be assistance from Minutemen in the mountains. But the democratic opposition is too defeated and divided to provide much help. The answer could be an “inside-out” strategy using special forces to take Washington and a few key nuclear bases. Provided the rest of the country was left to get on with its business, there would probably be little internal opposition to a seizure of the capital.

That leaves the substantial problem of an “exit strategy”. There is no point in a repeat of 1812. But the experience of America in Japan after the Second World War could provide a model. A period of occupation of five to 10 years could provide an opportunity to inculcate ideas of true democracy, with a fair electoral system based on absolute majority, abolition of the death penalty, introduction of unions into hi-tech industries and a break-up of the Zaibatsu, the overweening corporations such as Microsoft, Exxon and General Electric.

Given time, this rogue superstate might then be able to take its place once again among the family of peace-loving nations.

a.hamilton [at] independent.co [dot] uk

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