A few posts ago I dissected the CMHC housing report which still stubbornly refuses to acknowledge that the Victoria market is anything to be concerned about. I concluded that the only explanation for their report might be that affordability of single family houses is not out of line with historical norms due to our very low interest rates.
Overall this fell in line with previous measures of affordability that I’ve done using different data sets of income. But what about condos and townhouses? It is logical to assume that as the city grows it will become increasingly dense, and a greater proportion of residents will be living in higher density housing, whether by choice or necessity. Sales are currently split about 60/40 between detached and strata properties, and that doesn’t count all the pre-sales that don’t hit MLS and thus never appear in the stats. It’s safe to say that half of all purchases are for something other than a detached home.
First of all, the price to income of all property types has risen throughout the years. This is to be expected in an environment of falling interest rates. Like I’ve said again and again, people look at the monthly payment not the total price. That’s why we have a crisis in auto loans and that’s why we have a massive mountain of mortgage debt in this country.
So what happens when we turn this into a monthly payment? Assuming a 20% down payment and the prevailing 5 year fixed rate of the year, here is the situation for single family homes, condos, and townhouses.
Pretty similar trend in all property types, with single family homes stretching affordability more than the other types. This is still the clearest pattern in Victoria real estate that I’ve seen. Price booms start when affordability moves into the green range, and it ends once it becomes strained for the property type (red range).
Now of course it doesn’t take into account all the factors. As Hawk points out, as house prices increase that 20% down is an increasingly large number and that can’t easily be financed. Also for condos, the trend has been towards smaller and smaller units so on a price per square foot level what you’re getting is probably less than what you could have had 20 years ago.
Now in the past the corrections have come in the form of price stagnation and gentle declines as the combination of rising incomes and falling rates restores affordability. In the future this will be quite different as rates can’t fall much further. When the next boom corrects we will either see larger price declines or need much stronger incomes to prevent it.