How can people afford to buy a home in Greater Vancouver? That question came to mind as I struggled to catch up with the latest batch of national and local media stories on the lower mainland’s seemingly inexhaustible housing boom. Of course, Canada’s third largest metropolitan region has long been the most expensive in the country to purchase a home. Indeed, relative to the incomes of area residents, it ranks among the priciest markets in the world.

Twice a year, Royal Bank of Canada (RBC) economists estimate the proportion of “median” pre-tax household income needed to service a mortgage and cover property tax and utility charges on a standard detached home and a standard condominium, valued at current market prices. The term “standard” implies a residence of modest space and quality, not high-end or luxury accommodation. It is assumed that the home-owner contributes a 25% down payment and takes out a 25-year mortgage at a fixed five-year rate.

Using this methodology, the cost of purchasing and operating a single family home now amounts to an astonishing 120% of median pre-tax income for Metro Vancouver households, according to RBC’s latest report.[1] For a standard condominium, the cost is significantly lower – around 46% of income (although this excludes monthly maintenance fees).

The Vancouver area market is the least affordable in Canada, by a wide margin, across all categories of housing. For a standard detached residence, home ownership costs absorb 72% of median household income in Greater Toronto, Canada’s second most expensive market. In Montreal, 42% of household income is sufficient to own and maintain a detached home. For a standard condominium, home ownership costs in Metro Vancouver also exceed those in other cities, albeit not by as much. See the accompanying table for further details on affordability by metro area.

How do people in the lower mainland manage amid sky-high housing prices?

There are several factors to keep in mind.

First, recent BC government data indicate that roughly 10% of home-buyers are foreigners who don’t work in Canada or rely on the local economy to generate income. Foreign investors undoubtedly have played a role in pushing lower mainland housing prices higher, although by how much is unclear. Nor is it clear whether the BC government’s new 15% tax on foreign property purchases will have a lasting effect on housing demand in the region.

Second, compared to other metro areas in Canada (and the U.S.), lower mainland home owners simply get less for their money. They settle for smaller spaces, fewer amenities and longer commutes. A large and ever growing share of residents occupy condominiums of less than 1,000 square feet, which are considerably more affordable than single family homes. Even couples with two children in Greater Vancouver often end up in (smallish) condominiums. In most other North American cities, a majority of such people would be in detached homes and enjoy more living space on a per person basis.

Third, most current Vancouver area home owners purchased their properties ten or more years ago, when prices were lower. Today’s high prices don’t really pose a problem for them – indeed, soaring property values have dramatically increased household net worth for many homeowners in the region.

Finally, Metro Vancouverites and the local development industry have innovated to make home ownership feasible. Floor space has shrunk in newer condominium developments. Densification is well under way across the region. Many single-family home owners maintain secondary suites that serve as indispensable “mortgage helpers.” Parents have been stumping up large dollops of cash to enable young adults to get into the market. In some cases, we see two unrelated individuals or couples combining their resources to purchase a detached home in which both reside.

Notwithstanding the above comments, the reality is that hundreds of thousands of lower mainland families are now saddled with record debt burdens attributable to the escalating costs of home ownership. An unexpected shock, either a sudden jump in unemployment or a spike in interest rates, would deliver a blow to the financial well-being of many heavily indebted households. A sharp housing market correction, should one occur, would also hurt Metro Vancouver home-owners, and likely be enough to tip the region’s economy into a recession. Economist David Baxter recently estimated that a 20% decline in property values would shave around $100 billion from net worth in Metro Vancouver.[2]

Academic research on the history of housing booms around the world strongly suggests that an extraordinary, multi-year run-up in real estate prices, like the one experienced in Metro Vancouver, increases the odds of a subsequent market correction.[3] Lower mainland residents, financial institutions and government policy-makers all need to be alive to this risk.