How Unaffordable can Real Estate really get?!

Last month, the affordability index in our area was 22. This was the worst reading ever recorded in the Roaring Fork Valley. As a reference, a market with an affordability index of 100 is a balanced market where the median income is enough to afford the median home price.

At today’s rate, and with a 20% downpayment, the monthly payment on a $900,000 home is roughly $5,000 before taxes and insurance. To stay at the recommended 30% mortgage to income ratio, one needs to make $166,700 per year to “comfortably” afford the average house in Glenwood.

The median income in our area is roughly $100,000 per household. In Glenwood, where the average price of a house hovers around $900,000, it takes 9 years worth of median income to buy the median house.

By looking at these numbers, home prices seem very far out of reach, and you have to wonder if they can appreciate further, or if they have to crash soon to get back in line with local people’s income.

We can’t rule out that a price adjustment can happen, but really, things go both ways. It’s not at all impossible that home prices keep rising despite seemingly no locals being able to afford them. Our area is super attractive, the local economy is booming, the expansion of real estate is physically limited by the topography and the bordering of public land, there is a lot of wealth locally… These are the criteria of an ever appreciating market. But at what point is a market due for a reality check? Let’s look elsewhere in the World to figure out how unaffordable real estate really becomes, and what we have in common with these areas.

Vancouver, Canada.

Welcome to Vancouver, Canada, the third most unaffordable city in the World. Vancouver is a real darling. Tucked between the Pacific Ocean and the Rocky Mountains, you can decide if you want to go to the beach or to the mountains any day of the year. Much like our valley, access to recreation is a huge part of the success of Vancouver. The attractiveness of Vancouver, the lifestyle it allows, and despite it being able to grow to the size of a large city (The Vancouver metro counts about 2.6 million people), real estate increased beyond reasonable expectations. The growing population, mainly driven by immigration, puts a huge pressure on real estate to the point that it seems impossible, and maybe idiotic, to buy real estate. The average home price in Vancouver is $1,170,700, while the average household income is $87,000 per year. It takes 13.5 years’ worth of average income to buy the average home in Vancouver.

Sydney, Australia.

Sydney presents another case of a super attractive city in terms of lifestyle, with surfing accessible, all kinds of fun activities and a beautiful, pleasant climate. The job opportunities are plentiful and immigration has historically also been a huge driver of the demography, and therefore home prices. In Sydney, potential tenants line up around the block to apply for a rental apartment. Homes sell for prices that seem to make no sense if you look at the return for the investor, or the cost of the mortgage payment. The average price of a house in Sydney is $834,906, although prices vary by area. The eastern suburbs boast an average house price of $2,123,595, while the outer west sees an average price of $576,695. The average household income in Sydney is $96,000 per year. It takes about 9 years’ worth of average income to buy the average home in Sidney.

Hong Kong

If you really want to see how bad it can get, go to Hong Kong. Hong Kong presents the perfect recipe for appreciation: It’s attractive (lots of opportunities, and freedom for that part of the World), the land is constrained (it’s an Island) and absolutely prospering by all measures. According to CBRE’s latest Global Living Report, the average price of a home in Hong Kong is $1.254 million, making it the city with the highest average home price in the world. The Average household income is about $59,000 in Hong Kong. It would take more than 21 years’ worth of the average income in Hong Kong to buy the average house.

What do we have in common, and what’s different between here and these places?

As you’ve probably noticed, what these places have in common with the Roaring Fork Valley is:

• A limited amount a buildable land

• An attractive lifestyle

• High paying job opportunities

• A lot of wealth locally

That being said, we also have our differences:

• Smaller scale: All these areas are urban. In a rural setting, the scale is different and it can play to our advantage (safety for example, we’ve seen it during COVID) or not (how natural disasters impact us, seasonality etc…).

• Not as many high paying jobs: The economy and the pay scale is more robust in our area than in most other parts of the World. Though we don’t have the working elite you will find in a larger metropolis.
  

What to make of it, and what to expect for the future in the Roaring Fork Valley?

By looking around the World, we can see that we are not by any stretch in the affordable category, but it can also get much worse. Our valley has all the ingredients in common with the most expensive places on earth, and will become less and less affordable: a growing population, lots of money and little land to build on. So next time you hear somebody claiming that prices can only go down from here, you might not want to take their word for it. That being said, prices can only sustain if somebody can pay them. Affordability puts a cap on how much prices can grow.

If these prices can sustain despite making little sense for most buyers, it’s because of two simple facts:

• There is no alternative to real estate. If you are looking for an investment, you can go into stocks, gold, Bitcoin etc… But if you need a roof over your head, you can rent or you can buy, and there is only real estate.

• The high values feedback loop: high values keep sales volume low, and low sales volume keep values high. In a lot of these cities, people decide to keep renting because it doesn’t make much sense to buy a home. But for the ones owning the real estate already, it makes absolutely no sense to sell it. It makes money for them, it appreciates over time, and is a great storehold of wealth. In the Roaring Fork Valley, things are similar. It doesn’t make much sense to buy in the immediate future, and it also doesn’t make sense to sell. We could become one of these markets where real estate just doesn’t change hands at the levels that we’ve enjoyed until now, and remains out of reach for most.

In the short term, we could see affordability get better temporarily because of interest rates changing, or other financial conditions. One thing is for sure though, in the long run, I wouldn’t bet against the Roaring Fork real estate market!