Affordability Amongst Provinces - Valuing Canadian Real Estate

[Jack]

I`ve done some math and have come to some interesting figures with respect to each province`s affordability (earnings/property). What I did was annualize the 6 main provinces` average weekly earnings from StatsCan`s Canadian Economic Observer (Oct. 2008) and used them as the denominator in a calculation where the numerator was the average selling price of different types of real estate dwellings. Call it the Price/Earnings Ratio (P/E) for each province and each type of dwelling, and what it measures is the expensivity/affordability of real estate relative to earnings - IE, if Alberta`s P/E ratio for townhouses is 6.69, that means that it takes 6.69 times the average annual earnings to purchase the average townhouse in Alberta. So, with this metric, lower is better and indicates relative undervaluing. Here`s what I found:Type 1: Condo
1) Manitoba: 3.17
2) Saskatchewan: 4.46
3) Quebec: 4.59
4) Ontario: 5.43
5) Alberta: 5.53
6) B.C.: 7.01

Type 2: Townhouse

1) Manitoba: 3.41
2) Quebec: 4.97
3) Saskatchewan: 5.84
4) Ontario: 5.91
5) Alberta: 6.69
6) B.C.: 9.89

Type 3: Detached Bungalow

1) Quebec: 5.61
2) Manitoba: 5.74
3) Saskatchewan: 6.93
4) Ontario: 7.12
5) Alberta: 8.32
6) B.C.: 13.09

Type 4: Standard Two-Storey

1) Manitoba: 6.07
2) Quebec: 6.86
3) Saskatchewan: 7.17
4) Ontario: 8.17
5) Alberta: 9.05
6) B.C.: 14.11

Explaining this further, looking at the Standard Two-Storey measurement, the average two-storey house is 80% more expensive in Alberta than it is in Manitoba, yet the average annual earnings to support that variance are only 20% greater.

This leaves me with a couple questions:

1) Is Manitoba the next province in line to experience a significant upward boom in real estate values?

2) How badly are Alberta and British Columbia`s bubbles going to burst? Or will they not?

 

[Avoidconfusion]

You should do this for the maritimes provinces also, I think you will find some more value.

 

[mortgageman]

Manitoba (read Winnipeg) has had steady low double digit property value growth for the last few years. According to my friends who live there the market stalled last spring. Winnipeg`s economy is very diversified. However, there are large parts of the city that are rough in terms of housing and tenant profile. With that said, there are great areas like Osborne Village, Wolsley, around University of Manitoba, etc.
Brandon is the other major area that is worth exploring. Apparently vacancy rates are very low and there is a real affordable housing crunch in the city.

 

[ZanderRobertson]

The following is from Ray Turchansky`s October 18th column in the Edmonton journal:

"Housing is deemed affordable when the price is less than five times a family`s annual household income. Recent figures showed housing prices were 11.5 times annual household income in Los Angeles and 10.8 times in San Francisco. In Canada, figures were 12.1 times in Vancouver, 7.0 in Toronto and 4.3 in Edmonton, which now boasts a higher average annual household income than Toronto does."

I can`t source where he got his numbers from, but it jives with the article included in one of the "What`s Behind the Curtain" packages which stated that Edmonton was the only MAJOR city in Canada that was still undervalued (by 8 % I believe).

What is going on economically in Manitoba that might bring about a major RE boom?

My father and brother are farmers, and I know many of the government agriculture offices are there such as the Canadian Wheat Board. It seems like the federal government often throws money into provinces that need the stimulus.

Just a thought, I don`t know much about Manitoba. I can`t say that I`ve ever heard of anything that would indicate a boom there, but would like to know if there is any info regarding this.

Zander

 

[GarthChapman]

The quarterly RBC Housing Affordability report does this also. The latest one I could find is for March 2008 http://www.rbc.com/economics/market/hi_house.html

There is something significant that no-one seems to have taken into account in these studies - tax rates. If someone would just do this on an after tax basis we`d be closer to a true affordability index. Of course then I`d also like to see an adjustment for other taxes, such as Provincial Sales taxes...

 

[Jack]

 

[Jack]

QUOTE The quarterly RBC Housing Affordability report does this also. The latest one I could find is for March 2008 http://www.rbc.com/economics/market/hi_house.html

Not exactly. RBC`s report measures the average percentage of income required to service the average mortgage. Again, lower is better, so the results are similar, I`m just presenting it another way, finding out the earnings multiple for each dwelling in each province, which determines their relative expensivity.

QUOTE There is something significant that no-one seems to have taken into account in these studies - tax rates. If someone would just do this on an after tax basis we`d be closer to a true affordability index. Of course then I`d also like to see an adjustment for other taxes, such as Provincial Sales taxes...

I believe the earnings figures are already after-tax.

As for PST adjustments, sure, a province like AB would have the advantage there, given that they don`t have one - but - this is offset by the higher CPI for the province relative to all others.

Example, you might think that it`s more expensive to live in B.C., because they`ve got a 7.5% PST on all purchases. That said, it costs $124.10 for a "basket of goods" in Alberta, relative to $114 in B.C. That`s an 8.9% increase, which more than offsets the 7.5% PST.

 

[joe123]

I do a similiar tracking, however I don`t use the stated "average" home price. I track similiar housing. Such as the typical 50`s bungalow, new starter home, 80`s townhome. Compare apples to apples. What the "average" price gets you in different cities can vary. Alberta has a lot of new housing which warps the "true" average I believe, and some areas don`t have much for starter homes. Try to find a starter neighborhood like McKenzie town in Kelowna... Not going to happen... very dominant on the mid to luxury there.
Plus don`t perceptions play a huge roll? Even though Edmonton looks great on paper, I`m worried due to the common Edmontonian being absolutely convinvinced that the city is overpriced and doomed. If they believe it, it will happen..?

 

[ChrisDavies]

I`ve heard that MB is a landlord`s nightmare. Very strict (and retroactive) rent control and very anti-landlord legal channels when dealing with tenant issues and evictions.

 

[MikeMcCrae]

Right you are Chris. You have a lot of partners there. The rentalsman, Manitoba social services, and your tenant. The Government tells you how much rent you can raise your rents and if you do repairs and want to go more than that you need your tenants written permission as well as the rentalsman. If your tenant is on welfare the welfare department can object as well.

I do own property in Brandon that has adequate rents to cash flow for me, but I can`t sell the building for what it is worth because the new owner can not raise the rents to the proper amounts for the new value. Some properties can cash flow very well but they are generally very low end (slum) houseing and not desirable for long distance ownership. The only reason I invest there is I have my brother as my manager and partner.

Also remember the property purchase investment fines (land transfer tax) that the government imposes as well. Manitoba can work but do double due diligence before buying. Surprises are not fun.

 

[Jack]

QUOTE The Government tells you how much rent you can raise your rents

Realistically, how much of a benefit is it for the Alberta landlords like us to have control over how much we raise our rents? I guess it helps if 2006 or 2007 were to repeat themselves, but those are examples of market anomalies.

Supply & demand will always dictate rental increases or lack thereof. By being a property owner, what is the level of scarcity power that you have? If there are more renters than rentals, prices will rise, and vice versa. Correct me if I`m wrong, but you`re allowed to raise the rents once annually in the "rent-controlled" provinces, are you not? If the increase is unreasonable, nobody`s going to be renting there anyway, unless, as mentioned above, there`s an extreme market anomaly as in the case of Alberta in `06 & `07.

Does it really "hurt" to be limited to CPI-tied increases once annually on long-term holds? Doesn`t seem like it to me.

 

[GarthChapman]

Areas under long-term rent controls tend to discourage new rental construction (normally this refers to apartment buildings). Those areas not rent controlled tend to have more new rental construction, although only when times are good. I think I remember the demographia website having stats on this.

Rent controls in New York City have created bizarre marketplace, with grandfathered low rents from the 1970`s being in tremendous demand and distorting the market - look to a few episodes of Seinfeld for a sense of how that has worked. I am sure demographia has information on this phenomenom. What it has created is a very tight market for reasonably priced apartments but it`s easy to find an expensive apartment. I haven`t yet figured out how that is good for the average renter.

Perhaps more importantly, rent controls very much discourage landlords from spending on maintenance over time, so you end up with huge deferred maintenance problems, which reduces both values and living conditions for tenants. Having rented an apartment in Manhattan for a week this summer I can attest to this as a real problem.

I`ll take the free market anytime (even thought that`s a phrase not in favour right now), as long as there are also some regulations in place to protect tenants from predatory landlords. As in all things, there must be some balance for the market to work reasonably well for all parties.