Does Your City have the Most Overvalued Real Estate in Canada?

Thrilling, if you bought a house on top of the real estate peak in Vancouver in 1981, you might have to wait for 24 years (form 1981 to 2005) for real price to be back again.

Cool interactive chart: Canadian Major City Housing Price Chart, House Price and Inflation Adjusted Price

http://www.canadabubble.com/charts/695-canadian-housing-price-chart.html

When you look at the plot for ‘Vancouver Nominal and Real Housing Prices’, please interpret the ‘Real Price’ as the price in 2008 Q1 dollars. In other words, in Q1 of 1981, the price was ~550k in 2008 Q1 dollars.

this is quite interesting. however – i have a question here. in the “average sale price” metric it looks like you have included SFHs, towns, and condos for each city (correct me if i am wrong, but didn’t SFHs in vancouver just break $1M?).

therefore, shouldn’t you take the average rental price for all types of units, because your average purchase price metric includes things like studios, 1 bedrooms, etc?

Interesting, but a Price Earnings ratio does not have expenses. You should be normalizing these rates for the difference in the costs to live in each of these cities. In appraising real estate, the method your are using is known as a Gross Rent Multiplier (GRM) and is not a valid method to estimate market value, the GRM is only useful as a cross check to a value estimate. This is NOT a valuation method of choice -its just quick and easy to understand.

Oh, one more thing. You calculated the price rent ratio incorrectly. You are comparing apartment rental rates to house prices. When you should be comparing house rental rates to house prices. It is possible to have high demand for apartment rental rates in a city with few rental suites available, but an oversupply of houses to purchase.

Very interesting…makes sense to compare prices and rents. I either buy or rent…

I’m sure there are several different ways to calculate this but I think this shows the direction of valuations.

Personally, I live in a super-expensive city. But in a few years I’d consider ‘downsizing’ to a place like Charlottetown.

So what does someone living in Van-city do? Considering the commissions, transaction costs, etc.

Buying and selling r/e costs a lot of bread.

Good analysis. Is CMHC forecast really accurate?

You make good points, but they assume I have the right data in front of me. I decided to work with what I had…it gives a rough picture of the direction of valuations and that’s all I was looking to do.

Great points. I agree and disagree. This is meant to show the relative ‘expensiveness’ of various cities. It is not meant to show the fair value for real estate prices. All I’m trying to accomplish is a relative rank.

Wouldn’t you say the relative rents imply the cost of living differentials from city to city? Isn’t that why you use a rent multiplier in the first place?

I would have liked to dig more to get more precise housing rental data. Given what I had, I settled for rental units as a proxy. If you have something more precise, and are willing, I’d love to post it.

Are there even jobs in Vancouver? What do people do there besides play hackey-sack?

OK – so you’ve got hot Asian money buying up properties. That just prices the local hippies out of the market.

Don’t get me wrong. I love Vancouver. I’d move there in a second if it weren’t for the house prices and the fact that I don’t know where I’d work.

Well, this explains why I can’t find a rental property to purchase that is cash flow positive.

Sorry, I meant to add, in Calgary

Yes, there is a better way. Pick up a phone and call an appraiser in each of the towns. Ask them for the median home price, typical expenses for that home and the rental rate for that home.
I’ll start for Victoria, BC

Median Price $619,000

Gross Annual Rent (excludes homes with suites and condominiums)
$24,000
Vacancy Rate 2% or $480
Effective Gross Income $23,520

Expenses attributable to maintenance of the home
Taxes 3,000
Heat 2,000
Maintenance $500
Total Expenses $5,500
Net Operating Income $18,020

Which calculates to an Overall Rate of Return of 2.9% which does not include mortgage debt service which at 80 percent financing and 6% over 35 years would cost you almost $33,500 a year.

This is a pathetic rate of return in relation to the risk and capital invested. In stable market conditions that rate is typically in the 5 to 7 percent range for a well maintained home. Of course that would mean that the house price would have to drop to the point where the monthly mortgage payment would be slightly less than the monthly rent in order to provide a return on the equity invested or a positive cash flow.

And to answer your question the relative rents are an indication of the typical wages for a city, not the cost of living differentials. Fort McMurray, Alberta has rental rates that would make a Vancouverite cringe and it is not because everyone wants to live there.