Sunday, September 20, 2015

Leading vs. Lagging - Staying Ahead of the Pack in Real Estate

The stock market has its P/E ratios but what are the best indicators worth watching for real estate to know when a change in strategy is needed?
As real estate is a slower moving and less liquid asset class amongst stocks or bonds, it is important to see change approaching while it is still off in the distance.  The two largest drivers of real estate value movement for an urban market are the population and per-capita income changes within that region.  The problem with waiting for data on these two indicators is in some cases they can lag the market by 6 to 18 months.  The census data collected by the government on population figures which may be one of the more reliable sources can be well over a year behind the date it is needed. 
Given the lag in these indicators we must find ways of inferring up-coming shifts in market trends before those stats are released.  Three important leading data-points to understand and pay attention to are: Housing Starts, Sales to Listings Ratio, and Local Unemployment. 
Housing starts is a less frequently talked about indicator but is posted every month. Housing "starts" are tracked as the number of new building permits taken out by builders in each  municipality and can be treated as part of the housing supply.  Along with the number of active MLS listings which would include some of these new homes being built, the combination of these two represent the homes that buyers can choose from.  Some builders do not list all of their condos or houses on the MLS and prefer to sell them through direct advertising so it is important to watch both numbers.  
The Sales to MLS Listings Ratio could be viewed as a better and more timely indicator than population change although it is a mixture of a number of different factors including interest rates and effect of changes in the economy.  The sales to listing ratio in some of the Greater Vancouver sub-markets during the summer of 2015 was between 60-80%.  Anything over 30% is considered to be a sellers market, and in some cases there were more sales than the number of listings on MLS, showing a market where literally everything was selling. This stat is available monthly within weeks of month end making it a great leading indicator.
The last signal is unemployment.  The home buying power within an urban market is based on how much mortgage a buyer can afford to make payments on.  The level of unemployment is released every two weeks making it a great leading indicator. Taken in account along with recent changes in the prime interest rate and we can see how much change has occurred in the home buying power of the existing population within a city.  Right now Vancouver is seeing the lowest unemployment rate in recent history at 5.8% and with the lowest prime rate in the last five years at 2.7%, the fundamentals seem to be positively supporting home prices.
With strong GDP growth forecasted in BC for the rest of the 2015 calendar year, along with a relatively low level of MLS listings, extremely positive employment trends, and continued inward immigration, it is reasonable to expect the home price index will out-perform inflation (CPI).  
In future posts we will come back to these leading indicators and watch how changing real estate trends can be predicted.  If you have any more of your own favourite leading indicators feel free to share them in the comments below. Our collective goal should be to avoid the kind of exuberance which pushes markets beyond their fundamentals all the while ensuring we have the insight to make timely intelligent decisions about our real estate portfolios.

Monday, September 7, 2015

Home Price Increase Covered by Family Income Growth

Searching for the source of the increase in the prices of residential real estate in Canada, we looked to the growth in home buying power that comes from increases in family income. We found that family income growth covers virtually all of the growth in home value in most major markets - find out how below.

Looking at the average after tax income for Canadians* and specifically tracking the middle 60% of the country, we have come up with a growth in buying power benchmark of 75.4% from 2005 to 2015.  This number was calculated using an inflation adjusted change in family income with the change in prime rate factored in. To arrive at the buying power number we used a mortgage affordability calculator like the one on TD's website ( Taking the prime rate as a relative borrowing cost bench mark in December of 2004 a 4.25%, and the current prime rate of 2.7%, we found that buying power growth very closely tracked the home price index (surprise surprise).

Toronto and Calgary are above the national home price index** for the 10 year period so it would make sense they are above the national buying power increase bench mark (Calgary has a much higher average family income than most other markets).  Vancouver is nearly equal with the buying power benchmark and most other urban real estate markets are below.  

It is amazing how much media coverage and how many sensational stories on the potential demise of the market ignore this primary benchmark for home affordability economics. If the buying power bench mark drops due to family income decreasing and the prime rate increasing they would would expect to see home prices go down. Otherwise, as inflation drives up family incomes the home price index will continue to appreciate right along with them.

*Source: ESDC calculations based on Statistics Canada. Table 202-0703 - Market, total and after-tax income, by economic family type and after-tax income quintiles, 2011 constant dollars, annual, CANSIM (database). These numbers were modified back to non-inflation adjusted with CPI to match the non-inflation adjusted home price index. Found by website link

$757 Billion Home Market In Vancouver

To put $8.48 Billion into perspective, if we take 533,500 as the number of private "ground" dwellings in Vancouver from the 2011 Stats Canada Census, and multiply that by the average home price of $1.42 Million, we get a total market of $757,570,000,000 or $757 Billion. This number is for only Vancouver excluding the rest of the Fraser Valley and would not include condos or apartments.
Additional buying power of $8.48 Billion amounts to another 1.12% of the total market. Of course the number of $8.48 Billion is only taking into account the Provincial Nominee program immigrants and doesn't include the other 24,500 people immigrating to BC. Coming up next we will look at the change in the average income level of Vancouver and Toronto residents to see what impact they may have on these markets.

$8.48 Billion Into The Vancouver Housing Market

Where have the residential real estate equity gains been made in Canada recently?

Over the last three years the ranking goes*: 

1. Toronto (+21.94%) 
2. Calgary (+17.88%) 
3. Vancouver (+13.92%) 

But recently the numbers tell a different story.

Vancouver is leading over the last 6 months and is beginning to close the gap with Toronto and Calgary. With the price of oil dropping, the Calgary home price index has effectively been flat over the last 12 month period. During the last 6 months, the home price index ranking is as follows*: 

Vancouver (+9.17%)
Toronto (+7.54%) 
Calgary (-0.62%) 

What is giving Vancouver the financial fuel to support these home price trends? 

As of July 2nd, 2015 the Province of BC announced the “Provincial Nominee Program” was accepting applications again after taking a 90-day pause**. The focus is now on “high-impact workers and entrepreneurs”, described to align better with BC’s labour market and development priorities. 

Vancouver has seen positive population growth similar to Toronto, with strong inward flows of “economic immigrants”, of which approximately 2/3 are coming from Asia, 1/5 from Europe and Africa, and the rest from the Americas***. 

The total population change in BC from 2013 to 2014 was +31,519****. BC received 21,452 “economic class” immigrants which made up approximately 2/3 of the total. Seven thousand (7024) of these came from the “Provincial Nominee Program" alone in 2014. The vast majority - 86.1%*** of those coming to BC are choosing to live in the Lower Mainland, which continues to provide positive market support there. 

Lets try a simplistic calculation by making the assumption that all of the Provincial Nominee Program (PNP) applicants bought a home at the Vancouver average price of $1.2 million (based on the Greater Vancouver average in June 2014). If this was the case, then the total amount of home purchasing power flowing from the PNP would be $8,428,800,000 or $8.43 Billion. 

This wave of new money flowing into the region will continue to apply pressure to an already premium priced housing market. For as long as the PNP is in effect and the immigration into BC carries this economic class into Greater Vancouver, the home price index will be supported by it. With the recent announcement that the average home price in Greater Vancouver is now up to $1.42 million as of June 2015, the trend seems to be continuing. 

* - Data from The Canadian Real Estate Association Home Price Index 

** - Announcement details for the Provincial Nominee Program 

*** - Data from Welcome BC Immigration stats 

**** - Population growth stats from