Expanded Real Estate Chart Book
The
following chart book consists of
32 charts that summarize
trends, key factors, and relative valuations of Canadian real estate in
major Canadian centers. This summary has
been
generated solely for educational purposes and we would like to thank
the
UBC Sauder School of Business - Center for Urban Economics and Real
Estate, as well as Teranet and National Bank, and Standard &
Poors
for making numerous data elements and housing price indices available
for generating the following summaries. For definitions of the data
used in this summary please visit the following sites:
UBC Center for Urban
Economics and Real Estate.
Teranet - National Bank Home
Price Index TM.
S&P Case-Shiller Home
Price Indices.
Summary
Although
housing prices are impacted by a number of economic and
demographic factors, we believe that the prevailing themes stimulating
Canada's housing market over the last decade have been twofold:
Firstly, the organic growth
of the Canadian economy in response to global demand for commodities
has resulted in wealth accumulation and economic growth which can
justify a component of house price appreciation. Secondly,
over
the
last decade, there has been a rapid increase in Canadian mortgage and
household debt which served to inflate housing prices through financial
leverage. Both of these two factors, one sustainable but subject to
contraction risks (GDP growth) and the other unsustainable for
the long term (enhanced leverage), have amalgamated into the almost
unprecedented housing bull market.
Our
outlook on Canadian real-estate is negative and we believe Canadian
housing will begin an extended contraction phase resulting in a move of
home prices back towards long term sustainable valuations. This
contraction
phase will be predicated on both global and domestic factors that
include:
Global
• Softness and volatility in global commodity prices
• Chinese economic slowdown resulting in less-than-forecast demand for
Canadian commodities
• European debt crisis resulting in downward global GDP revisions
• A slow tepid recovery of US employment, housing, and the personal
balance sheets of US consumers
Domestic
• Limitations of further expansion of Canadian consumer leverage
• Lack of home ownership affordability in relation to renting
• A reversal of the emergency low-interest rate environment
• Digestion of over-built housing inventories in a number of regions
• The closing of price differentials between Canadian and US property
values through both an eventual appreciation of US housing and a
decline in
Canadian housing prices
• Mean reversion of home price growth to long term economic trends
Chart summaries are provided below and are divided into the following
five
categories:
Section
A (charts 1 through 9):
Canadian Real Estate Market Trends, Valuations, and Drivers of Home
Prices
Section
B (charts 10 through 17):
Canadian Real Estate Unemployment, Vacancy Rates, and Home Price Growth
in Major Canadian Cities
Section
C (charts 18 through 21):
Canadian and US Real Estate versus Stock Markets (TSX and S&P
500)
Section
D (charts 22 through 25):
US Housing Price Performance vs. Major Canadian Cities
Section
E (charts 26 through 32):
US Housing Price Performance vs. Major Canadian Cities
Section A (charts 1 through 9):
Canadian Real Estate
Market Trends, Valuations, and Drivers of Home Prices
Chart 1) Canadian misery index -
National, Vancouver, Toronto, and Montreal
The
Canadian misery index (inflation + unemployment rate) has been
climbing steadily since hitting a low at the end of the first quarter
2008. Toronto misery is at levels not seen since 1995. All three major
Canadian cities are at or above misery levels similar to those of the
early 2000s. Canadian interim misery index (not quarter end data)
indicates that national
misery is currently above 10%, last seen at the end of the first
quarter
of 2003.
Click Here to view a larger version of
this chart.
Chart 2) Canadian household credit
as a percentage of nominal GDP
Canadian
household credit, both consumer credit and residential
mortgage credit, has increased sharply over the last decade. Total
credit as a percentage of nominal GDP increased from under 60% during
the third quarter of 2001, to the current levels of 90%. The
surge in Canadian
household debt is predominantly comprised of residential mortgage
credit as can be observed from the chart below.
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this chart.
Chart 3) Growth of Canadian home
prices in comparison to nominal GDP growth and mortgage credit
Appreciation in Canadian home prices (from January 2000 onward) has
more
closely reflected growth in mortgage credit rather than growth in
Canadian nominal GDP.
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this chart.
Chart 4) Total Canadian housing
starts vs. estimated total increase in Canadian households: Vancouver,
Calgary, Edmonton, Winnipeg, Ottawa, Toronto, Montreal, Halifax
By
comparing total housing starts to total household growth in
major cities, it is possible to examine possible
overbuilt housing inventories.
From the chart below, Montreal appears to be severely overbuilt.
Vancouver, Calgary,
Edmonton, Halifax appear to be overbuilt but less so than
Montreal. Winnipeg appears
to have balanced housing inventories.
Ottawa and Toronto are apparently underbuilt. Note, the assumption
of 2.9 people per household that is used to create the chart below may
be a better estimate
of average household size in c markets over others.
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this chart.
Chart 5) Total employment as a
percentage of population in major Canadian cities: Vancouver, Calgary,
Edmonton, Winnipeg, Ottawa, Toronto, Montreal, Halifax
Total
employment as a percentage of population in Toronto, Calgary, and
Vancouver is similar to their respective mid 1990s levels. All major
Canadian cities have employment levels off from their highs. This
observation corresponds with the increase
in the overall Canadian unemployment. Note, individual cities will have
varying "natural" levels of employment based off of age demographics
and other factors that impact labour force participation.
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this chart.
Chart 6) Canadian real (inflation
adjusted) home price index: Vancouver, Edmonton, Toronto, Calgary,
Regina, Montreal, Victoria, Winnipeg
Long
term real (inflation adjusted) annual home price returns have
exceeded 3% in Vancouver and Victoria BC, while exceeding 1.5% in
most other large Canadian cities. Edmonton is the only exception with a
compounded annual house price appreciation of 0.68% over the examined
period.
To put this into perspective, numerous examinations of long term real
US home price appreciation
indicate that they have only slightly exceeded inflation at an
approximate annual
compounded rate of 0.5% per year.
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this chart.
Chart 7) Canadian real (inflation
adjusted) rent index: Calgary, Vancouver, Edmonton, Winnipeg, Montreal,
Halifax, Ottawa, Toronto
Canadian
residential rent increases have not historically kept pace
with inflation. This has implications for retirees expecting to utilize
rental income to finance long term retirement expenditures. As with non
inflation indexed bonds, cash flows from Canadian real estate may prove
to be
ineffective to satisfy future increases in the cost of living.
This is in addition to the fact that residential real estate
in Canada already possess low rental yields, or the net annual rental
income generated from a property dividend by the current market value
of the property.
Click Here to view a larger version of
this chart.
Chart 8) Canadian home prices to
rents: Vancouver, Calgary, Edmonton, Toronto, Montreal
Canadian
home prices are currently not inline with historic multiples
of residental rental prices. Most extended from historical norms are
Vancouver, Montreal, and Toronto. While Edmonton and Calgary, are
elevated from historic averages but below previous witnessed
highs.
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this chart.
Chart 9) Canadian home prices over
discounted rent valuation: Vancouver, Calgary, Edmonton, Toronto, and
Montreal
In
theory, residential real estate prices should equal the discounted
sum of future rental income. As a result, we have attempted to estimate
fair values for residential real estate in major cities by comparing
actual prices to theoretical discounted prices. In theory, this ratio
should equal one and deviations from this value should regress back to
the value one over time.
Note, discounted cash flow calculations are highly volatile and highly
dependent on underlying model assumptions. However based off of this
methodology, Canadian real estate appears extremely expensive in most
major markets, with the exception of Toronto. Also, Canadian real
estate only appears fairly valued if the assumption that current
interest rates (that are at emergency rates at multi generational lows)
continue for a prolonged period of time into the future. Any increase
in interest rates to even pre recession levels (which were also
historically low) causes Canadian real estate as a whole to appear
grossly overvalued.
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this chart.
Section B (charts 10 through 17):
Canadian Real Estate
Unemployment, Vacancy Rates,
and Home Price Growth in Major Canadian
Cities
The following charts display a time
series of unemployment, vacancy rates, and quarterly home price changes
for: Vancouver, Calgary, Edmonton, Winnipeg, Ottawa, Toronto, Montreal,
and Halifax.
Chart 10) Vancouver unemployment,
vacancy rates, and home price growth
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this chart.
Chart 11) Edmonton unemployment,
vacancy rates, and home price growth
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this chart.
Chart 12) Calgary unemployment,
vacancy rates, and home price growth
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this chart.
Chart 13) Winnipeg unemployment,
vacancy rates, and home price growth
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this chart.
Chart 14) Ottawa unemployment,
vacancy rates, and home price growth
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this chart.
Chart 15) Toronto unemployment,
vacancy rates, and home price growth
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this chart.
Chart 16) Montreal unemployment,
vacancy rates, and home price growth
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this chart.
Chart 17) Halifax unemployment,
vacancy rates, and home price growth
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this chart.
Section C (charts 18 through 25):
Canadian and US Real Estate versus Stock Markets (TSX and S&P
500)
Chart 18) From 1977 - Canadian real
estate
versus the TSX index
Displayed
in the chart below are Canadian home prices as a ratio of the
TSX index (Canadian stock market) from 1977. Seven cities are included:
Vancouver,
Victoria, Calgary, Edmonton, Regina, Toronto, and Montreal. Over the
long term, home prices in Canada have
lagged price appreciation of stocks. Note, the stock index below is a
"price index" and therefore, excludes payment of dividends.
Click Here to view a larger version of
this chart.
Chart 19) From 1998 - Canadian real
estate
versus the TSX index
Displayed
in the chart below are Canadian home prices as a ratio of the
TSX index (Canadian stock market) from 1998. Nine cities are included:
Vancouver,
Victoria, Calgary, Edmonton, Regina, Ottawa, Toronto, Montreal, and
Halifax. Over the medium term, home prices in Canada have
outperformed price appreciation of stocks. Note, the spike on the
charts observed at March 2009 represent the stock market bottom during
the financial crisis.
Click Here to view a larger version of
this chart.
Chart 20) From 1987 - US real
estate versus the S&P 500 index
For
comparison purposes the following two charts (Chart 20 and Chart
21) have also been
included which display US home prices as a multiple of the
S&P 500 (US stock market).
The chart immediately below displays US home prices as a ratio of the
S&P
500 index (US stock market) from 1987 onward. Fourteen US cities are
included in the chart below as well as a composite index of ten major
US Cities. Over the medium term, home prices in Canada have
outperformed price appreciation of stocks. Note, the spike on the
charts observed at March 2009 represent the stock market bottom during
the financial crisis.
Click Here to view a larger version of
this chart.
Chart 21) From 1998 - US Real
Estate versus the S&P 500 Index
For comparison purposes the following chart and the chart above have
been included which display US home prices as a multiple of the
S&P 500 (US stock market).
The chart below displays US home prices as a ratio of the S&P
500 index (US stock market) from 1987 onward. Fourteen US cities are
included in the chart below as well as a composite index of ten major
US Cities. Over the medium term, home prices in Canada have
outperformed price appreciation of stocks. Note, the spike on the
charts observed at March 2009 represent the stock market bottom during
the financial crisis.
Click Here to view a larger version of
this chart.
Section D (charts 22 through 26):
US Housing Price Performance vs. Major Canadian Cities
The following charts indicate relative
performance of US home prices
to Canadian home prices in four Canadian markets: Vancouver, Calgary,
Toronto, and Montreal. US home prices reflect Canadian dollars by
applying
Chart 22) US Home Prices versus
Vancouver Home Prices
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this chart.
Chart 23) US Home Prices versus
Calgary Home Prices
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this chart.
Chart 24) US Home Prices versus
Toronto Home Prices
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this chart.
Chart 25) US Home Prices versus
Montreal Home Prices
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this chart.
Section E (charts 26 through 32):
US Housing Price Performance vs. Major Canadian Cities
The following charts indicate annual
changes in monthly home prices and "sales pair" volume. Data has been
generously made available by Teranet - National Bank for: Canada,
Vancouver, Calgary, Ottawa, Toronto, Montreal, and Halifax.
Please visit http://www.housepriceindex.ca/
for the definitions and methodologies used
calculating their indices.
Chart 26) Canadian Home Price and
Sales Volume Change
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this chart.
Chart 27) Vancouver Home Price and
Sales Volume Change
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this chart.
Chart 28) Calgary Home Price and
Sales Volume Change
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this chart.
Chart 29) Ottawa Home Price and
Sales Volume Change
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this chart.
Chart 30) Toronto Home Price and
Sales Volume Change
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this chart.
Chart 31) Montreal Home Price and
Sales Volume Change
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this chart.
Chart 32) Halifax Home Price and
Sales Volume Change
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this chart.
Pacifica
Partners - Capital Management
Navigating
a Sea of Opportunity
Disclaimer:
This report is for information purposes only and is neither a
solicitation for the purchase of securities nor an offer of securities.
The information contained in this report has been compiled from sources
we believe to be reliable, however, we make no guarantee,
representation or warranty, expressed or implied, as to such
information’s accuracy or completeness. All opinions and estimates
contained in this report, whether or not our own, are based on
assumptions we believe to be reasonable as of the date of the report
and are subject to change without notice. Past performance is not
indicative of future performance. Please
note that, as at the date of this report, our firm may hold positions
in some of the companies mentioned.
Copyright (C) 2011 Pacifica Partners Inc. All rights reserved.
