Canada's 'housing bubble' deemed close to bursting

[Innsertnamehere]

I believe the average new construction detached home is 2,800sf.

$400/sf is only for the most crazy high end construction. Laneway suites are more expensive because of the complicated construction environment, and even then $400/sf seems high. I’ve heard laneway houses are typically closer to $300/sf, while a new build detached home with mid level finishes is more like $200/sf. Especially for a larger residence like a 2,800sf house where things like appliances have more square footage to dilute their costs.

Building a 2,000sf house custom with mid level finishes should cost about $400k. When a developer does it in a subdivision it’s probably more like $300k due to economies of scale and typically lower end finishes.

Now of course this is without development fees.

A typical pro forma for a subdivision developer may look something like this:

Construction - $300k
Utilities and development charges - $100k
Soft costs (architecture, sales, approvals) - $100k
Land - $150k

Total: 650k
Sell for: 750k
Profit: 100k (14%)

Extremely simplified of course.

Cheaper markets like Windsor will see smaller houses, lower development fees and soft costs, and lower land costs. So whack $50k off each category.

At least in Ontario.

[wave46]

Originally Posted by misher

Going back to the cost of housing, construction costs have soared.

A laneway house of 850sqft costs more than $350k before tax for construction thats $412 a sqft. This is in 2016.
https://www.cbc.ca/news/canada/british-columbia/laneway-vancouver-coachhouse-density-1.3835335

I'm not sure if Vancouver is simply out of tune, but the region of the country I'm living in is nowhere near that (Sudbury).

Newly built bungalows go for ~$400,000 plus taxes here. Semi-detached from $330k. Since I doubt the developer is losing money on the deal and is pricing to the market (this market has done decently well), I suspect the quoted construction prices are simply wrong.

This point remains though: Regardless of what's driving the cost of the housing, there's simply no way that a city like Vancouver should have anything more than a trickle of sales of $1.5 million homes, given the average income of its citizens. But yet it does. Which makes one wonder: Who is buying these $1.5 million homes?

[misher]

Originally Posted by wave46

I'm not sure if Vancouver is simply out of tune, but the region of the country I'm living in is nowhere near that (Sudbury).

Newly built bungalows go for ~$400,000 plus taxes here. Semi-detached from $330k. Since I doubt the developer is losing money on the deal and is pricing to the market (this market has done decently well), I suspect the quoted construction prices are simply wrong.

This point remains though: Regardless of what's driving the cost of the housing, there's simply no way that a city like Vancouver should have anything more than a trickle of sales of $1.5 million homes, given the average income of its citizens. But yet it does. Which makes one wonder: Who is buying these $1.5 million homes?

The problem with looking at median wealth in Vancouver is that it’s very low for the region. The DTES is filled with people on welfare. East Van is reporting a median income of 30-40k. Yet North Van is reporting median incomes of 100k.

Vancouver reports one of the lowest median incomes among Metro Vancouver.
Looking at a map of reported incomes it’s not “satellite families on the west side” that bring that average down, it’s the DTES and East Van.

So it’s hard to take median income stats for Van seriously as you have the Metro Core reporting lower incomes than the suburbs. Even white rock has a higher median income.

I would say we should use the median incomes of people in North Van as the number to use. When you have most of the provinces homeless housed in your metro core of course they bring the median income way down for that core. You also have a ton of criminals in East Van who are reporting low incomes. Van is surrounded by blue in the below.



http://www.vancouversun.com/pete+mcmarti...ore+poor+less+between/7597585/story.html

And yes in a city that’s growing 2% a year via immigration it would make sense if around 2% of the city’s total housing should be bought each year by immigrants. Around 1-2% of the provinces total housing is sold every year. Is it really that offensive that immigrants buy a house?

[esquire]

Originally Posted by Innsertnamehere

I believe the average new construction detached home is 2,800sf.

I'm not sure what's going on in the rest of Canada, but the average around Winnipeg is nowhere near 2,800 sf. The median home is probably in the 1,500-2,000 sf range with the main distinguishing factors between higher end and lower end being things like yard size, quality of finishes, location, etc.

The only place where you'd see averages of 2,800 sf might be in a handful of the wealthiest neighbourhoods in town (like Old Tuxedo), or some of the posher pockets of semi-rural exurbia (like East St. Paul).

[wave46]

Originally Posted by misher

The problem with looking at median wealth in Vancouver is that it’s very low for the region. The DTES is filled with people on welfare. East Van is reporting a median income of 30-40k. Yet North Van is reporting median incomes of 100k.

Vancouver reports one of the lowest median incomes among Metro Vancouver.
Looking at a map of reported incomes it’s not “satellite families on the west side” that bring that average down, it’s the DTES and East Van.

So it’s hard to take median income stats for Van seriously as you have the Metro Core reporting lower incomes than the suburbs.

A $1.5 million home costs about $68,000 in mortgage per year alone assuming 20% down and a 3% interest rate. Even with an income of $100,000 per year (say, $75,000-$80,000 after taxes), it's unaffordable.

A $1.5 million home is not affordable to any average person. Period. End of story.

Which leads me to the conclusion that the average person is not buying these things.

[misher]

Originally Posted by esquire

I'm not sure what's going on in the rest of Canada, but the average around Winnipeg is nowhere near 2,800 sf. The median home is probably in the 1,500-2,000 sf range with the main distinguishing factors between higher end and lower end being things like yard size, quality of finishes, location, etc.

The only place where you'd see averages of 2,800 sf might be in a handful of the wealthiest neighbourhoods in town (like Old Tuxedo), or some of the posher pockets of semi-rural exurbia (like East St. Paul).

Yeah Vancouver is a bit wack in that most homes are “newish” and seek to maximize floor space. So naturally average price per a home is higher as detached homes in Van are both newer and larger than in other cities. Plus they have fire sprinkler systems.

Rents are decent in Van so people prefer larger houses with 1-2 income suites.

An extra 2-3k a month income justifies paying extra for a bigger home as with interest rates at 2% assuming no extra costs and a rent of 3k an extra $1.5 million equals the bank interest. So obviously in addition to what people pay for a house for their own, they are willing to pay $500k-$1M extra for a few income suites.

[Truenorth00]

Originally Posted by esquire

I'm not sure what's going on in the rest of Canada, but the average around Winnipeg is nowhere near 2,800 sf. The median home is probably in the 1,500-2,000 sf range with the main distinguishing factors between higher end and lower end being things like yard size, quality of finishes, location, etc.

Not the norm in Ottawa or Toronto either. 2000-2500 sqft seems to be the bulk of floorplans I've seen. If anything, I'm starting to see developers try to build smaller homes and getting more creative with layouts, as development plans reduce the proportion of single family detached they can build.

[Innsertnamehere]

Now that I think of it 2,800sf might be the US average.

It’s probably the average size in places like Vaughan and Brampton, where detached are luxury products or designed for multi generation families, then London or Hamilton where they are still attainable by middle class buyers.

The reduction in single family product is from provincial density mandates, especially in the GTA. A new subdivision in the GTA will be lucky to get 25% of its units as detached today as you simply can’t get more than that while meeting the 80 people per hectare density mandates. It means frig tons of townhouses essentially. If a developer could they would build much more detached stock since the demand for it is essentially unending.

[Truenorth00]

Originally Posted by wave46

A $1.5 million home costs about $68,000 in mortgage per year alone assuming 20% down and a 3% interest rate. Even with an income of $100,000 per year (say, $75,000-$80,000 after taxes), it's unaffordable.

A $1.5 million home is not affordable to any average person. Period. End of story.

Which leads me to the conclusion that the average person is not buying these things.

Exactly, the math doesn't work out. The Ernst & Young tax calculator shows that $100 000 income is $77 410 after tax:

https://www.eytaxcalculators.com/en/2020-personal-tax-calculator.html

That's $6450 per month. Using low rates, 20% and 30 year amortization tells me that a milion dollar home is still over $3000 per month in mortgage payments. But that doesn't account for property taxes, utilities and maintenance. No wonder so many of our Vancouver friends complain about taxes. They are house poor!

I suspect a lot of the million dollar valuations in Toronto and Vancouver is foreign money and parents rolling equity to their kids to help them get into the market. It's not just financially unsustainable. It also creates resentment by folks who don't have generous parents or foreign incomes. Voting in governments who crack down on these practices becomes inevitable.

[esquire]

To misher's point, I have noticed the trend to maximize floorspace with infill homes... I see that across the country. It often leads to a bit of friction as you end up with scenarios where a modest 800 sf bungalow ends up being dominated by a 2 or even 3 storey 2,000+ sf square foot home next door. But in true SSP form I never put much stock into those types of NIMBY objections.

[misher]

The biggest factor in RE is interest rates. If rates rise how much interest we pay on our debt rises. Our federal government is paying around 8% of expenses in interest on its debt if rates double then they have to decide on how they are going to plug a hole the size of our military in the budget.

If you receive rent of $3000/month with annual costs of $6000 (and no tax), that makes a place worth $1.5 million break at a rate of 2%.

If we double interest rates to 4%, suddenly only housing worth $750,000 is affordable at that rent.

So given that the average house in Van rents for around $4-6k (likely more). That means housing prices at our current 2% interest rates should be around $2-3 mil.

Don’t go off on a foreigner tangent. The West side reports close to double the median income of the east side despite being the “place full of Chinese satellite families that report no income” which is obviously some stupid unproven racist 🞵🞵🞵🞵🞵🞵🞵🞵. This is basic math. And a lot of families buy a place then rent out the mortgage helper(s) which subsidizes half the mortgage or more. Also REITs and/or pensions and/or First Nations are the biggest land owners in Vancouver because with low interest rates RE investments make sense due to stable returns. Canada has close to a trillion in pensions and naturally a good chunk of that gets invested in our biggest RE markets.

[Truenorth00]

Originally Posted by Innsertnamehere

Now that I think of it 2,800sf might be the US average.

I provided this link yesterday:

https://www.point2homes.com/news/canada-real-estate/how-large-are-canadian-homes.html

Only in Australia is average home size over 2000 sqft. But I do think you're right. US subdivisions tend to have large lots and larger homes. And I suspect anything built in the 90s and beyond was probably jumbo sized closer to 3000 sqft. This is what makes watching HGTV on Americans home shopping entertaining after all....

Originally Posted by Innsertnamehere

The reduction in single family product is from provincial density mandates, especially in the GTA. A new subdivision in the GTA will be lucky to get 25% of its units as detached today as you simply can’t get more than that while meeting the 80 people per hectare density mandates. It means frig tons of townhouses essentially. If a developer could they would build much more detached stock since the demand for it is essentially unending.

A huge problem is our utter unwillingness to build smaller detached homes on smaller lots. A lot of our streetcar suburbs had these kinds of homes. And they aren't all that different in size than what you'd find in Europe. But having a 1000-1500 sqft detached home with a backyard just big enough for a patio set and vegetable patch and front door within 7-10 ft of the sidewalk seems like a crazy idea to most developers.

Everytime I walk through my neighborhood in Ottawa (inside the Greenbelt), I'm struck by how much space is wasted by front lawns alone.

[misher]

Originally Posted by Truenorth00

I provided this link yesterday:

https://www.point2homes.com/news/canada-real-estate/how-large-are-canadian-homes.html

Only in Australia is average home size over 2000 sqft. But I do think you're right. US subdivisions tend to have large lots and larger homes. And I suspect anything built in the 90s and beyond was probably jumbo sized closer to 3000 sqft. This is what makes watching HGTV on Americans home shopping entertaining after all....



A huge problem is our utter unwillingness to build smaller detached homes on smaller lots. A lot of our streetcar suburbs had these kinds of homes. And they aren't all that different in size than what you'd find in Europe. But having a 1000-1500 sqft detached home with a backyard just big enough for a patio set and vegetable patch and front door within 7-10 ft of the sidewalk seems like a crazy idea to most developers.

Everytime I walk through my neighborhood in Ottawa (inside the Greenbelt), I'm struck by how much space is wasted by front lawns alone.

Agreed. We treat the lawn and setbacks like holy grails. FSRs for detached are 0.3-0.2 in many cities. With two storey houses that usually means only 20% of the lot is actually occupied by the house. FSR’s for detached should be 1 with up to 50% of the lot allowed to be occupied. And minimum lot sizes should decrease considerably.

[Acajack]

Originally Posted by Truenorth00

Not the norm in Ottawa or Toronto either. 2000-2500 sqft seems to be the bulk of floorplans I've seen. If anything, I'm starting to see developers try to build smaller homes and getting more creative with layouts, as development plans reduce the proportion of single family detached they can build.

Owing to economic conditions, homes in Quebec were traditionally smaller.

Although Quebec has more or less caught up with Canadian averages in terms of overall affluence, homes here still remain on average smaller. My guess is that it's partly due to habit, and also partly due to Quebecers being more "experiential" with their spending as opposed to "material".

In similarly affluent suburban areas of Ottawa and Gatineau, recent SFHs are generally in the 2000-2500 sf range in Ontario, whereas in Quebec they are typically around 1800 sf.

My 10-15 year old street is upper middle class and only maybe 10% of the houses have more than 2000 sf. I don't believe any are as big as 2500. The vast majority are in the 1600-1800 sf range.

Also, single car garages completely dominate here, whereas in Ottawa two car garages are totally dominant. Often regardless of lot size, which of course leads to you know what. But that's another topic.

[esquire]

^ Quebec seems to have a penchant for smaller, more compact living generally. I've heard it said that car manufacturers tend to bring certain subcompact/city sized cars to Canada that wouldn't otherwise be here because they tend to be hot sellers in Quebec. A possible European influence?

[wave46]

Originally Posted by misher

The biggest factor in RE is interest rates.

So given that the average house in Van rents for around $4-6k (likely more). That means housing prices at our current 2% interest rates should be around $2-3 mil.

Housing prices should be reflective of local incomes, interest rates and supply, absent an outside force.

I admit that low interest rates and supply are limited in the Vancouver market, driving housing prices higher than the rest of the country.

I don't understand how - absent an outside force - housing prices can be completely detached from average income. If a $1.5 million home costs $68k in mortgage costs per year, that basically limits it to a narrow niche of people. I do not believe that the average income in Vancouver can sustain $68,000 worth of annual mortgage payments.

It doesn't compute. Unless there's something else happening.

[Truenorth00]

Originally Posted by misher

The biggest factor in RE is interest rates.

Your point is true on a superficial level. But a huge part of it is non-monetary policy. What do you think would happen to home prices in Canada if CMHC came out and said that they will not insure any mortgage that doesn't have at least 10% down or would limit their business to homes costing less than $500k? What do you think would happen to home prices if CMHC stopped doing securitization of housing and banks actually had to carry mortgages on their books or securitize the mortgages into bonds themselves? I would bet money the number of million dollar mortgages would drop by an order of magnitude over night. CMHC backstopping the vast majority of housing in this country is what has allowed some very irresponsible lending behaviour. Untraced foreign money is just the cherry on top of this whole house of cards.

[Truenorth00]

Originally Posted by esquire

^ Quebec seems to have a penchant for smaller, more compact living generally. I've heard it said that car manufacturers tend to bring certain subcompact/city sized cars to Canada that wouldn't otherwise be here because they tend to be hot sellers in Quebec. A possible European influence?

Quebecers are kinda strange on car tastes. They seem to love big American cars. But also euro hatches. Trucks seem less prevalent.

[Truenorth00]

Originally Posted by Acajack

Owing to economic conditions, homes in Quebec were traditionally smaller.

Although Quebec has more or less caught up with Canadian averages in terms of overall affluence, homes here still remain on average smaller. My guess is that it's partly due to habit, and also partly due to Quebecers being more "experiential" with their spending as opposed to "material".

In similarly affluent suburban areas of Ottawa and Gatineau, recent SFHs are generally in the 2000-2500 sf range in Ontario, whereas in Quebec they are typically around 1800 sf.

Size aside, when I compare Ottawa and Gatineau, I find those smaller homes in Gatineau are better finished. And there's more mixed development.

On size, I've always wondered how much of it is just used to the tax differential. Higher income and property taxes means less money for homes. Developers have adjusted accordingly.

[misher]

Originally Posted by wave46

Housing prices should be reflective of local incomes, interest rates and supply, absent an outside force.

I admit that low interest rates and supply are limited in the Vancouver market, driving housing prices higher than the rest of the country.

I don't understand how - absent an outside force - housing prices can be completely detached from average income. If a $1.5 million home costs $68k in mortgage costs per year, that basically limits it to a narrow niche of people. I do not believe that the average income in Vancouver can sustain $68,000 worth of annual mortgage payments.

It doesn't compute. Unless there's something else happening.

If you rent out the first floor for $3000/month that goes down to $32000 a year in mortgage payments which is $2000/month