Wednesday, May 15, 2013

The Vancouver Condo Price-Rent Ratio

A method of measuring relative valuation is to look at price-rent ratios, a "price-earnings" ratio for real estate. Vancouver does not have a market rent index, however CMHC does provide rental survey data that I have quickly validated to be close to prevailing rents. The price is garnered from the Greater Vancouver MLS-HPI (note the MLS-HPI before 2005 uses a different base so I "stitched" the two indexes as best I could). The results are normalized for Jan 2005 below:
The red line has been slowly falling from 2008 onwards, most recently the drops have been from an equal combination of rising rents and falling prices. The historical bound for price-rent ratio before 2000 has been between about 70 and 90. As an estimate, say the price-rent ratio is to revert to this historical bound in five years. What average annualized price change is required to do this?
Rents have averaged about 2.5% annual gain since the 1990s. Under this scenario, five years of -2.5% nominal price changes will put the price-rent ratio within historical bounds. To get to the middle of this range would require a more hearty -5% annualized nominal price change. If rental growth slows due to slow income growth or oversupply, price drops would need to intensify.

7 comments:

Arnold Shuchat said...

I have been giving this matter some thought over the last year or two as well.
One of the issues which needs to be considered is the effect of the tightened mortgage qualification rules. If it becomes harder to qualify to purchase property, then that would necessarily put upward pressure on rental properties and rent rates. The newer products on the market do not usually have the same rental restrictions as do some of the older stratas. The increased rental pressures would to a certain extent help support prices as the investments would look more attractive with falling vacancy rates.

jesse said...

Arnold, that may be the case, however the housing stock is either rented by the owner or rented from a landlord. I could argue the two aren't that different, especially in terms of pressures from increased housing oversupply.

Dmitriy Bykov said...

Love your blog and follow.

Why not to compare rent vs monthly mortgage payment (say for 5-yr fixed as prevailing) for the mentioned 1br. apartment instead? It would give you more or less accurate monthly "price of ownership".

At least it worth to plot it.

Dmitriy Bykov said...

Love your blog and follow.

Why not to compare rent vs monthly mortgage payment (say for 5-yr fixed as prevailing) for the mentioned 1br. apartment instead? It would give you more or less accurate monthly "price of ownership".

At least it worth to plot it.

jesse said...

I could include the so-called price-payment ratio. I'll add that in for next time, though a VERY important caveat for Canadians is that 5 year terms need to be renewed several times over the expected usable life of the property.

Kate Louise said...

Meticulous data shared. Thanks for the information and yes real estate business is escalating up every quarter. The reason behind today's scenario i think is flattening of housing projects in 2008 & 9 , leading to shortage of requirements.
(Kate: Condo finder)

Earl Smtih said...

Thanks for sharing with us this very wonderful information. Really appreciable.
The rental market in Canada is getting tighter - especially in Vancouver. But if you know where to go and what to look for, you can still get an excellent apartment in the Vancouver.
Long term vancouver corporate rentals