July Stats Packages

I am on vacation and not wanting to spend my precious free time updating charts so it'll just have to wait. In the meantime here are links to the REBGV and FVREB statistics packages for July 2010.

At first glance it appears that Months of Inventory is getting quite high and price drops are occurring.

How Real Estate Investors Invest Part 2

In the previous post in this series I outlined the basic inputs and calculations used by certain investors when determining the investment value of a particular property. In this installment we go through a simple example for a purpose-built rental building. A massive thanks to Rachelle over at Landlord Rescue for allowing me to publish a simple spreadsheet containing the calculations of an actual property in the Toronto area. (Toronto was used instead of Vancouver to avoid investors in Vancouver real estate from soiling themselves.)

link to spreadsheet (Note there is a bug with google spreadsheets; Click refresh if you get an annoying popup window and avoid dragging your mouse over the "anyone with the link" link. Should be fixed soon I hope.)

This is an actual real-life building in the GTA. We have the following inputs:

Purchase Price = $528,800
Closing Costs = $1,000
Deferred Maintenance (Renovations) = $0

Revenue
Rent = 5 units totaling $3725/month

Expenses
Taxes = $4759/yr
Insurance + Utilities* = $4974/yr
Property management** = 8% of revenue
Building maintenance = 10% of revenue
Vacancy allowance = 5% of revenue
TOTAL = $1668/month

* Rent includes utilities
** Property management fees can be a few % higher in Vancouver

Calculations
NOI = Revenue-Expenses = $2057
Cap rate = NOI/Purchase Price = 4.7%
GRM = Purchase Price/Revenue = 11.82 (price/monthly rent = 142)

Financing
Here the investor is putting 30% down and assuming a 5% mortgage interest rate. With these numbers the mortgage payments just cover the NOI and is cash flow neutral, which is the goal of this particular investor.

Discussion
Here we see the investor requires 30% down and 5% mortgage rate to make this property cash flow neutral. Also note the investor does not consider capital appreciation when determining the investment's value; it's all about the cash flow at what they consider to be a sustainable financing rate.

We can see right away the impact of lower mortgage rates on these investors' criteria for a cash flow positive property. They have no earnings, at least initially, save debt repayments. In time, the investor assumes, the rents will increase with inflation and start producing positive cash flow.

After some years there will be some added expenses as the building starts aging. This is partly, but not completely, accounted for in the 10% gross rent maintenance allowance. Significant overhauls may be necessary from time to time and this is accounted for through depreciation allowances, usually a few % of the purchase price on a geometric schedule. Though the spreadsheet does not explicitly cover this, one can expect in time some of the free cash flow to be diverted to capital replacement.

Also for consideration is the 5% assumed mortgage rate. Certainly in today's climate mortgage rates could easily stay at or below this level for some time. I have no doubt some investors are using even lower rates (even variable rates!) when calculating their monthly cash flow. Food for thought, though, that rates this low are borderline deflationary. It is unclear if the projected rental increases will be as large as anticipated if rates remain low.

With this in mind, there is a box at the bottom of the spreadsheet for calculating purchase price for a given cap rate. That is (at least in theory), an investment with revenues that generally track inflation should not vary their present value when inflation changes, therefore the cap rate will stay constant. What cap rate would be considered acceptable? Well the "acceptable" number used by this investor is 7% for that particular property, putting an acceptable purchase price in the area of $308,600. Food for thought.

So there you have it. A real-life example of a cursory analysis of a potential real estate investment. Certainly there is a ton more to consider when evaluating a particular property's investment viability but, following this investor's philosophy for what it's worth, having these numbers work on a particular property (at whatever values one considers acceptable) should warrant some additional investigation. Otherwise, it's probably best to spend one's efforts elsewhere.

Teranet House Price Index - May 2010

NEWSLETTER - JULY 28, 2010 Click here to view the BlackBerry format Click here to launch the newsletter in your browser Cliquez ici pour la version française Monthly Report

JULY 2010

Monthly price rise of 1.3% in May Canadian home prices in May were up 13.6% from a year earlier, according to the Teranet-National Bank National Composite House Price Index™. The 12-month gain was strongly influenced by Vancouver, up 17.1%, and Toronto, up 16.0%. In the other four markets surveyed, the 12-month rise ranged from 5.6% in Halifax to 11.4% in Ottawa. In Calgary it was 7.8% and in Montreal 8.5%. May was the second consecutive month in which prices were up from the month before in all six metropolitan areas surveyed. The monthly rise of the composite index, 1.3%, was the largest since last September. The monthly rise was 2.3% in Ottawa, 1.8% in Montreal (the largest gain in this market since June 2007), 1.2% in Vancouver and Calgary, 1.1% in Toronto and 0.7% in Halifax. Teranet – National Bank National Composite House Price Index™ Contact Us For general enquiries: info@housepriceindex.ca For licenses covering all index-linked products, please contact: Simon Côté 514 879-5379 Website www.housepriceindex.ca

Since market conditions have been loosening across Canada - from April to June of this year, the number of existing homes sold declined much faster than the number of new listings - it is too early to conclude that the relatively vigorous prices rises of April and May mark the beginning of a trend. The prospect of harmonized sales taxes coming into effect July 1 in Ontario and B.C. may have had the effect of pushing up sales in Vancouver, Toronto and Ottawa in the preceding months. Teranet – National Bank House Price Index™ The historical data of the Teranet – National Bank House Price Index™ is available at www.housepriceindex.ca. Metropolitan area Index level May 2010 % change m/m % change y/y Calgary 160.21 1.2 % 7.8 % Halifax 128.16 0.7 % 5.6 % Montreal 133.02 1.8 % 8.5 % Ottawa 126.22 2.3 % 11.4 % Toronto 123.03 1.1 % 16.0 % Vancouver 155.23 1.2 % 17.1 % National Composite 136.32 1.3 % 13.6 % The Teranet–National Bank House Price Index™ is estimated by tracking observed or registered home prices over time using data collected from public land registries. All dwellings that have been sold at least twice are considered in the calculation of the index. This is known as the repeat sales method; a complete description of the method is given at www.housepriceindex.ca The Teranet–National Bank House Price Index™ is an independently developed representation of average home price changes in six metropolitan areas: Ottawa, Toronto, Calgary, Vancouver, Montreal and Halifax. The national composite index is the weighted average of the six metropolitan areas. The weights are based on aggregate value of dwellings as retrieved from the 2006 Statistics Canada Census. According to that census1, the aggregate value of occupied dwellings in the metropolitan areas covered by the indices was $1.168 trillion, or 53% of the Canadian aggregate value of $2.207 trillion. All indices have a base value of 100 in June 2005. For example, an index value of 130 means that home prices have increased 30% since June 2005. By: Marc Pinsonneault Senior Economist Economy & Strategy National Bank Financial Group

Metro Vancouver Rental and Ownership Data

A great summary of the ownership, rental, and affordability state of the union for Metro Vancouver can be found over at metrovancouver.org.

• Key Facts
• Housing Diversity

In the latter link there is a presentation entitled Metro Vancouver Housing Data Book (PDF) that contains some wonderful demographic and affordability data that make authors of a housing analysis blog drool. A few key points made in this presentation:

• The median owner income of $69,318 is equal to approximately 125% of the median household income for the region.
• Based on the median income of $69,318, an “affordable housing cost” is equal to $1,733 per month using the standard that housing should not cost more than 30% of a household's gross annual income.
• In 2006, there were 817,230 households in Metro Vancouver; 531,725 (65%) were owners and 285,045 (35%) were renters.
• 21% (59,275) of renter households had annual incomes above $45,000. This fits the general definition of moderate and above income (above 80% of the regional median income). Of these households, 11% (31,220) had incomes between $70,000-$100,000, and 7% (19,975) had incomes above $100,000.
• Region wide, 39% (314,780) of all households had an annual income of $70,000 or above, of which 84% (262,035) were home owners and 16% (51,195) were renters. 20% (106,030) of owner households had annual incomes between $70,000-$100,000, and 29% (156,000) had incomes above $100,000.
• Of the 285,045 renter households in 2006, approximately 37% were accommodated in the 104,952 purpose-built apartment rental units counted by CMHC. The remaining rental stock is predominately non-market rentals, private condominium rentals, and rented single detached and other ground-oriented units
  
• The Statistics Canada Censuses shows that between 1991 and 2006 the total number of households increased from 609,380 to 817,035. For this period, as a percentage of the total housing inventory, apartment households increased from 34% (208,225) to 40% (321,970), while single detached households declined from 50% (302,120) to 35% (288,320).
• Data reported from CMHC shows that for Metro Vancouver for the period from 1999 to 2008 (10 years), average apartment rents increased from $725 to $937, an increase of 31% or 2.7% per year.
• During this same 10 year period for Metro Vancouver, according to the BC Stats Consumer Price Index, general prices increased by 20% or 1.8% per year on average.
• During this same 10 year period for British Columbia, according to BC Stats, average wages increased by 24% or 2.2% per year on average.
• Overall for the period, the average wage increase was greater than the general price increase, but lower than the average apartment rent increase.
  
• Metro Vancouver estimates that there are 69,200 - 75,500 secondary suites in the region. This represents approximately 22% to 24% of the total rental households (318,000) in 2009. [jesse: note the secondary suite accounting is all over the map. It is in many ways the proverbial "dark matter" of the city's housing market.]
  
• The average rent for a one bedroom secondary suite was $730, 20% ($189) less than the average rent in a conventional apartment building. The average rent for a two bedroom secondary suite was $862, 26% ($307) less than the average rent in a conventional apartment building.

There are much more data in the presentation. Well worth a read if you're trying to wrap your head around Metro Vancouver's housing market.

Bank of Canada Paper on Housing Stock

Title	A Model of Housing Stock for Canada
Author	David Dupuis and Yi Zheng
Type	Working Paper 2010-19
Date of publication	July 2010
Language	English
Abstract	Using an error-correction model (ECM) framework, the authors attempt to quantify the degree of disequilibrium in Canadian housing stock over the period 1961–2008 for the national aggregate and over 1981–2008 for the provinces. They find that, based on quarterly data, the level of housing stock in the long run is associated with population, real per capita disposable income, and real house prices. Population growth (net migration, particularly for the western provinces) is also an important determinant of the short-run dynamics of housing stock, after controlling for serial correlation in the dependent variable. Real mortgage rates, consumer confidence, and a number of other variables identified in the literature are found to play a small role in the short run. The authors’ model suggests that the Canadian housing stock was 2 per cent above its equilibrium level at the end of 2008. There was likely overbuilding, to varying degrees, in Saskatchewan, New Brunswick, British Columbia, Ontario, and Quebec.
Bank topic index	Domestic demand and components
JEL classification	E21, J00

You may download the paper in the following format(s):

• Acrobat (.pdf, 294 kb)