Fundamentals people, fundamentals!

Doesn't matter what industry you are in, or even what type of business, people always forget about the fundamentals. And that's what will trip you up at the end of the day.

The latest act that makes me laugh is the housing market in Vancouver.

See, currently a condo that would have sold for about $200,000 in 2001 is now selling at about $500,000. That's more than a 200% increase in prices. And there are a lot of reasons why people are saying that the housing market crash in the US will not affect us here. Here are some of the one's I've heard:

• We have the Olympics
• We are the best place in the world to live
• Lack of land
• Immigrants driving prices up
• Pent up demand
• Real estate never goes down
• US and foreign investors buying in
  

Let's see, to answer quickly:

• Olympics : A two weeks event - how is this meant to drive prices up beyond an announcement effect? Tourists don't buy. Investors might - but for 2 weeks? Not unless they can sell if off
  
• Great. So that should reflect in immigration numbers then
• Lack of land - in terms of what? Downtown core certainly but it hasn't stopped Condo's from going up and up. And really, we have yet to spread out to even a two hour commute. So why are we priced as high as some US cities?
• Immigrants - look at the numbers. The total number of immigrants have not moved from before. So where is the new demand coming from? And from personal experience, unless said immigrants are able to pay for the housing up-front, getting a loan is TOUGH without a credit history. Which takes a least a year (and a job!) to get
• Pent-up demand: Definetely in the earlier years like 2001 -03, maybe even 04 we saw the purchasing from that happening. But how much demand are we looking at here recently?By definition, pent-up demand must run it's course to normal levels
  
• Yeah right. Everything goes down - it's an investment
  
• Foreign investors - sure, they're what we call speculators.

Alright, so if the reasons offered are feable at best, that doesn't mean it isn't there. And obviously, people are purchasing. But why am I harping on fundamentals?

Because I want to ask the simple question - who the customer is? Really, if you break it down you have:

• First time buyers
• Upgraders
• Investors (and this could be broken into landlords and 'flippers')
  
• Rich visitors
• 2nd or 3rd home buyers
  

Now, a few points. Your average hourly wage for those between 26-54 is slightly more than $21. That works out to slightly more than $41k per year. Your average household income is about $60k.

At a median price of half-a-million for a house, or hell, even 300,000 for most 1 bedroom apartments, most first time buyers don't have the money. Even providing a 25% downpayment, a $300k real estate purchase would still require a loan of $225k. That's more than 5 times the annual income of your average citizen, you can count out most of your first time buyers. After all, banks sooner or later will go - ummm... no. I'm not lending you more than half your take home income. So the people here are just disappearing... if not already priced out of the market.

Upgraders - here we have a finite pool of individuals. After all, once you've purchased a larger location, you won't want to move for at least a year or two if not longer. And don't forget - everything is rising at the same time. So while your current house might be now 200% higher, so is the place you wanted to purchase. In the end, this group will dwindle if not already done so.

Investors - flippers are the one who are likely driving the marketplace right now. Investors who are looking for rental income must be crying. Renting a $300,000 condo right now is likely between $900-$1100 per month. Most condo's have a minimum of $200-$300 upkeep cost. So their take home for renting is less than a thousand. If you are paying even 5% on a $200,000 mortage on 25 years, you are bleeding money.

Visitors - so small to be insignificant on the net effect of the market.

Again, look at those average income.

At the end of the day, what you have is simple. A demand that is fundamentally not there (fads!) and a supply that keeps on increasing. It won't last as people start realising they can't afford the prices that keep on appearing and stop buying. And when that happens, a lot of people will be stuck with places they bought that they can't do anything about. They'll either struggle to meet their mortages or try to dump it.