Vancouver Condos Are Overpriced By 9%

Vancouver Condos Are Overpriced By 9%

Vancouver condos are hella expensive, but are they overvalued? Recently we’ve doing quite a bit of work with a national House Price-To-Rent index, but wondered how that applied on a more local scale. Today we’re going to give you a peak of what that looks like when used to measure Vancouver’s condo market. Turns out when you run the numbers, Vancouver condos were trading more than 9% above value at the end of 2016.

House Price-To-Rent Index

Let’s walk through what is a House Price-To-Rent Index. The index measures the gap between buying and renting a home. The creators of the index crunch the numbers on carrying the average priced home. They then compare it to the annual cost of renting a similar segment of housing. This is one of the primary methods economists use to measure whether the value of homes are out of whack, or in-line with historical trends.

In order to use the index, you look for outlying plots above or below historic levels. When the index is too high, prices will drop, or rents will increase to balance the value between the two. When the index is too low, prices will increase, or rents will drop. Afterall, the value of a home is typically tied to the rental yield it can command. The index captures how it changes compared to historically accepted levels.

Vancouver House Price-To-Rent Index…For Condos

We covered a national House Price-To-Rent Index a few days ago, but that’s only helpful for the broad market. Who really cares if condos in Moncton are overpriced, am I right? Well, people in Moncton maybe, but it’s not all that useful if you live in Vancouver. Unfortunately, a breakdown doesn’t exist in Canada – darn.

Don’t worry, we built one. Ahead of launching our data centre this fall, we thought we would run you through one of our micro-indexes. This one in particular is a House Price-To-Rent Index for Vancouver condos. It plots how far-fetched condo prices and rents became over the past decade. You’re welcome.

Condos Are 9% Overpriced Relative To Rent

Vancouver’s condo market is pricey, but how overpriced is a point of debate. Our House Price-To-Rent Index for Vancouver condos shows we’re currently at 109.76. This means the price of condos could come down ~8.89% to achieve balance. If you look at the chart, you’ll see this is much more in line than previous recent years. Did prices come down? Not exactly, they balanced the other way.

Index(2008=100). Source: Better Dwelling.

Rents Could Rise Over 9%

The other way the market achieves balance is rental price increases. This is how Vancouver has been bringing the ratio down recently. In this case, the city sees rents rise 9.76%. Normally that would be a difficult thing for the market to absorb, but the province is looking at a 32% increase in minimum wage. This actually makes the possibility of a rent hike that sticks much more realistic. As opposed to raising rents, no one can afford the hike, and they come down.

There’s a few things to note about using an index like this. How the market chooses to balance itself, and over what timeline is human dependent. This index shows that things will adjust, but we need to apply additional models for it to be useful. Tomorrow I’ll apply a basic predictive analytics model, like the one we used yesterday on national prices. This will give us a idea of where these numbers are heading.

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