Canadian Housing Prices: Some More Data to Ponder

Well, given the continuing pronouncements that Canada’s housing market is overvalued, I thought I would follow up my November post with another take on the data.  Among the many suggestions received on that post was to extend the data back further and to look at price/rent ratios. This time, I decided to gather CMHC data on average annual MLS residential prices and average annual rents for a two-bedroom apartment for the period 1992 to 2013 to estimate price/earnings ratios for a number of major Canadian CMAs. This provides a nice two decade look at housing prices in Canada.

The plots for major Canadian CMAs are set out regionally in Figures 1-3. Figures 1-3 show there has been a marked rise in the price/earnings ratio since 2001 in almost all Canadian CMAs.  Exceptions include places like Windsor.  However, there has also been a decline or moderation in P/E ratios in many centers over the last two to three years. For example, note the flattening out for Regina.   However, when the P/E ratios are ranked according to their 2013 values in Figure 4, they are highest in Vancouver, Montreal, Victoria, Toronto and Hamilton.  If one takes the 2013 ranking and calculates the percentage change in the P/E ratio from 1992 to 2013 (see Figure 5) one finds the biggest percentage increases in St. John’s, Quebec City, Sherebrooke and Regina.  They are followed closely by Saguenay, Montreal and Winnipeg. 

Ponder that over the Christmas holidays.  See you in the New Year.

Comments

[Nick Rowe]

A P/E of 25 means a yield of 4%. I'm not sure if municipal taxes and maintenance is included, probably not. Let's cut it to 2%, assuming those are equal to the rent. A 2% real yield (tax-free for owner-occupiers) is not so bad. But not great either, given risk and illiquidity. It all depends on whether real interest rates will stay low for a long time.

Purely anecdotally, when comparing house prices to rents, I get the sense that Ottawa house prices are a bit too high, and the condo market is a bit overbuilt. But then I've been thinking that for some time, and they keep on going up!

[Nick Rowe]

I mean: assuming those are equal to *half* the rent.

[genauer]

the netherlands and their 350 year long herengracht index comes to my mind

[jt]

Good post. I was surprised that Victoria tracked the Vancouver bubble for a long time. Tells you how retirement and baby boomers (and speculators riding with them) is really driving asset prices in general.

Nick: you forgot the 10%/yr tax-free capital gains from ZIRP. Aren't you an expert in monetary policy? ;-}

[R I]

I agree, good post. Curious to see what others glean from this. Interest rates have dropped significantly since 1992 - one would expect to see an increase in P/E as a result.

[Jim Sanders]

Wasn't 1992 the rock bottom of the Toronto (and elsewhere) housing market after the collapse from the LAST housing bubble? It seems an odd starting point if that is true.

[mick]

thank you for this. a quick point, not that it would effect the overall trend however.

is MLS average price and the CMHC rental data you used an apples to apples comparison? i believe the former is of all unit types whereas the CMHC data is for purpose built rentals. if so, this will likely add a downward bias to your estimates.

thanks again.

[Livio Di Matteo]

Jim:
I started the data as far back as a I could easily get it.
Mick:
I believe you are correct that the rent data being for two bedroom apts is from a somewhat more narrow base than the housing price data.

[Andy]

The persistence of differences in p/e ratio by region is interesting.

A "rational" explanation for a difference at any point in time would be that there are different expectation for future rent growth by region. But that shouldn't explain a persistent difference.

Differing risk assessments of regional economies could be an explanation. Those assessments would need to be pretty persistent.

Differences in tax and or maintenance costs as a % of rent by region could be an explanation.

And, in reality renting and owning a home are far from perfect substitutes. Typically (I think), renters are a group and owners are a group, and any individual typically makes a transition between groups once in a lifetime. Therefore, differences in zoning laws affecting supply of each type could have a persistent impact.

[Margaret]

“Canada’s housing market is overvalued”, did you know that according to the IMF, Canada has the most overvalued housing market in the world! So can you imagine it? While housing markets across the globe slowly recover, it’s no great secret that some seem crazy overvalued. Canada’s ratio is 85% above the average. That just proves how extraordinary high is the price to own home and raise children. There are a hundred million foreclosures, late payments, shutdowns and underwater except one country - Canada. Therefore by default, Canada has the most over-valued housing market in the world! The high prices in the real estate market are driven by speculations and the foreign investors. Homes should not be treated as a stock. Canadians politicians should look first after the interests of their fellow citizens.

[jesse]

The win here is to use CMHC rents, not CPI, as many analysts do without accounting for what CPI rent actually measures. An improvement would be to use quality-adjusted price data instead of the "average"; for larger centres the MLS-HPI data are available going back a few years, and further back in time Royal LePage data can be used.

I graphed Vancouver MLS-HPI apartment price to CMHC 1 bedroom price, which gives as good an "apples to apples" comparison of earnings as I can find, barring going house to house, starting from around 1990:
http://housing-analysis.blogspot.ca/2013/10/vancouver-cma-price-to-rent-ratio.html

I know Canada is overvalued blahblahblah, but, at least in Vancouver, the price-rent as measured above has been steadily coming of its highs in 2008. Victoria even more so.

[Nick Rowe]

Good blog post jesse.

(I had a quick skim through some posts on jesse's blog, and they look like a good analysis of the housing market. A bit BC-centric,.....but we can't have it all!)