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Over at Victoria's Truth, a poster has consistently argued that at most, a 10% correction is in the offing, though lately he has mentioned the possibility of a 20% correction.

Rather than reply there, and perhaps disrupt the thread into a back and forth between bears and trolls er bulls, I decided to validate my take on things - which is that the target price of $350,000 = median single family home is not only likely, it is supportable. Or, am I out of touch, is it really different here now?

Okay - it's different everywhere. So what? Does that mean Victoria is in a protective bubble that isolates it from the wider sweep of economics? Does Victoria and BC for that matter run counter to the trends in the larger economy? If a global over valuation of real estate is correcting, do so many wealthy refugees from less desirable locales want to move here, that it won't matter? Prices will still keep going up?

This is a routinely expressed fantasy on why it's different here, this time.

The assertion that the current housing market is not particularly unaffordable, and the recent run-up in prices is not out of the ordinary, is used to discount the likelihood of any significant correction to prices.

The appearance of real estate bulls on bubble blogs, of all places, happens when real estate bulls sense something has changed, tectonic plates of the economy are rupturing, an earthqake is coming, and they go looking for people who might be reading a point of view that is bearish, who might not be stampeded into buying, without immediate bullish action. The continuation of a bull run to the bitter end requires greater fools, like flippers, to throw their savings into attempts to ride the market higher, and requires fear that affordability and opportunities are slipping away.

The same arguments were being made in the US in 1977, as I noted in a post a couple days ago. Look what happened afterward - a continent wide crash, brought on by a hike in interest rates. Anybody who thinks interest rates can't go higher isn't paying attention to the price of gas, and could be taking the biggest gamble of their financial lives - if their financial security depends on the ability to stretch on a mortgage at current rates.

The poster made statements that median family income in Victoria is $72,000 which are unsupported. I have sources here and here that list median family income in Victoria as between $64,000 and $66,700.

At the same time, in its March report on housing, Scotiabank pointed out a lack of affordability will have a significant impact on first time buyer activity, and identified Victoria as a market where it costs about $1,000 less per month to rent than to purchase comparable two bedroom accommodations.

Anyway, this poster mentioned that 8 X earnings seemed like an arbitrary number to compare Victoria affordability with, instead stating that 33% of gross incomes was a better measure of local affordability. So let's investigate that premise a little bit further.

Gross income of 33% of $66,700 is equivalent to a an affordable mortgage payment of $1835 per month - using usual lending standards, and not including taxes, maintenance, strata fees etc. Also, this assumes that other personal debt will not bring the total debt service over 40% of gross income - another common threshold used in lending. How much mortgage will this payment get, at 6% (the current prime rate)? While a discount rate could be available on a 5 year mortgage in the 5.25% range, mortgage standards require use of the prime rate when calculating the appropriate maximum mortgage, based on gross income.

The answer is: around $285,000.

According to the 33% gross income measure of affordability, that is the maximum mortgage payment that is available to the median income family in Victoria, at the present rates.

If I adjust the median income to $72,000/yr, the affordable mortgage payment increases to $1980, which would carry a mortgage up to $310000 - about $250,000 short of the amount needed for the average family house currently.

For first time buyers in anything but the upper income brackets, housing is now too expensive - however, there are a lot of houses and someday they all need to be sold, and contrary to popular spouting on the subject, any wave of baby boomers buying here will be followed by a wave of boom sellers in 10-15 years, as deaths and downsizing finally take them out of the market as a demographic force.

To calculate the current multiple of median family income that equals the average family housing price, simply divide the average price by the median income: $568,710 divided by $66,700 equals 8.51 times earnings.

If we look at the mortgage a family can carry and assume they have a 25% downpayment (an unlikely scenario at current prices, but there you go), the price that is affordable based on your $72,000 median income and a $310,000 mortgage is in the $420,000 range.

With 10% down, the affordability reaches a limit at $344,000.

Unlike the contentions of some posters on other Victoria bubble blogs, housing is not as affordable as in times past, except for the wealthy, and for those with large paper equity gains in the local real estate bull market. Affordability is nowhere close to what it was 7 years ago, when houses throughout Victoria routinely listed at less than $250,000. Can this state of affairs continue?

The increasing inventory reported by VREB in the last 3 years ultimately suggests otherwise.