Vancouver CMA Rent Analysis

An important part of the housing market is the rental stock, most closely surveyed by CMHC from a universe of just over 100,000 units from buildings containing 3 or more units (CANSIM table 027-0040, using rental survey data taken every October). This dataset is interesting to track because its pool has been relatively unperturbed by new dwellings: most of the rental stock tracked by CMHC is of older vintage. This provides a way of tracking same-unit rental growth over time, something that individual investors would be most concerned about and provides a method to directly compare same-unit price trends to their yields, at least on a relative basis, something that can become muddied with the change of vintage of a survey's data sources. I have pulled the data to look at how rents have changed in Vancouver CMA for this "baseline" rental pool and have normalized them based on 2002 CPI-adjusted prices.

We can see that real rents have been appreciating between 0.75% and 1.25% per year. Note that from between 2006 and 2010 population growth was on the high end of historical ranges and this is correlated with tightness in the rental market.

Looking at the rent to median income ratio:

Median incomes have fluctuated more than rents, causing the ratios to be more variable. After 2008 it can be immediately seen that as a percentage of income rents are now more dear.

An interesting graph is tracking dwelling spreads -- the percentage change between a dwelling type and the dwelling type with one additional bedroom:

What this graph shows is a "curve" for the spread between different dwelling types, in some ways akin to a bond yield curve. A diminishing spread would indicate compression between dwelling types.

There had been some thought that real rents have not been increasing. These data indicate that real rents are increasing at a rate around 1% per year, with more marked changes happening recently from 2006 through 2009. In terms of incomes there is additional fluctuation due to labour market changes, however it appears that rents are over longer time periods tracking incomes closely, though 2011 has produced tighter conditions.

Changes in population growth appear to be having an effect on rental rates. It is unclear recent tightness in the rental market is a permanent change -- for example, rents are increasing because the city is comparably more desirable for a given income -- or if we should expect relative weakness in rental growth going forward. The most recent rental survey from April 2012 indicates no strong signs of weakness.

Inflation and House Prices

Following up on a conversation in the previous post, I thought it would be interesting to look at the correlation between consumer price inflation and house prices. This chart shows YOY BC CPI and the YOY change in Nominal Benchmarked house prices for Greater Vancouver. Click on the chart to make it bigger.



The correlation between the two series is 0.18 - not strong, but positive. I think we need more data than 15 years to prove conclusively that there is a link between inflation and house prices. The fact of the matter is that inflation has been relatively low for a very long period of time and interest rates have fallen dramatically during this low inflation period. We don't really know what much higher inflation will do to real estate values of the short / medium term but we do know that real estate is a very interest rate sensitive asset since most people use borrowed money to buy real estate. If I look back at high inflation periods in the past (the 70s), house prices were a much smaller multiple of personal incomes than they are today and rates were also much higher than they are today which would indicate that affordability is a combination of the interest rate and the price - duh!

If we expect inflation then we should also expect much higher interest rates eventually to bring the inflation down and this would deflate house prices as current house prices with a 10% or 15% mortgage rate would be out of reach for all but the super rich. As we know, the housing market is fundamentally a supply / demand based market and if there is no demand at a given price the price will fall until the price meets someone's ability to pay.

Free For All

It's a free-for-all kind of day today.

We could discuss:

Inflation - it's up
Federal Budget - spending is up, taxes are down (kinda)
Housing - it's silly - inventory is rising, sales are declining
Markets - ambivalent

You lead the way.

Inflation - A Murky Picture of a Beast

Inflation a standard definition (dictionary.com): a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency

An alternate definition (itulip.com): 1. to an economist, an increase in the general or "all goods" price level resulting from an oversupply of money; 2. to a government statistician, a political football thrown onto the field as producer and consumer price indexes, continuously reformulated and subject to interpretations invented to suit various constituencies over time, such as the under-reporting of home price inflation via an equivalent rent formula when home prices are rising and rents are falling, in order to hide the fact of a housing bubble that is needed to keep the economy from falling into recession 3. to the person on the street, rapidly rising prices of non-traded goods and services, especially insurance, education, and health care, resulting from an excess of cheap credit and the inappropriate use of credit to purchase depreciating assets.

I snagged this neat graphic over at itulip.com and it illustrates how the CPI (Consumer Price Inflation) can remain low despite massive price increases in real estate, health care, education, and most other 'services.' This 'service' price inflation vs. 'product' price inflation is due to the interesting effects of globalization and governmental monetary arrangements that are beyond the understanding of most of the general public.



On a personal observational level, I have definitely noticed the massive price declines of goods made abroad and the massive price increases of goods and services created here in Canada. Feel free to discuss the effects of these differentials in inflation. How do they impact you and your personal choices? Why?