Penny wise, pound foolish. Valuing Vancouver Real Estate.

Following the three metrics discussed in the previous blog post, let’s see where if Vancouver is overvalued. Let’s not be penny wise, pound foolish…

Price to income for Vancouver

One good source for price to income ratios is the Demographia International Housing Affordability Survey (http://www.demographia.com/dhi2018.pdf), which has data as of Q4 2017 and again measures the median price to median income for a number of cities. Here’s their table for the Price to income ratio for the major housing markets (you can see a longer list in the pdf):

If you plot these numbers in a map, you get the following:

You can see that in Vancouver has the third worst price to income ratio in the world at 12.6, only surpassed by Hong Kong (19.4) and Sydney (12.9). It is definitely the worst in North America. It is even higher than San Francisco (9.1), Los Angeles (9.4), New York (5.7) and it is more than double that of Seattle (5.9) and Portland (5.5), two cities also in the West Coast.

As we discussed in the previous blog post, a price to income of 3 is what is expected of a normal city based on what people can access with credit using historical interest rates. A price to income ratio of 12.6 appears to be out of line with this fundamental, and points to a serious overvaluation of the market.

Price to rent for Vancouver

This very useful tool allows you to see the price to rent ratio in different parts of Vancouver: Census mapper

Histogram of the distribution of Price to rent ratios:

Remember that Tulia’s guideline was to rent if the ratio was greater than 20? Well, this plot shows that for most of the Greater Vancouver Area the ratio is greater than 50, which again points to a serious overvaluation of the Real Estate in Vancouver.

Steve Saretsky also documents a price to rent ratio in Vancouver that is higher than that of San Francisco for one and two bedroom condos:

One Bedroom Price to Rent Ratio

CityMedian Sales PriceMedian Rent PricePrice to Rent Ratio
Vancouver$569,000 CDN$2090 CDN23
San Francisco$846,000 USD$3500 USD20
Manhattan$1,100,000 USD$3500 USD26

Two Bedroom Price to Rent Ratio

CityMedian Sales PriceMedian Rent PricePrice to Rent Ratio
Vancouver$899,000 CDN$2430 CDN31
San Francisco$1,250,000 USD$4637 USD22
Manhattan$2,107,777 USD$4312 USD41

These values make it very difficult to rationally justify buying vs renting in Vancouver.

Deviations from the trend

If you go to the Canadian Real Estate Association: CREA website, you can download the House Price Index values for the different house types since 2005. I will describe in the next blog post what this value is, and its advantages and disadvantages, but for now let’s take it at face value as an indicator for the value of properties at different times. If you go to the Inflation.eu website, you can download the inflation values for each of these years, and then you can correct the HPI values by inflation, to see how the plot looks like (remember Schiller’s plot from last blog post?). This is how the plots look like, with 100 being the normalized value from 2005 for each unit type, again corrected by inflation (Numbers for ‘Greater Vancouer’):

This plot shows the composite HPI for all the unit types combined:

Unfortunately, the CREA data does not go back before 2005 to get a better sense of the numbers in a longer period of time. Nevertheless the plots illustrate quite nicely that the growth in prices from 2015-2018 was extraordinary and deviates significantly from the inflation corrected ‘baseline’ from 2007-2015.

EDIT: The teranet database goes back to 1990, so here’s the plot with those numbers:

Summary

Price to income, price to rent and a study of changes of prices with respect to inflation all suggest that the market in Vancouver is significantly overvalued. In future blog posts we will discuss some of the reasons for this, and also reasonable expectations for the short and long term. For now, in the next blog entry, let’s discuss a bit more the HPI as this number will be useful in some discussions and is often used in the media as benchmark for telling people whether prices go up or down.

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