BCBusiness

S p e c i a l F e a t u r e The Power of Equity It isn't just migrants and outsiders pushing up home prices. Consider the role of existing residents' rising home equity When it comes to understanding rising home prices, the drivers cited typically range from immigration and foreign investment to speculators, shadow- ippers, and the underground economy. What is not commonly cited in these discussions about prices is the potential impact that the region's existing residents may have on prices and ašordability. According to the 2011 Census there were an estimated 2.4 million residents in Metro Vancouver living in 909,500 homes (the 2016 data has yet to be released). Of these homes, roughly 591,600 units were owned and the remaining 317,800 were rented. The census also reported that 41 per cent of those in the region who were homeowners had no mortgage—that is, 240,000 households lived mortgage-free. While only 17 per cent of owners under the age of 45 had no mortgage, 53 per cent of those 45 and older also did not. The proportion for these older age groups ranged from almost a third of owners aged 45 to 54 (30 per cent) to fully 83 per cent of those 75 and older. The census also gives us an estimate of the value of these mortgage-free homes. In 2011, the average value of mortgage-free homes in Metro Vancouver was $771,257. Households led by those aged 55 to 64 had the highest values, at $818,000, with values falling oš slightly through the older age groups to $706,000 for mortgage-free owners aged 75 and over. Looking at this data, it's possible to estimate the total current amount of mortgage-free equity in Metro Vancouver. Between 2011 and August 2017 the region's benchmark price increased by 64 per cent, which would have translated into an increase in value of the average mortgage-free dwelling to $1.27 million. Considering the demographic proŸle of the mortgage-free homes and their associated values results in an estimate of $355 billion in mortgage-free equity in the region today. Of this amount, slightly more than half is held by the baby boomer generation (those aged 55 to 74) with a further one-Ÿfth being held by those over the age of 75. There's a direct impact on prices of this older population trading up the housing value ladder and being able to beneŸt from the increasing value of their homes, years of paying down their mortgages, rising incomes and falling interest rates that we have seen since the 1980s. These factors have facilitated the Boomers movement up the housing value ladder, multiple rungs at a time. Another impact on prices can be seen as this generation helps their children get into the housing market. For example, a 25- to 34-year-old couple that has a household income in the range of $75,000, qualiŸes at an interest rate of 4.64 per cent, and after meeting all other lending criteria could ašord a home in the range of $350,000 with a Ÿve-per-cent down payment. Of interest, there have been more than 8,000 sales in Metro Vancouver this year that this couple could ašord, representing 18 per cent of all sales year-to-date. But consider the implications of one set of parents ošering to help boost the kids' down payment. RateHub stats show that for all Ÿrst-time home buyers in B.C., 42 per cent received down payment help from their parents (and 45 per cent of Ÿrst time buyers who put down 20 per cent or more had parental help). If the young couple gets parental assistance toward a 25-per-cent down with an additional $95,000, they have two options. First they could purchase the same $350,000 condo that their current income could support and signiŸcantly reduce their mortgage to $235,000 from $330,000. Or they could add the $95,000 to their existing purchase price and consider a purchase in the neighbourhood of $445,000 (there have been 13,590 sales in the Lower Mainland this year that were no more expensive than this, which represented 30 per cent of all sales year-to-date). This means the couple's buying power is now almost 30 per cent higher than it otherwise would have been, thereby pushing home prices up at the margin. Put slightly dišerently, their purchase price is 30 per cent higher than what the couple could otherwise ašord based on their income (but note that here, their mortgage payment has not changed at all). There are currently 250,000 boomer households in Metro Vancouver (144,000 of which are mortgage-free) and more than 570,000 children aged 20 to 34. With the census showing that 220,000 of them are still living at home, the power of equity will continue to play a role in pushing prices. ■ GR A PH COUR T ESY OF RENNIE GROUP 2017 MORTGAGE FREE HOUSING | GREATER VANCOUVER 2017 Mortgage Free Housing GREATER VANCOUVER 15% 17% 30% 50% 69% 83% 35% 30,814 158,805 192,892 8,741 3,047 75,001 124,630 11,079 20,744 213,771 152,797 46,234 196,313 147,310 72,998 133,361 102,816 71,150 99,694 76,985 63,555 under 25 years 25 - 34 years 35 - 44 years 45 - 54 years 55 - 64 years 65 - 74 years 75 years and over kids entering the market 144,149 households NUMBER OF HOUSEHOLDS BY AGE NUMBER OF OWNED HOMES NUMBER OF MORTGAGE FREE HOMES % MORTGAGE FREE

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