Single detached home prices in Vancouver are the highest they have ever been and the most astronomical in Canada.
With the average Vancouver home now priced at a cool $1 million and up, these prices don’t leave many options for the new prospecting home buyer or recent graduate student fresh out of school. Young families often find it exceedingly difficult to purchase their first home.
A rising solution to Vancouver’s housing woes has been something called laneway homes. A laneway house is a smaller, detached home, typically located where a garage is on a lot. Permits for laneway homes have increased every year since 2010, reaching 357 in 2014.
More on that below. First, let’s take a closer look at how affordable (or unaffordable) housing is in Vancouver.
Assessing the Vancouver Housing Marketing – Income of Vancouverites
Vancouver’s Home Index Price (HPI) for detached properties on the east side hit a high this April 2015 of $1,046,000 an increase of 16.2 percent from the same time last year. The HPI or MLS gives an indication across all trends in home prices for certain types of homes in a given neighborhood. Homeowners working with an experienced realtor can determine if the price of a home in a certain neighborhood is accurately priced or not.
For these million dollar homes you would think you would be getting a mansion, but this is the furthest thing from the truth. Aesthetically speaking, the majority of these homes are nothing special to look at, take for example an east side property that sold for $993,000 in 2015—an increase of 11.4 percent over last year.
Vancouver’s east side is not the crème de la crème of hot properties, yet this hot housing trend has increased the value of sub-par homes and neighborhoods into the stratosphere.
Median total income in Vancouver according to Statistics Canada
2008 – $68,670
2009 – $67,550
2010 – $67,090
2011 – $68,970
2012 – $71,140
Many people say that the purchase of a home is the best investment a person can make, I beg to differ when it comes to investing in Vancouver’s overpriced real estate market. The average family in Vancouver earning a middle class income ($71,000 per annum).
Attempting to purchase a detached home in one of the Greater Vancouver neighborhoods will have them forking out more than 50 percent of their take-home salary to afford monthly mortgage payments—this does not include utilities, land taxes and homeowner insurance. Prospective homeowners also have to take into account any outstanding loans, student debt and credit card debt before considering a mortgage.
Depending on where you live it may not make financial sense to purchase a property just to end up with back-crushing mortgage payments. For many people starting out, it may be more logical to rent instead of buy.
Qualifying for a Mortgage Ain’t Easy
The state of the economy, mortgage scandals and the unpredictable job market has made qualifying for a home mortgage in conservative Canada even more problematic for a large segment of the population. The job search website Workopolis did some number crunching to determine the minimum household income to purchase property in Vancouver, here’s what they found:
Average price: $819,336
Monthly mortgage payment: $3,570
Property tax: $251
Income required: $147,023
The above rates don’t include the additional expense of utilities, taxes and any other miscellaneous expenses that may arise. These rates were also calculated on a five-year fixed rate mortgage at 2.99 percent. Vancouver required three times the household income than it would require compared to purchasing a home in Halifax. Average home purchase prices were provided by the Canadian Real Estate Association using a mere 10% down payment of the purchase price and $100 a month for utilities.
Most banking institutions consider a down payment of 5 to 20 percent a high-ratio mortgage. First time buyers putting less money down will have a longer amortization period of at least 25 years. Lending institutions will only lend money on high-ratio mortgages if the buyer takes out mortgage insurance, this protects the lender in cases where the borrower defaults on mortgage payments.
The cost of insurance varies depending on the size of a buyer’s mortgage, Canada Mortgage and Housing Corporation (CMHC) or Genworth Canada both provide this type of insurance not to be confused with property insurance. The additional cost of mortgage insurance increases the overall cost for first time buyers.
Getting pre-approved for a mortgage in Vancouver will require the prospective home buyers to jump through several hoops before getting qualified.
1. Credit score: Future buyers with a credit score of 680 to 900 qualify for a mortgage with a major banking institution. If a person has a less than perfect credit score they will have to seek out a less than “A” plus lender who may charge a higher than average interest rate. Equifax and Transunion are Canada’s credit bureaus.
2. Down payment: As already discussed, you can qualify for a mortgage with as little as 5 percent down but keep in mind you will be paying for your home for a much longer period of time which means higher interest rates.
3. Debt service ratios: TD, Bank of Montreal, VanCity and other “A” plus lending institutions will assess how much you owe percentage wise compared to your income. Potential buyers who have a high percentage of debt in most cases will not be able to qualify for a mortgage.
4. Employment history and earnings: Any blips on the radar including gaps in a person’s employment history will be accessed. Employer pay stubs and a notice of assessment if you are self employed will all be taken into account to determine your eligibility for mortgage qualification.
Uncertain employment prospects, layoffs, corporate restructuring and increasing Vancouver housing costs have all contributed to the rise in laneway homes as a viable living alternative.
Laneway Homes Make Good Financial Sense
Homeowners in the coveted position who already own a detached home in a RS1 or a RS5 zoned area can benefit from having a laneway home subsidize their mortgage payments.
What is a Laneway Home?
To recap, a laneway house is a smaller, detached home, typically located where a garage is on a lot.
Laneway home rentals are a great option for singles who work near the downtown core and who don’t want to commute from Burnaby or Coquitlam.
Vancouver’s overpriced housing market has led to more people seeking out a minimalist lifestyle. Young 20 and 30-somethings don’t have the finances to drop a $100,000 downpayment on a first time home. People are slowly waking up to the realization that being house rich but cash poor does not align with today’s get-up-and-go modern lifestyles.
The Growing Popularity of Laneway Homes
In December 2013, Vancouver City Councillor Geoff Meggs said (and was quoted in Vancouver Sun) that permits are coming from all over the city and are not concentrated in just a few neighborhoods. Often seen as a family-based solution with parents building for their adult children, it’s not a silver bullet for the affordable housing strategy but is one piece in trying to confront the (housing) crisis.
The popularity of laneway houses is rapidly growing. In 2010 a total of 192 permits were issued and in 2011 there were 229 issued. Fast forward to 2013, a total of 348 permits were issued to build these diminutive rental houses. Year-end figures for 2014 show that 357 permits were issued in Vancouver.
Costs and Benefits of Laneway Homes
Constructing a laneway home for $240,000 on a single lot as an owner makes a lot of sense when you can rent it out for $1,500 to $2,200 a month. Laneway homes have the added benefit of preventing urban sprawl.
From a homeowner’s perspective, the addition of a laneway home on their property increases the property value. Generating a second stream of income by investing in a laneway home is more affordable than applying for a secondary mortgage to purchase a condo in Greater Vancouver.
Every year in Vancouver, property prices continue to rise and this makes laneway homes a potential answer for homeowners and home renters who prefer to reside in this beautiful world-class city.
Kenny Wong is the Operations and Marketing Manager for PHW Homes.
Last modified: June 23, 2018