Population density and house prices: Should Vancouver command such a premium?
MARCH 21, 2012
It’s been frequently suggested that Vancouver’s lack of available land has driven house prices to extreme levels. That same thought has also been used to justify Toronto house prices, though to a lesser degree.
I want to share a couple thoughts on that front:
1) The number of dwellings in every major Canadian city has increased in line with growing population.
There should be no net effect of growing population when enough dwellings have been built to meet demographic demand (though speculative demand is another story altogether).
Below is a chart showing the cumulative growth in population and number of dwellings in Canada’s three largest cities since 2001.
While Vancouver’s population has grown 17% since 2001, the total number of residential dwellings has grown 22%. Toronto has grown by 17% but has grown its total residential dwelling stock by 24% in that time.
In terms of housing starts, we note that construction of single family homes in Vancouver is running more or less in line with decade averages while multiple starts (condos apartments, rows, etc) are well above decade trend. If there really is a lack of buildable land, it certainly doesn’t seem to be stopping developers from bringing supply to market.
The same can not be said of Toronto and Montreal where single family housing starts are down substantially from levels of 10 years ago while multiple starts are well above historic norms.
2) Population density: Should Vancouver command such a premium?
Below is a chart I’ve compiled that compares the population density of North American cities to the median resale house price. Yes, Vancouver is densely populated, but it also commands a near 100% price premium over the median resale price of homes in New York and San Francisco. Note also that the resale price for Vancouver is actually for the entire metro area, meaning the city-specific number will be significantly higher.
Vancouver house prices are not just expensive in nominal terms, they are also very stretched relative to incomes. In the chart below, population density is plotted against the median multiple (median house price divided by median household income) as calculated by Demographia.
3) Rents not indicating supply pressure
Finally, consider the price/rent ratio in Vancouver relative to US cities. If indeed there is a land constraint issue, one would expect a premium on house prices but also on rentals as any population is made up of renters and owners. Even in densely-populated cities, house prices and rents historically move more or less in tandem.
Of course, a credit bubble can distort that ratio as houses are bought on credit while rents are paid out of income. Credit spigots can easily be opened, allowing marginal buyers to enter the ownership pool, but incomes are much more “sticky”. Coupled with a change in mass psychology that embraces greater ‘ownership premium’ and the price/rent ratio can, for a time, become distorted. But among fundamental measures of house price sustainability, there is none more important and none that displays a greater mean-reverting tendency than the price/rent ratio.
The IMF recently calculated Vancouver residential dwellings to have an average price/rent ratio of nearly 60. Toronto was estimated at nearly 40. Compare that with estimated price/rent ratios of US cities in 2005, courtesy of CNN:
The bottom line is that land constraints and population density simply cannot account for prices at these levels. Both Vancouver and Toronto house prices are being driven and sustained by a credit boom of historic magnitude in Canada.
-Ben
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44 Comments
Ben, you are saying that "Both Vancouver and Toronto house prices are being driven and sustained by a credit boom of historic magnitude in Canada." - I agree with "sustained" part but in a starter part the government plan to bring in the wealthy overseas buyers played a big role in our community when they started to arrive in multiples and buy the properties for cash - they ignited the market. I understand your limitations due to an insufficient data avail. on the buyers residency and transactions history such as cash or mostly cash versus credit payments but locally it is rather obvious - we now have multiple dwellings standing empty or newer bigger homes rented to the multiple families - we can see the cars parked outside of these homes - as the owners are overseas.
I am actually surprised that in Vancouver the diff. in population has growth and the total number of residential dwellings is only 5%, it feels like more - probably due to a very large new condo numbers that were only released on the market recently and are not reflected in the stats yet. Our condo market is flooded and I fully expect it to start collapsing soon.
I posted some graphs based on CMHC starts and completions data from Statscan (CANSIM tables are free now!!!!)
http://housing-analysis.blogspot.ca/2012/03/february-2012-cmhc-data-vanc...
Look at how prevalent multifamily has become over the past generation, and how the number of single family dwellings (which includes detached multi, e.g. house with suites and duplex I think) has been decreasing. Make no mistake, in Vancouver the trend is towards multifamily units and this is in part due to geographic constraints.
I attempted to normalise the trend of multifamily versus population growth by looking at the number of bedrooms built per new resident, assigning 1.6 rooms per multi and 4 rooms per detached. These numbers were chosen to roughly equate to 1 new person per bedroom-completion. In other words we can expect that as MFD increases in prevalence the number of starts per new entrant will increase and that starts have ballooned like crazy is slightly tempered by lower occupancy capacity of these new marginal units.
Even with this normalization it's apparent that Vancouver is currently building above what it requires for new population. Also it shows how deeply cyclical construction and population growth in Vancouver is historically. With an eroding manufacturing base and more reliance on construction employment I'm more than a little concerned for the city in the medium term.
So much for city planners. I cannot believe how eager Vancouver is to give away any and all of its industrial, light industrial, and commercial land for condo developments. Where are all of these people going to work? Oh right, they are all going to be real estate agents selling condos. That's the recipe for a sustainable economy.
BTW well done on the G&M forum this morning. Your comment at the end was the kicker, recent owners switched from renting a house to renting money from the bank. We can frame the issue in many different ways and I think that way of explaining it will go down better than talking about abstract concepts of opportunity cost and real interest rates (even though it's saying the same thing)
You're also correct, in my view, that OSFI changes, if implemented as proposed, are going to cause significant pressure on prices. For those who claim that this is a rash and ill-conceived path, these guidelines are designed to temper the market in a way that avoids an even worse fate. These are big difficult decisions; I don't envy the government right now.
Thanks Jesse!
Can anyone put up the link to the interview? I don't even know what station it was on right now so a little help is appreciated.
Wrong are to focus on, you are always renting money -ITS THE COST TO RENT THAT MONEY THAT MATTERS!
I agree, I really think Ben's analogy about "renting money" was a great way of simplifying things for friends and family.
if you want your spouse to feel all flustered, their heart to palpitate and their palms to get sweaty, all you have to do is whisper those three little words into their ear…… "reversion to mean"
According to Demographia, among the six major nations in the study, Vancouver has the second least affordable housing when median price is measured as a multiple of median family income. As a result, this is what a million dollars will purchase in Vancouver's vastly overheated market:
http://viableopposition.blogspot.com/2012/03/what-million-dollars-will-b...
Can we say "bubble"? All one has to do is look at real estate in Los Angeles to see how bad a west coast correction can be.
Hi Steve, the Demographia survey is seriously flawed and can't really be taken seriously. Huge holes in the survey have been exposed on numerous occasions, for example, link below.......
http://australianpropertyforum.com/blog/entry/3174279/8081
(or google 'Demographia Debunked')
The figures used by Demographia for house prices and income levels bear no resemblance to reality. Check it out.
Stav.
Population growth may lag behind the number of housing units, but the size of the average family has fallen and the number of separate housing units needed for the same population has risen.
That said, house values in Vancouver and Victoria are no longer connected with reality. I live in the poorest neighbourhood in Victoria and have a half million dollar house.....
Don't forget that divorce rate has also gone up, causing a large growth in twin homes.
Don't forget Canadians that are leaving too!
Canada http://i43.tinypic.com/4fy0du.png
Ontario http://i41.tinypic.com/kdu5j9.jpg
British Columbia http://i42.tinypic.com/1h8s44.png
This analysis lacks the fact that people live in small spaces in New York, etc. Yes, Toronto could become like NY and people can live in small spaces and keep the condos filled. This above study doesn't rule that out.
NYC has a much lower home ownership rate than either Toronto or Vancouver.
Hi Ben - great forum at G&M yesterday. It appears most of the people that were on there are totally clueless about what is going to happen. Lots of simplistic questions.
Thanks for great answers.
Ben, you should really read this. They mention you.
http://www.canada.com/national/nationalpost/financialpost/story.html?id=...
Landlord, you should read this.
Canada’s mortgage body moves to slow booming housing market http://www.theglobeandmail.com/report-on-business/economy/housing/canada...
This is what I stated yesterday regarding Flaherty cutting off CMHC insurance to banks and also part of the BoC's NGDP targeting policy as I discussed here before. We're not likely to see any changes in lending rules, but we will see insurance premiums surge. Simply said, If you're not credit or income worthy, investors will make you pay a hefty premium.
They can say many things, draft guidelines, but nothing is happening. My link above is FROM 2005!
Listen to the interview: http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2012/03/o...
Insurance premiums are going up across the board.
And here is tiny effect of what lies ahead. http://www.mortgagebrokernews.ca/forum/investment-lending-about-face-hur...
Thanks Greg - It feels we like before will have too many parts moving around CMHC, F, OSFI, Finger pointing, Mortgage brokers exiting, etc...but we all have to take a deep breath and remember this has happened before and here we are almost 10 years later with very low rates and RE investors made a fortune hanging on through these moments.
If rates go higher, the brakes will hit on prices, That will be healthy for the market. We need less brokers and strong rules to keep weaker players out of the market. I have many clients wanting to get in and just can't reach here, but 10-20%, they will be happy to homeowners. Remember, more people want house prices lower then higher on the margin right now.
hahaha, keep the weaker players out of the market? Be careful what you ask for. I love homeowners who just don't quite understand what's driving this market.
Which is what Ray?
If they really wanted to cool down the RE market, they would finally fixed the official Rent versus Buy calculator here:
http://strategis.ic.gc.ca/eic/site/oca-bc.nsf/eng/ca01817.html
"We are currently in the process of updating this calculator. We apologize for any inconvenience this may cause."
- how convenient that the tool that would instantly show to any starting investor (at least in Vancouver) is broken and all our tax money can not buy us a new one...Ben, can you ask them why?
Nice catch Olga. :)
works fine for me.
Ben, you use data from Demographia to make your case, but that Demographia survey is seriously flawed and can't really be taken seriously. Huge holes in the survey have been exposed on numerous occasions, for example, link below.......
http://australianpropertyforum.com/blog/entry/3174279/8081
(or google 'Demographia Debunked')
The figures used by Demographia for house prices and income levels bear no resemblance to reality. Check it out.
Stav.
G'day Ben
Check out this paper from the Cato Institute. In my opinion, it explains the whole land supply argument well: http://www.cato.org/publications/policy-analysis/how-urban-planners-caus...
In a nutshell, markets with highly responsive (market-based) land supply, whereby new homes can be built quickly and cheaply in response to changes in demand, typically have more affordable housing AND less volatile prices (i.e. fewer boom/bust cycles).
Land supply constraints, by slowing down the provision of new homes and increasing their cost, makes housing less responsive to increases in demand, leading to greater 'panic buying' from first home buyers ('buy now before you miss out') and speculators (chasing capital gains). By contrast, markets that are permitted to provide new housing quickly and cheaply are more likely to dampen demand and reduce panic buying and speculative activity.
Cheers Leith
Important read for tomorrow's budget. This is the center of it all.
http://online.wsj.com/article/BT-CO-20120328-714296.html
That link is the short version. Use Google link: http://tinyurl.com/73lt4uc
Folks,
We absolutely need more condos in GTA. The demand is insatible. In order to balance the supply and demand, we need condos coming to market fast and furious.
Everyone knows land is limited for houses. But for condo construction, GTA has unlimited land supply. Every parking lot and dump can be converted into highly profitable condos. We should use this once in a life time opportunity, i.e., low interest, ample supply of capital, to build, build, build.
Everyone should do his or her civic duty to support the condo market. Encourage your parents, sibilings, in laws, co-workers and friends to gather $15,000 to $20,000 for a pre-construction condo downpayment.
Let's convert GTA from a sleepy backwater to a truly world class city!
Too late. Genworth is already sending employees to paint foreclosed homes, literally.
Genworth using internal resources to deal with foreclosures http://www.theglobeandmail.com/globe-investor/genworth-using-internal-re...
Shhhhh.. March condo data from http://tosolds.ca/
https://docs.google.com/file/d/0ByrPFSoPLahJMjZkLXk4SzBSdlNFMTFua3h1RHl4...
There sure is a lot of red ink in those stats, Greg.
I don`t get what those stats are supposed to say. All I see is that condos are selling for less than list price, which always happens.
Is there something I`m missing
Great interviews with the Globes Rob Carrick, Ben. Good to see you out on the town and dispensing some timely, sensible advice about renting versus buying. And you did it without getting political or insulting anyone. I am sure we will be hearing more from you.
Hmm... Interesting stuff in the new federal budget. 300K immigration applications - out the window. Changes by end of year to the 'investor immigration program' aimed to 1) raise the minimum amount required from $800K up to 1M - 1.5M; 2) control where the money goes to make sure it goes to the job creation rather than end up being dead money locked in fixed assets. Hopefully the madness in RE market would end?... North York area keeps on selling 10 -20% over asking on average even at this insanely high prices.
"We are about to find out that economics and finance has a far bigger impact on your life than politics, and if you don't believe me let me finish with a very clear declaration, and hold me to this, come back at me years in the future.
The sovereign debt problems along with the costs of an aging population are going to revamp society in the most profound way, and the part that worries me, that includes violent social unrest, and those who don't understand it are just going to be road kill along the way."
Michael Campbell (the brother of former B.C. Premier Gordon Campbell) made the above statement on his "Money Talks" radio show last Saturday on radio station CKNW in Vancouver, B.C.
If anyone wishes to listen to these words for themselves click on the following link to CKNW's audio vault enter March 24 in the date drop down box, 8:00 AM in the time drop down box and then click on "listen". When the audio starts to play, move the slider ahead to 39 minutes and 30 seconds to hear the quote. (Put your mouse on the bar just above the "listen" tab, click the mouse, hold it down and then slide the pointer ahead on the bar. You have to release the mouse to see where you are, and then repeat the process again one or two times to get to the 39 minutes and 30 seconds mark.) You do not have to register on the website to use the audio vault. It is strictly click and play. CKNW's audio vault stores program audio for a period of 30 days.
http://www.cknw.com/other/audiovault.html
Just like I said, Canadian banks are flipping mortgages to BoC and US Fed. http://i41.tinypic.com/2dbv6gg.png http://i44.tinypic.com/28k802a.png
Oh ya, we have safe banks alright...
At least I'm not the only one scratching my head as to why the F's budget didn't address any progress on covered bonds, instead, the government stated it is "moving forward" without providing any details.
"I expected to see more detail," said Avery Shenfeld, chief economist at CIBC World Markets. "Obviously it's still a work in progress. It doesn't have to be in the budget. It's a bit of a surprise because I was looking for a whole addendum on it."
Still more work needed indeed, because our government has already tried to create another Federal arm (bigger government) to uniform provincial securities regulations that would require a constitutional amendment to the Trade and Commerce Act, which unfortunately for F, the Supreme Court has already overruled in December. http://business.financialpost.com/2011/12/22/supreme-court-rejects-natio...
Translation: Covered bond legislation, muerto.
So what's F's next plan?
"Public-sector investment pools, in Canada and abroad, would be allowed to buy shares in Canadian banks for the first time if the plan is approved." http://gulfnews.com/business/banking/canada-banks-may-tap-wealth-funds-1...
This could work—only one problem—investment pools would have to meet a certain criteria to qualify as a safe investment for public sector funds, meaning, shares/units issued would have to be granted senior credit status leaving all current shareholders as subordinates. This is risky business.
It goes to show how desperate our government is and how far they are willing to go.
My wife and I are simply doing what my parents and grandparents did in these situations...live lean and keep on investing in things we understand. Just look at other past bubbles in Western Canada such as Fort McMurray AB, or Kelowna for instance: 10 years ago there was an enormous labor boom in the oilfield, and lots of Albertans got in and got rich, riding the housing and wage boom in Alberta and investing it in the Okanagan (just one huge trend as an example). The results of this were simple to see; those who came and bought in BC with cash were able to ride out the US recession (which is still ongoing) but have not gone bankrupt or lost their shirts. Those who saw the surge and invested as speculators are now wearing a barrel with suspenders and a "Will work for my down payment back" sign.
The same goes for Vancouver, where we absolutely refused to sell our condos when we got married a year ago, even though they were fetching a healthy profit from investors. Why give the investment potential to an investor when we can just get a cheaper car, do our own renos, a few more sleepless nights (which we were due to have anyway) and ride it out...as a result, we are now able to buy a chunk of farm land and continue diversifying our RE portfolio. You gotta live somewhere right?
I like the comment about renting the bank's money as well, but at least we get to live in our investment, and continue using our own imagination to cut corners on spending. This way, we have some degree of control over our investments (rather than giving our money to a broker and putting HIS kids through university).
Again, to anyone who is thinking of selling in Vancouver or Toronto because you believe the cash will yield a brighter future...this is not the answer. As Canadians, we should be ashamed about how little of our own country we own anymore. Tighten your belts Canada! It's time to truly differentiate ourselves from our Southerly neighbors by making more trips to the library and fewer trips to the mall!
Have confidence, the future is brighter than you think!
G and J Hilman
The tougher mortgage rules just unleashed last week may discourage more Canadians from getting into the housing market,
but international investors are not bothered much, if at all.
The condo markets in both Vancouver and Toronto are both prime draws for the international crowd,
may of which plunk down a hefty 20 percent down payment, making them exempt from the new government rules.
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