The fallacy/ foolishness of Median (or Average) Income vis a vis AVERAGE Real Estate prices

prompted by –

Think house prices are unaffordable now? It gets worse

ROB CARRICK

The Globe and Mail

Published Wednesday, Jan. 08 2014, 7:29 PM EST

Last updated Thursday, Jan. 09 2014, 1:06 PM EST

A comment on the Globe article’s comment page and sent to the author

Dear Mr Carrick,

The fallacy/ foolishness of Median (or Average) Income vis a vis AVERAGE Real Estate prices

Median Income statistics tell a BIG broad-stroke story and can help in comparing a given year to any other year, or, comparing one area/country to another area/country, BUT, much like annual average temperatures, which tell a broad-stroke story about a country/area’s climate, they tell you very little about the weather.

With weather/climate you must understand the seasonal variations and similarly, with Median (or average) Income statistics you must know about “Quinitiles”.

Statscan divides populations into chunks of 20%, equal one-fifths – Highest, Fourth, Third, Second and Lowest Quintiles is their terminology

I call them “Silk Collar, White Collar, Blue Collar, Company-supplied Collar, and No Collar”

2011 Statscan info By Quintiles
-Government Transfers 2011
http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/famil88a-eng.htm

By Quintiles -Income Tax 2011
http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/famil88b-eng.htm

From these two, using the Transfers Received, the Imputed % of Total Income that the Transfers represent

AND using the Income Taxes Paid (and the “imputed” % of Total Income)

I submit this me-calculated Table on Incomes by Quintile for:

1) “Economic Families of 2 or more” 

and

2) “Unattached Individuals”  — that’s how Statscan does it

(email me for the Spreadsheet – it didn’t paste too well)

Govt Transfers TO these two Groups, by Quintile									Income Tax FROM these two Groups, by Quintile
Economic Families														Economic Families
of two or more			“Implicit”								“Implicit”			of two or more
	Gov’t		Transfer Rate as		Income		Ave.#1 &#2		Income		Transfer Rate as		Inc Tax
	Transfer $		% of TTL Income		Calc’d #1		Calculations		Calc’d #2		% of TTL Income		Paid
Lowest	$15,400		51.1		$30,137		$30,068		$30,000		3.0		$900	Lowest
Second	$12,900		23.9		$53,975		$53,817		$53,659		8.2		$4,400	Second
Third	$10,800		13.9		$77,698		$77,962		$78,226		12.4		$9,700	Third
Fourth	$7,700		7.0		$110,000		$110,313		$110,625		16.0		$17,700	Fourth
Highest	$6,000		3.0		$200,000		$200,913		$201,826		21.9		$44,200	Highest
Average	$10,600		11.1		$95,495		$95,279		$95,062		16.2		$15,400	Average
					Wholly Unscientific Median EXCLUDING bottom TWO QUINTILES =~
							$110,313
					Wholly Unscientific Wage Ranges
					Min		Max
			No Collar		$0		$41,943
			Company Collar		$41,943		$65,889
			Blue Collar		$65,889		$94,137
			White Collar		$94,137		$155,613
			Silk Collar		$155,613		who knows
Unattached Individuals														Unattached Individuals
Lowest	$5,400		64.6		$8,359		$8,867		$9,375		3.2		$300	Lowest
Second	$10,600		57.6		$18,403		$19,618		$20,833		2.4		$500	Second
Third	$8,600		30.3		$28,383		$28,309		$28,235		8.5		$2,400	Third
Fourth	$5,700		13.1		$43,511		$43,541		$43,571		14.0		$6,100	Fourth
Highest	$3,600		4.2		$85,714		$85,913		$86,111		21.6		$18,600	Highest
Average	$6,800		18.3		$37,158		$37,246		$37,333		15.0		$5,600	Average
					Wholly Unscientific Median EXCLUDING bottom TWO QUINTILES =~
							$43,541
					Wholly Unscientific Wage Ranges
					Min		Max
			No Collar		$0		$14,243
			Company Collar		$14,243		$23,964
			Blue Collar		$23,964		$35,925
			White Collar		$35,925		$64,727
			Silk Collar		$64,727		who knows

As (with hope) you can see, the Lowest/ No Collar Quintile (20% grouping) of the population are not buying homes of Any Price, because they are single-earner families (that likely already have a paid-off home) or are non-earner families who are on welfare/Assistance/ gov’t pension/OAS/GAINS (Ont), since 51% of Total Income (of the whole Quintile) is from Gov’t Transfers.

NB – there is NO accounting for assets here …. this is about INCOME (the stuff that “do-gooding vote-buyers” want to redistribute and to “minimize the disparity between rich and poor” — may I say, as a compassionate-type myself, this type of “correcting” cannot be done (accurately, honourably and righteously) without factoring in assets. But it’s too volatile politically to do the necessary-in-that-case “means-testing” on Grandma/pa, so they just try to tax it back (and Grandma/pa’s accounting-helper tries to minimize it — call it Job Creation.

Kinda-similarly, the Second/ Company Collar Quintile can only buy a house in a big city with great $$ assistance from relatives etc (very possible depending on the family) OR, as above, these folks are single-earner families with a paid-off home

With these two non-buyer segments eliminated , the price/income ratios – today’s and tomorrow’s – fall in line with everyone’s rules-of-thumb on income to shelter-cost.

IMHO, the top-3 Quintile incomes will grow at 5.6% (the calculated requirement that astonied The Mop & Pail columnist) because the prices of the goods and services these folks deal in will increase with inflation (driving their pay up, nominally) PLUS these are the “hard-working” types who spend a percentage of what they earn and earn more if they need more. (NB watch for the return of C.O.L.A clauses in contracts & labour negotiations)

Yes, in the big metro centres the prices ARE higher …but the wages, income, compensation packages of the top 3 Quintiles are higher too  – again averages and national median figures tell nothing.

Yes, the dollar values (ie selling prices) of “over-the-average price” homes/neighbourhoods will increase (sometimes proportionately to the overall, metro-area increase, sometimes above it or below it) – but, (an also-overlooked aspect of Mr C’s analysis) these buyers are not putting 5% down – they put 25-75% down (proceeds from the sale of their previous home)

As to Vancouver and its commuter-watershed – this is a special “Immigration-based” anomaly – the flood of money coming from across the Pacific is overly-concentrated here.

To these international buyers, 1) Vancouver prices are dirt cheap, 2) they pay all cash -sometime to hold and not even occupy, 3) this realty asset is a pathway/ safe-storage-place for money from their homeland, 4) a pathway to residency/citizenship, 5) a pathway to ‘free’ healthcare, 6) a pathway to relatively-cheap post-secondary education of the highest quality etc etc … all while maintaining their citizenship/ cultural/ business/ family attachments in their home country.

IMHO, as a non-resident observer, Vancouver is a special case, the Buyer pool is unique and therefore, I suggest, unless you live/ work in Vancouver (or plan to), simply ignore/ eliminate this market from comparative, pan-Canadian housing stat analysis.

As a matter of fact, in a 2% inflation world, with borrowing costs at 3% and a while considering a completely tax-free appreciating asset (that ALSO provides shelter/ prestige/ “community”/ security-of-tenure/ income to offset the monthly payments) …. you’d be a fool NOT to borrow to buy the biggest home, in the best area, with the largest mortgage (NB borrow long & fixed for next year or two) that you can qualify for – i.e. unless you have no credit, no money, or no income …… and the Top 3 Quintiles of Canada -the Buyers- don’t have to worry about those thing

So Mr Carrick, please stop trying to talk-down the realty market or bleat about affordability!

Note of Commiseration and Understanding: Sir, if your newspaper tells you to talk-down real estate because they think their bread is only buttered by advertisers from the “stocks, bonds, over-priced Dividends, fast-trading derivative-products (ETF’s are the mildest, but are still derivatives) and high-frequency trading” businesses, then,  I understand you predicament – heck, you gotta pay the piper to earn your paycheque … but please, just not at our industry’s expense so often — my word, Torstar seems to have a whole department on that “beat” already.

To me, today’s Real Estate market (prices relative to incomes) is most comparable to the 1950’s. What did the young families in the then-Top 3 Quintiles do?

They bought a rundown cheapie & fixed it, or bought further away from downtown, or bought a home with a basement suite or upper flat in it, Sometimes the purchased homes with family-a$$istance, sometimes just with NHA-assistance or a with second/ third mortgage … and that’s what young families are doing now.

Nothing’s changed. Nothing ever changes (after you give time for lagging sectors/ segments to catch up to leading sectors/segments) …..it’s just that everything (like a loaf of bread) is at a higher Nominal Price, because of inflation’s unspoken little brother – Currency Devaluation.

 NEXT ISSUE — The past and future (makes a good title anyway) of INFLATION in Toronto real estate.  NB this post will be the same advice we gave to Buyers in the 1970’s … except today Central-Banks cannot raise rates to moderate big-ticket purchases (it would break all the Muni/ Prov/ Fed budgets) AND the Bank of Canada DOESN’T WANT to curtail spending AND doesn’t want to push up the C$ by raising rates faster than the USA (who have now almost-promised no hikes til 2016)

Robert Ede,

Sales Representative,
RE/MAX Hallmark Realty Ltd
Toronto
416-494-7653

robetede@gmail.com

Your Realty Whisperer and Realtor-Philosopher: Honour , Simplicity & Value-for-money.

Do it Right…..the First time