"If you want affordable housing go to Detroit" - Sauder School of Business

Posts have been few lately due to circumstances beyond our control, but we couldn't let this latest gem go by unreported.

In today's Vancouver Sun there is an article titled "Housing affordability not as cut-and-dried as it seems. Complex issue: The figures look daunting, but somehow Vancouverites have been coping with the cost"

The Sun reports that the simple numbers on housing affordability in Metro Vancouver are unequivocally alarming: It costs just over 8½ times the median after-tax household income of $61,975 to buy a home for the median price of $517,677.34.

Compared to the norm in banking circles just a generation or two ago when low-equity borrowers were likely to be denied a mortgage if the cost of the house they wanted was more than three times what they earned in a year, this seems insane.

But the article argues that if you look at the issue more closely, the message is nuanced and somewhat mixed.

Today's 8.5-to-one ratio is, to be sure, quite a bit worse than 20 years ago when it was 6.6 to one, and even worse still than the 5.9 to one figure in 2003. But ...

These historical ratios, though lower than today's, were still very high by any conventional measure, and they never once dipped to a low or even "normal" level during the entire duration of the last two decades. Yet Vancouverites still coped, and the population still grew by well over 500,000 in that 20-year period...

Half the reason for a high priceto-income ratio is not the cost of a home, but rather the lacklustre growth of personal incomes in Metro Vancouver over recent years to the point where we trail most major cities in Canada. If this turns around - and, once again, there are no guarantees - the affordability squeeze will ease.

The central message?

Robert Helsley, dean of the Sauder School of Business, added an additional perspective when he spoke last week at a UBC-sponsored symposium on affordability. He suggested Vancouver's high home prices are "the price of admission" to this amenity-rich little corner of the world.

Similarly highly priced real estate is found in other places where people really want to live - Hong Kong, San Francisco, London and New York, to name a few.

"If you want affordable housing," Helsley said, "go to Detroit."

Instead of calls to halt the easy credit and low interest rates that fuelled and created the unaffordability to begin with, we get sermons to 'let them eat cake'.

Marvellous.

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Another West Side Realtor says the market is collapsing, tells clients "you must cut prices to sell"

Summer may have finally arrived on the Wet Coast, but the saying of the week remains 'when it rains, it pours.'

But instead of the endless Rainforest drizzle, the topic du jour is realtors.

For the last week and half the focus has been realtor Keith Roy.

But another horse has entered the Vancouver West Side race of realtors telling clients the market is crashing.

As profiled by Garth Turner yesterday, realtor Sam Wyatt is the latest to do a spit-take on the REBGV/BCREA/Sauder School of Business kool-aid.

Wyatt's synopsis of the Vancouver real estate market?

“This market is collapsing.”

You don't say Sam?

From his website:

Homes are simply not selling in the same volumes as they have been and the longer people wait to reduce prices, the larger the inventory will grow.

Last month I pointed out that the active listing volumes for detached Westside houses actually exceeded the highest volume during the credit crisis. In June the number of houses actively listed was even higher at 1078. During the credit crisis, the active listings of detached homes on the Westside never exceeded 1053 houses. Keep in mind also that the three year average number of active detached homes listed on the Westside between January 2009 and December 2011 was only 589. This is a very serious situation.

One of the most influential elements of the Vancouver West real estate market has been the large proportion of sales to foreign buyers, particularly from China. From a purely anecdotal point of view, the number of these sales has significantly diminished. We have been in a "top-down" market were the sale of the most expensive real estate has driven up prices in the rest of the market as sellers have opted to down-size or move to less costly neighbourhoods. By moving into lower price points, the sellers of higher priced real estate were able to drive up prices because they were relatively flush with cash compared to those making lateral or up-size moves. As a result, the closer to the entry level of the market, the fewer gains were made. Gastown apartments have made little price gains if any over the last 3 years while detached homes have nearly doubled. When houses prices fall, the rest of the market will almost certainly follow.

The new rules for Canadian Mortgage and Housing Corporation (CMHC) insured mortgages will have a detrimental effect on sales at the entry level of the market. Maximum amortization periods for insured mortgages have been reduced to 25 years. Over the past several years this maximum has fallen from 40 to 25. The most recent move from 30 to 25 years will be the most significant in that it will exclude many first time buyers from qualifying even while interest rates are near all time lows. If the banks follow suit and adopt the CMHC rules , as they almost always do, it will likely also dissuade many investor buyers from purchasing condos to rent out. I predict this because the lower amortization period will significantly increase monthly mortgage costs and lower the proportion of those payments that are tax-deductible interest.

Vancouver's real estate market is getting and is going to get hit from both ends. So, now that you are thoroughly depressed, here is the bright light: IF YOU SELL NOW, YOU WILL STILL BE SELLING NEAR THE TOP OF THE MARKET. If you plan to sell, you will need to price BELOW the most recent comparable sales prices. If you don't do this, your listing will stagnate.

While it lacks the flair Keith Roy had for kicking his industry under the bus, it's another indication - from a realtor himself - of the looming potential for our housing bubble to burst in spectacular fashion.

It also echo's Richmond realtor James Wong's advice that if you "want to sell your property, deep price cuts are needed."

With realtors seemly tripping over themselves to publicly tell you to bail on the market ASAP... it might almost make the average person begin to take notice of what's coming.

Horrors!

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Conflict of Interest?

If you follow Real Estate in the Village on the Edge of the Rainforest, you are well acquainted with C. Tsuriel (Tsur) Somerville.

Somerville's official title is Associate Professor, Real Estate Foundation Professorship in Real Estate Finance Director, UBC Centre for Urban Economics and Real Estate.

(try saying that 3 times fast)

The Vancouver bear blogosphere prefers to call him "that real estate flunky from the UBC Sauder School of Business."

He earns that title because, as the media's 'go-to' guy when a 'non-partisan' expert opinion is sought, he seems to constantly come across as nothing more than a spokesperson for the Real Estate industry.

Take, for example, this quote from an article in the Globe and Mail last month.

As sales slump and listings soar, the Globe comes out with a story headlining "Cooler housing market no catastrophe."

To hear some people talk, one of the hottest housing markets in the world is experiencing a serious course correction. Prices are down significantly over last year. But what does that mean?

Tsur Somerville, the oft-quoted real-estate economist from the University of B.C., doesn’t see signs of a major real-estate story brewing. He actually holds a refreshing perspective on the local scene. He won’t even go so far as to say that buyers hold the advantage at the moment, even though supply far exceeds demand.

Critics content Somerville will NEVER go so far to say that it's a buyer's market, a viewpoint driven largely by comments like this one from a recent Vancouver Sun article titled 'Vancouver's Housing Market unlikely to face significant price correction - expert':

Although the Vancouver housing market may be out of equilibrium, a significant correction is not expected, said Tsur Somerville, director at the University of B.C. Centre for Urban Economics and Real Estate at the Sauder School of Business.

To those who watch Real Estate, Somerville is as R/E optimistic as every single rah-rah realtor who eternally flogs the 'it's a great time to buy' mantra.

So is all the criticism of Somerville simply sour grapes from the real estate bear blogosphere because the man, an expert in his field, won't come out supporting the outcome they foresee?

Or does Somerville actually have a bias toward supporting the real estate industry?

Last week a faithful reader passed on this interesting link to me (hat tip alexcanuck).

It's the website for the Sauder School of Business. Specifically the sponsorship page acknowledging those companies who provide significant funding to the Centre for Urban Economics and Real Estate.

i.e. The source of funding for Tsur Somerville's paycheque.

Toss into the mix the fact that the courses he teaches at the Sauder School of Business are:

• Commerce 307 - Real Estate Investment
• Commerce 408 - Real Estate Development

And you would be hard pressed to believe that someone who teaches you about investing in real estate or developing real estate - two field's where boundless optimism is crucial - then it's doubtful this person is going to come out and tell you the market is in trouble.

Besides... if he's telling you the market is in serious trouble, who's going to sign up to take his courses?

So what do you think?

Is there a conflict of interest... or at least the perception of a conflict of interest here?

I suspect in a poll of the bear blogopshere, the answer is all too obvious.

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