Canada's economic future

[jdobbin]

It's obviously not a uni-causal relationship, but to argue that dual incomes don't play a part in driving any market common to both income earners would be ludicrous. The only way you could argue otherwise is to claim that each newly working female didn't increase the family income but merely took some of her husband's from a finite pot.

I don't think I argued that it didn't have an influence. I just don't know if it is the primary cause for higher house prices.

[August1991]

It's obviously not a uni-causal relationship, but to argue that dual incomes don't play a part in driving any market common to both income earners would be ludicrous. The only way you could argue otherwise is to claim that each newly working female didn't increase the family income but merely took some of her husband's from a finite pot.

Wait a second here.

When wives work outside of the home in paid employment, they produce goods and services sold in the economy. IOW, demand may increase because wives have money to spend but then more goods and services are available because there are more produced.

Above in this thread, I suggested that wives became construction workers increasing the supply of housing. The effect of wives in paid employment on housing prices would be a wash.

----

By focusing on housing prices, this thread is risking serious error. The price of a house combines both the house construction and the land beneath it (primarily the location). As David Ricardo long ago noted, the market value of something like land often contains what is called an "economic rent". In simple terms, you are paying for the right to be at a particular location - and that varies with time and place.

To have a decent place to live in Calgary is a valuable commodity right now so understandably house prices in Calgary are high.

When MikeDavid rails against immigrants, I reckon that he owns no property in Canada. If Canadians maintain their civilized society, it may well be that owning property in Canada will be beyond the ability of Canadians - unless they inherit land from their parents.

Land is a commodity as any other except that they aren't creating any more land. (Incidentally, beauty is similar to land. There is only so much.)

[Pat Coghlan]

Well, dual-income families certainly helped prices rise to the high levels from which they are now falling.

Care to guess what's going to happen to those $1M homes in Calgary owned by plain old middle class folk?

House prices didn't rise swiftly when the majority of people were single income?

Sure they did, but Dad's salary rose in unison. The standard rule that a family could afford a house roughly 2.5 times the gross family income applied. Today, house prices are roughly 4 times the primary wage earner's salary.

With $300K and $400K (or higher) house prices, you can be sure that the families that are buying them don't have a single $150K income.

[jdobbin]

Sure they did, but Dad's salary rose in unison. The standard rule that a family could afford a house roughly 2.5 times the gross family income applied. Today, house prices are roughly 4 times the primary wage earner's salary.

With $300K and $400K (or higher) house prices, you can be sure that the families that are buying them don't have a single $150K income.

Are those houses the same size though? I asked you this before. The average house size has increased and the now often have a two car garage. Plus, those prices have jumped because of demand in many areas. As we can see in the States, if supply outstrips demand, those prices tumble pretty fast.

So, I have to think that there is a lot more going on than just two incomes affecting house prices.

[Michael Bluth]

Are those houses the same size though? I asked you this before. The average house size has increased and the now often have a two car garage. Plus, those prices have jumped because of demand in many areas. As we can see in the States, if supply outstrips demand, those prices tumble pretty fast.

So, I have to think that there is a lot more going on than just two incomes affecting house prices.

2006 saw the worst housing slump in the US in 17 years. Link

Canada is in need of a correction. The job market here in Alberta has slowed a little, although it's still incredibly hot. Something tells me there won't be a slump here, more like a slowing in the rate of growth.

[AmericanPop]

^ Improving productivity is simple. Since productivity is a output over inputs(usually labour), just fire some workers and make the leftover work 60-70 hours a week.

But a better solution in the long term would probably invest in the best technology available.

That would be improving efficiency. Productivity concerns itself only with the ammount of output.

[Pat Coghlan]

Are those houses the same size though? I asked you this before. The average house size has increased and the now often have a two car garage. Plus, those prices have jumped because of demand in many areas. As we can see in the States, if supply outstrips demand, those prices tumble pretty fast.

So, I have to think that there is a lot more going on than just two incomes affecting house prices.

They're larger, but require much less labour to construct. Materials are also crappier (particle board vs plywood etc.). Carpenters use chainsaws.

Modern technology enables larger houses to be built more cheaply.

Are you suggesting that we've surpassed the previous 2.5 times gross income as the affordable price for a house because we're buying bigger houses?

[jdobbin]

They're larger, but require much less labour to construct. Materials are also crappier (particle board vs plywood etc.). Carpenters use chainsaws.

Modern technology enables larger houses to be built more cheaply.

Are you suggesting that we've surpassed the previous 2.5 times gross income as the affordable price for a house because we're buying bigger houses?

Some aspects of housebuilding uses cheaper materials, some use superior materials such as windows, insulation, water heaters, furnaces and duct work and electrical.

Houses sizes have gone up every year decade since the 1950s to accommodate larger appliances, larger entertainment requirements and more bathrooms. Houses in the 1950s were less than a 1000 square feet for families that were larger than today's families. They usually had one garage and one vehicle if they had any at all.

New house sizes in 2007 are often double what they were in the 1950s and the 1960s.

There is no doubt that this size increase has affected prices. How much so is a matter of debate but it isn't one that can be dismissed.

There are other issues that affect the price such as demand. Toronto, Calgary and Vancouver have always had prices accelerate faster because they are growing markets and there have been fewer houses than people wishing to buy them over the years

Decreases in interest rates have created a pent up demand which has created a bubble. Right now it is a sellers market. In the U.S., the bubble has broken and it is a buyers market.

I think anyone who focuses on one aspect of house prices is going to be seeing one tree and missing the forest.

[Renegade]

Are you suggesting that we've surpassed the previous 2.5 times gross income as the affordable price for a house because we're buying bigger houses?

Why is it you only look at the price to guage affordability? The interest rate plays a significant factor in affordability. If you look at Chart 1 you will see that housing affordability was as low in the late 90s as it was in the mid-80s. Even now while it is higher, it is not significantly so.

Housing affordability in Canada

Edited July 29, 2007 by Renegade

[Pat Coghlan]

Are you suggesting that we've surpassed the previous 2.5 times gross income as the affordable price for a house because we're buying bigger houses?

Why is it you only look at the price to guage affordability? The interest rate plays a significant factor in affordability. If you look at Chart 1 you will see that housing affordability was as low in the late 90s as it was in the mid-80s. Even now while it is higher, it is not significantly so.

Housing affordability in Canada

I don't look at the price in isolation. I look at the price relative to family income, and am pointing out that not only have prices gone up faster than family incomes, but that the fact that most families now have two incomes is one of the primary reasons that prices have risen to current levels.

Just FYI, I polled a couple of octogenarians re: house prices and salaries in the 1960s. Most memories are understandably not precise, but the general opinion seems to be that the price of a house was roughly equal to the primary (usually sole) wage earner's income. For example, in the mid-60s a senior clerk in the government made - I'm told - about $10K, and many houses could be purchased for close to that. Granted, they weren't the luxury homes being built today, but a close friend of my wife's family (a salesman) told me that he bought a 4-bdrm home in Mississauga in the 60s for $25K, and seemed to recall that his salary was about $30K.

Extrapolating to today, that would mean that a small home in Toronto would fetch about $250K, and a senior government clerk would be earning $250K.

Clearly, house prices have gone wild relative to personal & family incomes. Getting back to the title of this thread, I think this will spell a crisis within 5-10 years.

[jbg]

Just FYI, I polled a couple of octogenarians re: house prices and salaries in the 1960s. Most memories are understandably not precise, but the general opinion seems to be that the price of a house was roughly equal to the primary (usually sole) wage earner's income. For example, in the mid-60s a senior clerk in the government made - I'm told - about $10K, and many houses could be purchased for close to that. Granted, they weren't the luxury homes being built today, but a close friend of my wife's family (a salesman) told me that he bought a 4-bdrm home in Mississauga in the 60s for $25K, and seemed to recall that his salary was about $30K.

**********

Clearly, house prices have gone wild relative to personal & family incomes. Getting back to the title of this thread, I think this will spell a crisis within 5-10 years.

Ditto my neck of the woods. In 1964,my parents bought a house in Scarsdale, New York for $40,000, in line withi upper middle class incomes. In 1974, following my father's death and my mother's remarriage, we sold for $82,000, about 33% higher than similar incomes by that time.

Women were fast catapulting into the work force. Recently, neighboring houses are changing hands at roughly $800,000, despite some rather significant disrepair. Very few people make that kind of money annually. My own townhouse, about 2/3 of the size of what I grew up in, is "worth" about $625,000. I won't reveal my income here, but trust me, I don't make that kind of money.

[geoffrey]

^ Improving productivity is simple. Since productivity is a output over inputs(usually labour), just fire some workers and make the leftover work 60-70 hours a week.

But a better solution in the long term would probably invest in the best technology available.

That would be improving efficiency. Productivity concerns itself only with the ammount of output.

Generally, productivity is economic output per labour hour. So nah, Nova, your solution doesn't quite work. In fact, long term it may be better to work shorter weeks. The French workers, for example, are more productive for each hour worked, but less productive per worker because they work short weeks and have lots of vacation. So it's a balance.

It's a basic HR/managerial concept that overtime costs more than 1.5x... people aren't as productive per hour when working OT. Canada has one of the longest work weeks and least vacation in the G8.

Then again, the US is more productive than us, and they work as long and have equal vacation. Some Euros are more productive and they work less and have more vacation.

So really. Is it a labour issue?

Investing in technology is a major point. Canada's low dollar over the last 10 years has prevented alot of large scale capital expenditure on foreign produced machinery. Now that manufactures can buy upgraded gear cheaper from the States, you'll see some increase in productivity. Interestingly, one of the most criticised government policies is the accelerated CCA for oilsands investment. Personally, I'd like to see this extended to all industries instead of eliminating it for oil and gas.

The Income Trust structure, in a few independant reports, also proved to be more productive than traditional corporate structures. We lost that though, unfortunately.

[Pat Coghlan]

Just FYI, I polled a couple of octogenarians re: house prices and salaries in the 1960s. Most memories are understandably not precise, but the general opinion seems to be that the price of a house was roughly equal to the primary (usually sole) wage earner's income. For example, in the mid-60s a senior clerk in the government made - I'm told - about $10K, and many houses could be purchased for close to that. Granted, they weren't the luxury homes being built today, but a close friend of my wife's family (a salesman) told me that he bought a 4-bdrm home in Mississauga in the 60s for $25K, and seemed to recall that his salary was about $30K.

**********

Clearly, house prices have gone wild relative to personal & family incomes. Getting back to the title of this thread, I think this will spell a crisis within 5-10 years.

Ditto my neck of the woods. In 1964,my parents bought a house in Scarsdale, New York for $40,000, in line withi upper middle class incomes. In 1974, following my father's death and my mother's remarriage, we sold for $82,000, about 33% higher than similar incomes by that time.

Women were fast catapulting into the work force. Recently, neighboring houses are changing hands at roughly $800,000, despite some rather significant disrepair. Very few people make that kind of money annually. My own townhouse, about 2/3 of the size of what I grew up in, is "worth" about $625,000. I won't reveal my income here, but trust me, I don't make that kind of money.

When a couple of people told me that house prices in 1965 were roughly equal to a years salary, I couldn't believe it.

Back in 1965, if there was only one income of, say $1,000 (after-tax) per month, a typical monthly budget *might* look something like:

Shelter: $200

Property tax: $25

Food: $200

Utilities: $50

Transportation: $100

Insurance: $30

Doctor/dentist: $25

That still leaves about $350 for savings, entertainment, furniture/applicance purchases, clothing, tuition etc.

That's like have an extra mortgage payment left over. No wonder people in those days could afford a cottage etc.

Now, imagine if the same family had a second after-tax income of $500-$1000. Imagine how that could drive up demand and prices for housing in general.

Now you understand how the price of your townhouse got to $650K in Toronto.

Then ask yourself who from the next generation is going to be able to buy that house from you.

I see a big problem coming. Really big.

[jdobbin]

When a couple of people told me that house prices in 1965 were roughly equal to a years salary, I couldn't believe it.

Back in 1965, if there was only one income of, say $1,000 (after-tax) per month, a typical monthly budget *might* look something like:

Shelter: $200

Property tax: $25

Food: $200

Utilities: $50

Transportation: $100

Insurance: $30

Doctor/dentist: $25

That still leaves about $350 for savings, entertainment, furniture/applicance purchases, clothing, tuition etc.

That's like have an extra mortgage payment left over. No wonder people in those days could afford a cottage etc.

Now, imagine if the same family had a second after-tax income of $500-$1000. Imagine how that could drive up demand and prices for housing in general.

Now you understand how the price of your townhouse got to $650K in Toronto.

Then ask yourself who from the next generation is going to be able to buy that house from you.

I see a big problem coming. Really big.

Canada Housing and Mortgage Corporation has existed since 1946. The reason they existed is because people needed assistance to buy houses even then.

Houses in 1950 were often bare bones and sometimes no basement.

In the 1960s, basements became a standard feature and costs went up quite a lot.

Houses today are double the size of the 1940s bungalow not including the basement.

According to NPR:

http://www.npr.org/templates/story/story.php?storyId=5525283

The average American house size has more than doubled since the 1950s; it now stands at 2,349 square feet. Whether it's a McMansion in a wealthy neighborhood, or a bigger, cheaper house in the exurbs, the move toward ever large homes has been accelerating for years.

Some cities are experiencing a bubble market right now. We'll see if what happened in the U.S. happens in Canada where house prices are collapsing. It is now a buyers market.

Mother Jones has said that two income families can bid up the price of the average size home today.

http://www.motherjones.com/news/qa/2004/11/10_400.html

Right. Of course, the notion that mothers are all going to run pell-mell back to the hearth and turn back the clock to 1950 is absurd. But that aside, a big part of the two-income trap is that families have basically bid up the cost of living. Housing is a big example. A generation ago, an average family could buy an average home on one income. Today you can't do that in three-quarters of American cities. We all know that housing prices are going up, but what most people don't realize is that this has become a family problem. Housing prices are rising twice as fast for families with kids.

A lot of that has to do with public schools. As confidence in the public schools has dwindled, people are bidding up the prices on homes in those school districts with good reputations; so for a typical family, the only way to afford one of those homes is to send mom to work. Average mortgage expenses have gone 70 times faster than the average father's income, and the only way families are keeping up is by bringing in two incomes.

You'll notice this story says based on location.

Parents are moving to better areas for their children and bidding up the costs trying to be in the right neighborhood.

[Pat Coghlan]

The average American house size has more than doubled since the 1950s; it now stands at 2,349 square feet. Whether it's a McMansion in a wealthy neighborhood, or a bigger, cheaper house in the exurbs, the move toward ever large homes has been accelerating for years.

I'm looking at the SAME house that sold in 1965 for $X which could be bought with an average salary of also $X. I gave an example of buying a $12,000 house with a $12,000 annual salary.

Today, the SAME house costs over $300K, yet the average salary is, let's say, $40K. The price of the house has risen by a factor of 25, while the average (individual) salary has risen by a factor of only 3-4.

I'm not saying that this is all due to most families having 2 incomes now, but a BIG PART of the increase is due to those second spouses now being in the workforce.

[Renegade]

Just FYI, I polled a couple of octogenarians re: house prices and salaries in the 1960s. Most memories are understandably not precise, but the general opinion seems to be that the price of a house was roughly equal to the primary (usually sole) wage earner's income. For example, in the mid-60s a senior clerk in the government made - I'm told - about $10K, and many houses could be purchased for close to that. Granted, they weren't the luxury homes being built today, but a close friend of my wife's family (a salesman) told me that he bought a 4-bdrm home in Mississauga in the 60s for $25K, and seemed to recall that his salary was about $30K.

Extrapolating to today, that would mean that a small home in Toronto would fetch about $250K, and a senior government clerk would be earning $250K.

Clearly, house prices have gone wild relative to personal & family incomes. Getting back to the title of this thread, I think this will spell a crisis within 5-10 years.

Here are some more meaningful numbers so you can compare:

S311-322. Selected housing unit cost series, 1951 to 1976

E49-59. Average weekly wages and salaries, industrial composite, by province, 1939 to 1975

If you look at the numbers for 1965, you will see that the average value (as listed on MLS) was $15,918.

If you extrapolate the wage data to a yearly rate, the average wage was $4732.52

That is a ratio of 3.36:1

Yes, I agree that famiy income has gone up due to two-income families, but you should also account that there are many more single parent (and thus single-income) families than in decades past.

The price of gold is a very good indicator of how prices have changed

OK, lets look at house prices relative to how much gold it would take to buy a house then an now.

Using your previously posted gold values, a house worth $15918 in 1965 would require 455 oz of gold to purchase. 455oz of gold today is worth approximately $318,000. That is not dissimilar to today's price of an average house.

Edited August 2, 2007 by Renegade

[Pat Coghlan]

Here are some more meaningful numbers so you can compare:

S311-322. Selected housing unit cost series, 1951 to 1976

E49-59. Average weekly wages and salaries, industrial composite, by province, 1939 to 1975

If you look at the numbers for 1965, you will see that the average value (as listed on MLS) was $15,918.

If you extrapolate the wage data to a yearly rate, the average wage was $4732.52

That is a ratio of 3.36:1

Yes, I agree that famiy income has gone up due to two-income families, but you should also account that there are many more single parent (and thus single-income) families than in decades past.

The price of gold is a very good indicator of how prices have changed

OK, lets look at house prices relative to how much gold it would take to buy a house then an now.

Using your previously posted gold values, a house worth $15918 in 1965 would require 455 oz of gold to purchase. 455oz of gold today is worth approximately $318,000. That is not dissimilar to today's price of an average house.

Will, I maintain that if we still had one-income families, the prices of houses wouldn't be $300K+. I guess the point here is that two incomes have trapped families into requiring two incomes in order to maintain their standard of living. It will be difficult - if not impossible - to go back to the one-income family, at least for everyone but upper middle-class and beyond.

Gold has not held its value. In 1980 gold was $800/oz and the Dow (or was it S&P) was also 800. The Dow reached 14,000 recently. Gold remains less than $800/oz. Central banks are keeping the price down.

[gc1765]

Houses today are double the size of the 1940s bungalow not including the basement.

Even an empty lot in Vancouver will cost you about a million bucks.

[geoffrey]

Even an empty lot in Vancouver will cost you about a million bucks.

Vancouver has reasons though. You guys are trying to squeeze 3 mil in a space not much bigger than the 1 mil Calgary. Calgary condos are now nearing Toronto/Vancouver heights, yet we have virtually unlimited expansion room.

It's demand driven, and when the market takes a downturn, prices will be reduced dramatically... here anyways.

Unfortunately, Vancouver isn't a housing bubble. It's a bazillion people trying to fit into an area that only fits a few.

I'd still pay more to live in Van over Calgary anyday, mind you.

[gc1765]

It's demand driven...

I realize that. Still pretty crazy though. Sometimes I wonder how there could be so many millionaires in Vancouver. I realize most of them are only millionaires because they have probably owned their house for quite some time, but who are all of these people paying a million and a half for a bungalow?? Also makes me wonder how the average Joe can even afford an apartment here, let alone a house.

[Renegade]

Will, I maintain that if we still had one-income families, the prices of houses wouldn't be $300K+. I guess the point here is that two incomes have trapped families into requiring two incomes in order to maintain their standard of living. It will be difficult - if not impossible - to go back to the one-income family, at least for everyone but upper middle-class and beyond.

Maybe, maybe not. The price of housing is driven by many factors. For example an influx of wealthy immigrants from HK drove up the price of housing in Toronto in the 80s. There is an increasing urban population and a fixed amount of land. In addition, people have been encouraged to invest in the largest house they can afford. The cost of construction material and labour has skyrocketed. Low interest rates, increase affordibilty and drive up house ownership demand. All of these and more influence the price of housing, not just a single factor and it would be impossible to predict what the prices would be if only a single factor were changed.

I do agree however, that there is no going back. Now that two-income household is the norm and is accepted it will not revert back.

Gold has not held its value. In 1980 gold was $800/oz and the Dow (or was it S&P) was also 800. The Dow reached 14,000 recently. Gold remains less than $800/oz. Central banks are keeping the price down.

I used gold because it was your suggestion that such a comparison was more valid. In any case your comparison of gold prices, compares gold at its speculative peak to today. To see if has held its value you need to compare its moving average over time.

[Bonam]

To the people saying house prices have risen because houses are bigger... I'd say that actually that has almost nothing to do with it. The vast majority of the cost of a house, at least in expensive cities, is the land that it's standing on. As someone pointed out, an empty lot might cost $1mil in Vancouver. That's just the cost of the land. And the strips of land that houses are built on certainly haven't gotten any larger since the 50s/60s. Houses today often have very very tiny yards.

As for who owns the houses in Vancouver... mostly, people who bought them when they were much less expensive. The majority of people buying them today will be making mortgage payments til the day they die. It's not just the expensive parts of Vancouver where houses have those costs... even in the less expensive east side of the city, where there are certainly no millionaires, houses are in the 1mil range. The average Joe in Vancouver just doesn't have a choice, either they pay 2/3+ of their montly income for their mortgage and save like crazy on everything else, or they move to Surrey or something.

[Pat Coghlan]

Well, with the US mortgage crisis taking down global markets, what do people think is going to happen to those $400K+ house prices in Canada over the next 1-2 years?

[M.Dancer]

Well, with the US mortgage crisis taking down global markets, what do people think is going to happen to those $400K+ house prices in Canada over the next 1-2 years?

I think instead of appreciating at 13% they will appreciate at 8%.

What may happen though is the new home market will slow down....which affects the manufacturing sectors....

Edited August 15, 2007 by M.Dancer

[Pat Coghlan]

I think instead of appreciating at 13% they will appreciate at 8%.

What may happen though is the new home market will slow down....which affects the manufacturing sectors....

So, a $400K home will appreciate in price only $32K per year, rather than $52K.

Tell me, when the homeowners want to sell their $500K-$600K home in a few years, who's going to be able to afford it???