When central and southern Alberta experienced catastrophic flooding in June 2013 there were 32 states of emergency declared and over 100,000 people displaced throughout the region. Reports of price gouging at various retailers surfaced on social media; one story in particular claimed that an unscrupulous Calgary retailer was selling individual bags of ice for $20.

Calgary price gouging

Given the urgency of the situation, and depending on your level of preparedness, what options do you have?

  1. Move on to the next retailer and hope to find an honest owner
  2. Go home with no ice and wait for the situation to return to normal
  3. Suck it up and buy the ice, grumbling the entire way home about how you got ripped off
  4. Hope for some kind of government intervention to protect you and other consumers from price gouging
  5. Borrow ice from a friend or neighbour who has plenty to spare

Priced out of Vancouver and Toronto?

Many prospective home buyers in cities such as Vancouver and Toronto act like a $20 bag of ice is a good deal; as if they don’t buy that over-inflated bag of ice now they risk having to pay even more for a bag of ice in a few years, or worse, not being able to find a bag of ice again in the future.

It’s understandable. Ice is better than no ice. And buying expensive ice today is certainly more tempting than the prospect of buying more expensive ice (or no ice) tomorrow. But here’s why a first time home buyer is crazy to get into the Vancouver or Toronto real estate market today.

The Real Estate Board of Greater Vancouver said the price of a condominium apartment in April 2016 reached $475,000 – up over 20% from the same time last year. Meanwhile a townhouse in the greater Vancouver area will set you back $608,600 – up 22% from last April.

Related: Why Vancouver’s real estate prices are so crazy

Just as frothy in the GTA, the Toronto Real Estate Board reports that the price of a condo-apartment went for $409,631 in April while a townhouse cost $537,934.

When we look at housing affordability, recent Statistics Canada data suggests that the price to income ratio in Vancouver is an eyebrow-raising 11.2 while Toronto’s is 8.2.

Median household income in both Toronto and Vancouver comes in around $76,000 – surprisingly below the national median of $80,000 (and a knock to those who say the best paying jobs are in Canada’s two largest cities).

Let’s bring out our first time home buyers; a couple we’ll call Jon and Dany who live in the fictional Canadian city of Vanronto.

Jon got his foot in the door at a start-up and makes $30,000 annually. Dany is a designer with a software company and brings in $50,000 per year. Together they have scraped together $25,000 for a downpayment. They’re tired of paying rent to a landlord they never see while all of their friends move into brand new apartments and townhouses that they bought on the outskirts of downtown.

Dany’s parents insist that renting is a waste of money. “Why pay someone else’s mortgage?“, her mom says.

Both Jon and Dany are still paying the last of their student loans. Jon also has a small credit card balance of $2,500, while Dany pays $250 per month on her leased Honda Civic. The couple decides to head down to the bank to see what they can afford.

How much mortgage can you afford

The good news is that Jon and Dany can get in on the ground-floor (literally) of a lower-end condo-apartment. It’s not in the heart of Vanronto like where some of their friends ended up, but the neighbourhood is up-and-coming with lots of potential, and the subway is close by.

The bad news is that while they can afford to buy a $445,000 condo, they haven’t considered their other monthly living expenses – important ones like groceries, or gas for their slightly longer commute. The leftover $1483 might stretch them thin.

Related: How much home can I afford?

And what about saving? This couple worked hard to squirrel away $25,000 over the last few years. Will they still be able to set aside money for emergencies, travel, or a new car? What about retirement? Dany’s employer offers a generous matching program for their group RRSP plan that she has yet to take advantage of.

There’s a lot to consider beyond the bank’s affordability calculator when buying a home. Does it pass the real life ratio test?

Put together by Rob Carrick of The Globe and Mail, the real life ratio uses take home pay instead of the less useful gross income used by the banks. It encourages you to use other expenses such as insurance, daycare, as well as a percentage for home maintenance and upkeep.

“Use the Real Life Ratio and you’ll know what you’re getting into before you buy a house. You may decide you need to save a bigger down payment, buy a smaller house, live in a cheaper location or not buy at all.”

Jon and Dany pore over the numbers and find their real life ratio is at 88.74, and according to the guidelines, any number over 86 shows a financial stress overload. In short, it means this couple has less than 12% of their take-home pay left over each month to pay for food, clothing, transportation, entertainment, travel, and insurance premiums.

Admitting defeat, Jon and Dany head back to their rented apartment to mull their options. The most reasonable solutions seem to be staying put and continuing to rent, or leaving Vanronto for good and moving to a more affordable city in Canada.

Final thoughts

Wannabe home buyers in Vancouver and Toronto can easily get caught up in the euphoria of an overheated market. Sure, maybe their parents made a killing on the houses they bought 30 years ago, but maybe their colleagues overextended themselves to buy homes closer to downtown, and maybe some of their friends received gifted down payments from their relatives to get into the market.

(Some 100 people even camped out for two weeks just for the chance to buy a $500,000 condo).

Much like price gouging during an emergency, as long as you’re prepared you still have the option not to pay the over-inflated price and wait it out, or move to a more reasonable and affordable location.

Know a bad deal when you see one. Overextending yourself just to get a piece of the real estate action in Vancouver or Toronto is not just a bad deal, it could spell your financial doom.

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11 Comments

  1. CP on May 9, 2016 at 7:35 am

    I agree with your numbers and rationale (particularly since I have two children who I can’t imagine how they will ever buy here)…but as a Vancouverite that’s grown up and lived here for 43 years, there are a few other factors to consider. To the best of my knowledge there has only been one big downturn in the early 80’s (where my parents got caught with two homes…but mom went back to work when interest rates went to 21% and they rented it out until they sold at a profit a few years later). Prices truly don’t go down here. Our home we bought in boring old Langley 40 minutes out of the city has gone from $550k 9 years ago to 1.2 now. All the same points you made in your article we considered and felt at the time of purchase. We felt sick with uncertainty. Also in the Metro Vancouver, rental vacancy rates are under 1%. I know of people that are going to rental open houses where there are 25plus people parading through to get a shot at renting a place. Its very very difficult to get a steady rental that a landlord won’t gouge you or sell under you. People are desperate to have fixed housing…and a purchase guarantees that. Other than the crazy price of houses..rents are the 2nd biggest topic of conversation in Vancouver. Next is that most of the people I know buying here are not doing it with their money solely. Mom and dad/grandparents are selling their house on the west side and disbursing to the next generation so they can buy with a decent down payment, whereby the kids and grandkids can live nearby. Lastly…..I work with many engineers and professionals that are recent immigrants to Canada. They still view Vancouver as a great deal. They say you simply can’t buy what Vancouver offers in their home countries…clean air, relative safety, decent schooling and a fantastic quality of life. Some of them are buying more than one house….their future kids home. I agree its all very crazy and I’m sad that our Steady-Eddy real estate market is gone. I suspect prices will go up even more. There lots of money out there…just not the typical route or origin we’re accustomed to from first time buyers.
    Always enjoy your blog posts….thank you for great consistent info and interesting topics!

    • Cheryl on May 9, 2016 at 9:35 am

      ….but after re-reading my comment….perhaps I’ve taken a drink of the Vancouver Real Estate kool-aid! 🙂

      • Richard on May 9, 2016 at 10:46 am

        It may be possible that Vancouver becomes an international status symbol like London and New York, which would sustain prices if not lead to further increases and make it unaffordable for a lot of the people who really live there. I’m just not sure what would lead to that. Why not Seattle, or San Francisco where there are a lot of startups paying a lot more? Even for the stories that might begin to justify this it doesn’t seem like the best option.

      • VanNuck on May 10, 2016 at 12:10 pm

        I think you may have 🙂

  2. Pellrider on May 9, 2016 at 9:44 am

    Your article didn’t say exactly why the prices are high. Who buys those 2 million home and where that money came from?
    Since no one is investigating where and how the cash is coming, the prices will stay go up.
    You are right about the salary. Average salary is going down in Toronto for sure. I can see more people are moving to eat of Toronto for more affordable houses. That is making the prices go up there too.

  3. M on May 11, 2016 at 5:02 pm

    Nice post.
    Typo spotted here:

    Jon and Dany *** PORE *** over the numbers and find their real life ratio is at 88.74, and according to the guidelines, any number over 86 shows a financial stress overload. In short, it means this couple has less than 12% of their take-home pay left over each month to pay for food, clothing, transportation, entertainment, travel, and insurance premiums.

  4. Echo on May 11, 2016 at 5:26 pm

    Thanks – fixed!

  5. Peter Crisp on May 11, 2016 at 11:51 pm

    I heard on the radio that SFU researchers have found what everyone already knows – it’s a large influx of money from offshore, specifically mainland China, that’s driving house prices up right now. To a lessor extent, the same trend is happening in Toronto. When a decent but not outstanding 3 bedroom apartment in Shanghai can sell for over 1 million CDN dollars and it shouldn’t be, we should be asking why housing prices are rising so rapidly there when the economy is, by all measures, tepid. My guess is that large amounts of liquidity are being pumped into the economy there, driving up commodity prices (until recently) and housing prices. Many people are bailing, and buying here – where the air is better, the tap water doesn’t need boiling, and you get a house and some land instead of an apartment. I’m not sure that this will end well, or if it will create one more burst of price rises here or not. But we should be watching what’s happening there as much as here.

  6. Kent Murphy on May 15, 2016 at 5:40 pm

    Our government needs to place higher priority on monitoring & policing foreign investment in cdn real estate & illegal strategies not to pay any tax. If this segment exits Canada for more attractive global opportunities worry is it could cause meltdown in real estate market. Admittedly the worse case scenario. KM

  7. Tom on May 29, 2016 at 8:09 am

    Yes vancouver and toronto real estate is very expensive but…
    I just came back from a trip to japan, china, mongolia and Russia, and looking at single family houses.
    Japan, there are houses in the city, but tiny and very expensive and very few unless you get in the countryside, and i mean 50-60 km from any city.
    China, houses do not exist in the cities, unless you mean shanties, anything resembling a house is for the multimillionaires.
    Mongolia likewise
    Russia, except for shanties in siberia, i didnt see any single family houses.
    In all countries, people have to live with their parents, and lucky to be able to afford a 300 sq ft appartment.
    In all the countries , i never saw a single quality built, large single family house such as we have , if it existed, it was well hidden, where we have half of the city occupied by them.
    I think that is why the asians are buying these, the prices are dirt cheap compared to what they could get over there.

  8. Brian on June 12, 2016 at 5:58 pm

    Interesting article and I agree with your conclusion. However I feel your setup metaphor about the $20 ice doesn’t hold economic water and in fact continues to perpetuate an economic fallacy.

    While I agree that it is painful that one might have to pay $20 for ice under trying circumstances, it is far from dishonest behavior (choices 1 and 3) and does not warrant government intervention (choice 4).

    On the contrary, What you refer to as “price gouging”, a derogatory term, is known in economics as “price rationing”. The retailer in your example perhaps has limited amounts of ice to sell and by raising the price is preventing hoarders from buying up his entire supply thereby depriving others in need of ice from a limited resource.

    Why does the neighbour have so much ice ? Is he hoarding ice that others might need?

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