Vancouver vs. Los Angeles Real Estate

In recent months, Canadian consumers have been admonished repeatedly by Mark Carney, head of the Bank of Canada and Jim Flaherty, Canada’s Minister of Finance about the necessity for Canadian consumers to keep their wits about them when borrowing money to purchase a home.  In light of that, I want to revisit Vancouver’s real estate market, the hottest market in Canada and the United States.  I’ll look at the affordability of a median home measured using the Demographia concept of median multiple which is defined as the median price of a home divided by the median household income in that market.  Keep in mind that Demographia defines markets with a median multiple of more than 5.1 as a "severely unaffordable market"; historically, real estate markets are most affordable when the median multiple is 3.0 or less. 

 

Let’s look back in time at changes to Vancouver’s median multiple since 2005 as shown on this graph:

 

Now let’s look at what has happened to the median price of a home in Vancouver since 2005:

 

The median price of a Vancouver home has risen by 81.9 percent since 2005 in contrast to the median gross household income that has only risen by 12.9 percent, from $56,500 to $63,800.  Those two numbers alone explain the drop in affordability in Vancouver’s market.

 

Now, let’s look at what has happened to real estate in another West coast market, Los Angeles, one of the most unaffordable markets in Demographia’s universe for three years running prior to the housing bubble collapse in 2007.  The two markets are relatively comparable; both cities are located on the west coast, both have an affluent population and both cities are among the largest real estate markets in their respective countries.  Before I get into the details, here is a quote about the Los Angeles real estate market that I found on the Bloomberg Businessweek website from April 11, 2005:

 

"For 2005 homebuilders are still optimistic about demand. There’s a backlog of unfilled orders for new homes, and Los Angeles-based KB Homes, for example, recently raised its fiscal 2005 profit forecast. Ryan Brown is one real-estate investor who remains upbeat. He and his business partner, Jeffrey Lewis, buy and remodel homes in the Los Angeles area. Their latest project is a three-bedroom, three-bath house in the Hollywood Hills that is listed for $1.49 million. "The whole bubble thing is really overrated," Brown says. Yet even he has reduced his price expectations, figuring appreciation may slow to about 3% or 5%. For the industry as a whole, higher mortgage rates will inevitably cut orders. By 2006 home construction will become a drag on the economy.

More important than housing’s direct effect on the economy will be fallout from the slowdown in home-price appreciation. This is where the economy will be most vulnerable. Thanks to the easy availability of refinancings and home-equity loans, consumers have gotten used to tapping into the equity built up in their homes." (my bold)

 

Annual price appreciation slowing to 3 to 5 percent?  Didn’t see the looming storm coming, did you Mr. Brown?

 

Back to the data.  Here is what has happened to Los Angeles’ median multiple since 2005 when Mr. Brown was so confident about the future:

 

Here is what happened to the price of a median home in Los Angeles over the same time period:

 

In Los Angeles, since 2007, the price of a median home has fallen by $263,600 or 44.8 percent.  One can quite readily see how easy it would be for mortgage holders to find themselves underwater when nearly 50 percent of the equity in a home vanishes into thin air.  The median multiple has dropped from a severely unaffordable 11.5 to a still severely unaffordable 5.7 but housing is much more affordable in 2011 than it was in 2007.
 

To summarize, yes, I realize that things are somewhat different in Vancouver, British Columbia, particularly with the influx of hot Asian money.  That said, as in all things, one can never say never.  Just ask residents of Los Angeles   Vancouver’s real estate market is so vastly unaffordable by the majority of its residents that eventually, market forces will take over and the city’s real estate market will follow that of Los Angeles back to a state of sustainable equilibrium.  When that will occur, no one knows but I can guarantee that in 2005, residents of Los Angeles didn’t see it coming either, nor did they suspect the magnitude of the readjustment.  Just ask Ryan Brown.

Click HERE to read more of Glen Asher’s columns.

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