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December 16, 2009
Resiliant Canadian Home Prices–Alternative Theory
Unlike the housing market crash in the USA, in Canada the average home price is reaching record highs, or is already there depending upon how you measure it and adjust for inflation. Market watchers are starting to cry “bubble!” They are predicting a burst, or at least a noticeable slow down soon. (Good article in the Globe and Mail on who is saying what, and why.) They may be right — or not.
However, here I offer the theory that maybe the steady increase in house prices isn’t a bubble, but a response to shifting urban trends. The demand for homes (whether condo, townhouse or single family) close to the urban core continues to grow, while supply cannot keep pace. The result is rising prices.
Increasingly, individuals and families want to live in close proximity to jobs, as well as urban amenities. There is a limited supply of housing in such places, and thus prices go up.
When analysts speak of record high prices, they are typically talking aggregate values, nationally. What I want to see are prices broken down by proximity to urban core. Home price increases may be uneven geographically with the rapid increase of metro core homes masking declining or stable values in suburban places and smaller towns.In the Metro Vancouver area, for example, homes actually in Vancouver, near or in the dense urban core — with proximity to a wide variety of urban amenities from restaurants to theatre, the ocean and transit — have continued to increase in price throughout the recession. But in the more distant, automobile-centred suburban areas, this is not the case.
In the GTA, I’m hearing a similar phenomenon. Home values in Rosedale or Forest Hill continue to rise; demand for downtown Condos has not been satiated. But what about the distant suburbs?
Does anyone have some good, local level numbers?
Other comments on my theory that it’s the rising sale prices of houses in certain places driving up the national average?
Topics: urban history |
December 17th, 2009 at 4:10 pm
It’s both. The traditional cores of Vancouver and Toronto are doing well, but so are the burbs. You’re theory on some sort of distinction between city and burb is totally off - if anything, homes in subrban Toronto have been selling better than in the core (because they weren’t overvalued to begin with).
Low interest rates are driving the price increases - not some sort of urban/suburban divide.
December 17th, 2009 at 6:20 pm
Here are the October 2009 stats for Oakville:
http://activerain.com/blogsview/1332516/oakville-ontario-sales-statistics-october-2009
December 21st, 2009 at 2:30 pm
While working on a simplified housing price formula, I realized the link between housing prices and affordability in today’s environment. The formula looked at how income, interest rate, and percentage of income spent on housing affected housing prices.
Affordability is assumed to be how many years it takes to save for a downpayment. In today’s environment interest rates decrease and drive up home values. So the amount of time it takes to save for a downpayment on rising housing prices increases. First time home buyers have an impression of declining affordability.
The more interesting aspect of the formula pertaining to cities happens when there is an increased percentage of income spent on housing (usually cause less is needed for transportation). The Canadian average is 33%, but in cities like Toronto and Vancouver it goes from 40% to 50% of income spent on housing costs. This increase also increases how many years it takes to save for a downpayment, which makes housing seem unaffordable.
Just started exploring these relationships, but you are welcome to use the spreadsheet and come up with your own conclusions.
The formula sheet is linked if you want to play around with it. It makes the following assumptions…
-all levels of income taxed at 33%
-30 year term mortgages
-25% downpayment
-when renting, savings for downpayment equals rent
-no inflation, variable rates, or other taxes or housing costs taken into account
Following link to Housing Prices Formula (variables to change are highlighted in green)…
https://spreadsheets.google.com/ccc?key=0AgnMGOs_ncCtdDFxQ3pUeG1pYWd6dS1lNHowTzVYYkE&hl=en
January 3rd, 2010 at 9:58 pm
Thanks for the ideas and thoughts. As I said, this is a theory and I need better suburban data. I’m suspicious that aggregate data isn’t telling the whole picture.
Chris — thanks for the Oakville link. Do you know where I might find similar numbers for 2008 and 2009? The 2009 numbers show impressive growth, especially after mid year, but the Canadian economy shifted out of recession about that time.
Global Urbanist - thanks for the sheet, I’ll take a look at it. Housing is definitely on aggregate more expensive. I’m not sure many first time buyers make a 25% down payment so realistically we’re looking at 95% LTV mortgages with CMHC or other insurance added. I don’t know if that affects your formula.
But the mortgage term shifting is a good point. 5 years ago no one discussed anything other than 25 years in Canada. today 35 is the norm.
January 5th, 2010 at 12:26 pm
More on the shared file on housing price affect from changes in Income, Interest Rate, or Percentage of Income spent on housing.
-An increase in income has a proportional increase in housing prices, but does not affect the savings period for a downpayment
-A decrease in interest rates raises housing prices and the savings period a bit less than proportion.
-An increase in the percentage of income spent on housing increases in proportion for housing price and the downpayment savings period.
So the current conditions of stagnant income growth, low interest rates, and increasing proportion of income spent on housing creates an environment where first time buyers must save for almost 10 years for a downpayment on a 35 year mortgage. If you are working from 20 to 65 that is your entire working life. This tells me that the limits of housing prices are reached in most markets in Canada.
5% down gets people into homes quicker, but can also act as an anchor should the housing value drop below 5%. Note the scenario of what is happening in Michigan today…
https://docs.google.com/Doc?docid=0AQnMGOs_ncCtZGNiaHFicGNfMjBnNWN6OW5kZw&hl=en
January 13th, 2010 at 12:09 pm
I once lived close to the office, about five blocks away in a one-bedroom apartment, and later around the corner in a three-bedroom half-duplex I shared with others.
It was in the years 1975 to 1978, and I was living in Prince George, working in the Royal Bank Building at 6th and Victoria, and living on Renwick and then later McBride Crescents.
It was the best arrangement ever! At noon I could walk home in five mintues, make a sandwich, take a twenty minute nap, and be back at my desk at 1 pm. Like the song says, you never know what you got till it’s gone.
In a larger metropolitan area however, the job market is necessarily more dispersed, at least for skilled workers and professionals. Indeed, one of the basic economic purposes of large urban areas is to provide a wide ranging skill pool and a (hopefully) matching set of diversified employment opportunities in a single large urban area. That will inevitably necessitate job or contract matches that reach from one end of the metro area to the other.
As Anthony Downs points out in his book Stuck in Traffic, attempts to encourage people to live closer to their work are bound to fall short, partly because of normal mobility in the housing stock, a tendency for some people to change residences periodically. If one ever reached a state were x% were living within m kilometres of work, … normal movement would soon begin to upset things. As Downs puts it, people choose their homes for many more reasons that just minimizing the distance to work.
What I personally think is even more important is mobility in the job market, especially with two earner households now the norm. If husband and wife work in widely differing locations, where do they “choose” to live in order to confrom to the “close to work” doctrine? And what happens when, having chosen a residence location, one or both of them loose their job or simply change jobs to pursue a normal career progression? Are they really expected to take the kids out of school and move across town, no matter what?