We’ve all seen the newsreel by now. John and Hillary Smith, standing in the driveway in front of their new Hummer, crying how unfair it all is that they’re losing their home, car and credit. They bought with a “No Decs No Docs” mortgage – a mortgage approved in America with no declaration of income and no documentation – and their $300,000 purchase is mortgaged to the tune of 110 per cent (that’s how they got the Hummer). Now it’s up for renewal at current rates, not the special sign-up rate. Making things worse, after a 20 per cent drop in market prices, their castle is now worth only $240,000 – but they’re still on the hook for $330,000.
The Smiths should, of course, never have been in the market in the first place – and with recent changes in U.S. lending practices, buyers now require a down payment and a job to qualify for financing (a novel concept!). The question for us smug Canadians is: how insulated are we from the current crisis in the U.S. housing market?
The quick and easy answer is that we are different. We are savers. We have real down payments. The more fundamental answer is that in Vancouver, when you buy a pre-sale condominium you have to put up a 10 to 25 per cent deposit, driven by construction lenders – and that’s only the deposit. Homeowners top up deposits to arrange conventional financing with 25 per cent down, and we are seeing investors go into their pockets for 35 to 40 per cent down payments or more.
Compare this to my experience over the past nine years in Seattle, where Washington state law says that a maximum of only five per cent of your deposit is ever at risk should you not complete your purchase. A Seattle development going through completion as I write is experiencing a fallout rate of over 35 per cent, with purchasers walking away from their five per cent deposit. Same thing in Southern California, where last month I toured a building that just 30 months earlier was 100 per cent sold out. Today, it’s sitting 35 per cent vacant. In Vancouver a developer could never obtain construction financing with an entire building sold based on five per cent deposits.
Because we’re more conservative, our market is also more orderly – with real buyers and fewer fluctuations. But that doesn’t make it any more affordable. Vancouver, especially downtown, is no longer reliant on local incomes to sustain the housing market. More and more discretionary wealth from Iran, Korea, China and Europe is picking up the slack and driving up prices. There’s also the upward pressure that the multibillion-dollar Olympic branding campaign is putting on prices – all this in a city that has, under current zoning, very little residential construction on the horizon.
In Greater Vancouver, there are now two distinct markets: one fuelled by external forces and not reliant on local incomes (think downtown Vancouver), and a second one that’s totally reliant on local incomes (think anything south of the Fraser). Both market segments are sensitive to supply, and both markets should be sensitive to affordability – but for those expecting a U.S.-style collapse in prices, think again. While there may be some temporary relief on the resale side, many condo units are now being turned into rental properties as vacancy rates approach zero. More rentals equal fewer resales, and that means stable prices.
Ultimately, sellers who have to sell will take offers, and sellers who don’t have to sell will take their properties off the market or rent them out. In uncertain times, it is the developer – and not just homeowners like the Smiths – who is running from the market.
