Historical Prices Rental Market

Rents and Incomes

Again I apologize for the lack of updates, but as I’ve said, I am swamped with actual work, so blogging has taken a back seat… and unfortunately there is no end in sight just yet, so, it is what it is.

I seem to be getting a lot of e-mail from people who have recently bought for some reason, often accompanied by a series of calculations of why it was a good idea. They seem to be looking for some kind of validation, so I say I’m happy for them and wish them luck.

They then reply saying that they though I was against buying now… to which I reply, I am, the fundamentals of the market are extremely poor, and as such they are exposing themselves to a great deal of market risk all for very little potential upside, that their calculations are flawed (and how)… but that it’s their money, and if they’re happy with their purchase that’s all that should matter to them.

Most don’t respond again after that point, though the one that did, did so with a very succinct “Fuck you”… not terribly clever, but I do appreciate brevity. I guess this must be just a small taste of what Garth Turner gets on a daily basis over on his blog.

Anywho, enough of the self-aggrandizement. Today I’m going to take a look at the relationship between rents and incomes in Edmonton. Just recently Statcan came out with their most recent Survey of Labour and Income Dynamics. Notably because as far as I can tell it’s the only freely available source of historical market incomes in Canada. Unfortunately data is a year or two behind, but beggars can’t be choosers. Here is a look at the household median numbers for Edmonton through 2007, real (inflation adjusted to 2009 dollars) and nominal.

Not surprisingly it was up over 2006, but not as far as many figured it would be. In inflation adjusted dollars it was up 5.3% year-over-year (from $62,750 to $66,100)… which would normally be quite impressive, but many had been prophetized these would be in the 10% range year-over-year (and even then it wasn’t nearly keeping pace with home prices).

It should be noted, average household incomes actually were up by over 10%… jumping from $76,875 to $86,150 (a 12.1% increase). But, as most know, average isn’t a great measure (as it tend to skew significantly), especially when the median is available. So, as per usual, we’ll be sticking with the median whenever possible.

Getting back to the graph, it is worth noting that this is by far the highest real incomes ever seen in Edmonton. Historically they generally have resided in the $50,000-$60,000 range, and as of this measure they’ve eclipsed the $65,000 mark for the first time ever.

Going forward it will be interesting to what happens to incomes… depending on the methodology and timing of when the survey was done, and how it corresponded with that little economic hiccup that hit in the fall. So, if incomes don’t drop for the 2008 SLID, I’d imagine they’ll take a big hit by time the 2009 numbers come out… but we are a year and two away respectively from knowing those.

Here we have the nominal incomes and average 2 bedrooms rents charted out…and before you say, ‘but, but, but I thought you said averages suck?’ They do, but this is one of those cases where it’s the best measure we have, and for what it’s worth, in the case of rents it probably doesn’t tend to get skewed nearly as bad as averages for items like income would.

One would expect them to chart a similar pattern, and they appear to, but that could just be me cooking the scaling, so here’s a scatter plot.

Unfortunately with rents only going back to 1990, this isn’t a major sampling, but they do appear to follow a general pattern and the R2 value is fairly significant at 0.8955. There are a few plots that are off a bit, but they’re all in the general area.

I didn’t find either of these graphs to be overly relatable though, so I devised another measure to graph out.

This is rent as a percentage of gross (before tax) income. Whether you want to think of it as monthly or yearly, the number remains the same. From 1990-2007, the average was 16.20% and the median 16.17%. So, for every $100 a person was paid, they would pay about $16.20 in rent.

As we can see there are three quite noticeable spikes. In 1992, 2002 and 2007… ’92 being the highest, when it was over 18.5%. Going back to the first and second graphs, we can explain those spikes in ’92 and ’02. as a result of very noticeable and sharp drops in income… which looking at the general trend I would chalk up to aberrations in the survey results, thus incomes were probably reported a bit lower then they really were.

Incomes likely were dropping at those times, there were significant recessions those years, but I just suspect they didn’t drop to the degree witnessed in the data. There does appear to be a fair bit of fluctuation in the numbers over the life of the SLID, so the incomes have made a very jagged pattern as many of the spikes are probably largely due to over/under-reporting, and it’s really more the overall trend to pay attention to. So when the numbers on either side are relatively close, but the one in the middle is way high/low, it’s probably largely an aberration.

It is interesting to note that for 2007 though, incomes were actually up a fair bit, yet rents increased even more. So this is very unlike the other two spikes, as this one was rooted in a disproportionate hike in rent. This will only become more evident when the 2008 numbers come out, as there was another big rent hike that year.

Using the long term average/median of 16.2%, and guesstimating a continued growth of incomes to $70,000 that would suggest rents in the $950 territory… while as we discussed last week, currently rents are around $1050 currently, though the rental market is becoming increasing soft here, and decreases have already been witnessed in Calgary.

Time will tell, but for now at least it appears that first real estate prices broke from incomes, then rents did, and they now both appear to be higher then market incomes would suggest they should be. It’ll be interesting to see how it all plays out.

Anyway, I don’t think there is anything ground breaking in this data, but it is good food for thought. If you have any questions or comments, fire away!

Rental Market

Rental market update

Sorry I couldn’t get to this sooner, but June has been a busy month for me. Kind of doubting I’ll be able to get in as many posts as I would like this month, so instead of posting tripe, I’ll try to focus on quality instead of quantity.

After reading that last line, the girlfriend just laughed so hard she snorted, and said “not in the bedroom,” really snide like. What could she possibly have meant by that?!

Anyway, CMHC released their spring rental market updates for the provinces this week. They just started doing these spring releases last year, and it’s not as detailed as their annual reports (comes out in December), but lots of interesting stuff in there anyway.

Lets start with the high profile stat and get it out of the way first, rent.

I actually did a post that covered long term rents just a couple weeks back, and planning on doing another one on rent-to-earnings in the near future, so we won’t go into rent too much.

It’s interesting the 2-bedroom rents have actually continued to go up since October, but the overall average has went down slightly. In Calgary (and Alberta as a whole) rents were down across the board when compared to October.

It also goes against my personal experience, as I’ve seen my rent significantly reduced. Last summer it was actually supposed to go up from $1060 to $1210, but they axed that after sending the notice… then a few months after that I got it reduced down to $900, which is actually less then it was when I first moved into the place (September ’06).

Rents were really taking off at that point, as vacancy rates were virtually nil. At first I figured I could get a decent place for $750-800, but pretty quickly clued in that wasn’t going to happen… ended up getting a 2-bdrm for $910, which actually seemed like a helluva deal three weeks later when I moved in and noticed new tenants were then getting charged $1210.

That advertised rate stayed there for two years, and my rent was getting incrementally increased annually. But as time went on, vacancies in the complex slowly increased, and finally last fall they dropped the advertised rate to $1100, then $1050, and last time I checked it was $999. Established occupants can easily get it below that, even without a lease, as is my case.

As we took a look at in May, price-to-rent ratios are still very high, so it would be very unsettling to real estate prices if rents stopped growing, or even reduced as has been seen in Calgary.

The real estate bulls out there have claimed that rents are just catching up to prices because rents are much stickier then prices, and thus prices really aren’t out of line it’s just lag… but rents reversing course would blow that contention out of the water.

For the rest of this entry I’m going to focus more on another part of the rental market equation, supply and demand. Here we see vacancy rates and that they’re spiked significantly since the fall. There may be some seasonality in the numbers though (last April also seemed to have an unusually high rate), so until we get more spring numbers I think it’s too early to draw any definitive conclusions.

In any case, this will be a number we’ll be keeping an close eye on. That it’s quite high should be no surprise, as anyone even taking a quick look around can see there are tons of rentals on the market, and an ever increasing number of “accidental landlords” joining the ranks (not sure how/if CMHC accounts for them in these surveys).

I also wanted to take a look at more of the hard numbers, so here are the total available apartment rentals. It’s interesting to note that this number actually contracted over 10% from 2003 through 2008 (presumably condo conversions)… all during a time when the population was growing significantly.

This would indicate a big pinch of supply, and that would ring true though the end of 2006, as vacancy rates were at their lowest… though oddly it wasn’t until 2007 that supply started to really contract, all the while vacancy rates were creeping up. This continued through 2008 too, supply kept shrinking, yet vacancy rates kept rising.

We can see why in the occupied stats, obvious these numbers had to be dropping. The number of renters peaked in 2006, and has fallen off significantly since then. This is an interesting observation, as over this time the economy was booming and population growing.

One would assume the rate of renters in a population would stay fairly level, thus when the population grows the number of renters should also grow proportionately… but we saw the reverse.

Thus, I hypothesis that we witnessed an unusually high number of renters became buyers since 2006. Which in many ways would make sense… we experienced record sales tallies, and to do that you need record numbers of first-time-buyers.

This may actually also be something of a troubling realization though, as this would seem to indicate that a significant portion of future first-time-buyers were actually induced to convert earlier then normal, and thus it’s leaving something of a void going forward.

That has been something of a popular theory amongst the bearish, and would seem to be backed up in these findings. Of the renting population there will always be a certain portion that cannot buy for whatever reason, those who could but won’t and then there are those that will eventually buy as they come of age… but when a large number of the latter are induced early it might be great in the short term, but long term it can cause real trouble.

So, while a drop of 7,000 or so over two and a half years may not seem like much in a city the size of Edmonton… but in an average year there is only 16,000 to 20,000 sales in the city, and its those entry level buyers that grease the wheels so to speak.

If they aren’t there, those currently holding entry-lever properties can’t sell and move up-to mid-classed homes… and those people holders can’t sell and move into high-end homes… etc, etc.

One first-time-buyer can spur two, three, even four subsequent sales up the property ladder. Without them, things seize up in a hurry… so any kind of future shortage would have significant consequences.

Historical Prices Rental Market

Price to Rent Ratios

Obviously there are no lack of indicators and ratios out there, we’ve looked at several here over the months. Some in my opinion are fairly useful, like absorption rate… others I feel are as useless as tits on a bull, like sales to new listings.

In any case, today we’ll look at another one… price to rent.

I briefly took a look a historical rents awhile back, but have since came across a better data set (well, same set actually but a longer horizon, and in cases like these, the more data the better). To set the groundwork, here are the rents for Edmonton and Calgary going back to 1990.

The two cities have tracked fairly similar patterns. Rents were relatively stagnant in the early 90′s, then in 1997 they started about a 5 year run up then plateaued again through 2005, after which they again took off. These figures are from October of each year for those curious.

As the name implies, the other part of the price-to-rent ratio is price. Creative name, I know. Anyway, here are the residential averages and condo averages for each city taken from October of each year.

Now our rent variable is that of 2-bedroom apartments, so obviously the condo average would be the better comparison other. So why did I include the residential average, well, it’s because I only had Edmonton condo averages going back to 1999, so I had to do some estimating to fill in the ’90-98 portion.

For the three years, ’99-01, the condo average was generally around 70% of the residential average (FWIW, in recent years that ratio has been closer to 75%). So going backwards, I used that proportionally. As prices were very stagnant over that period I felt that was an acceptable method… but if you disagree, I have also done these ratio’s using the residential average.

No such issue with the Calgary number as I had the full set. It is interesting to note that the Calgary condo numbers track extremely close to the Edmonton residential number. Also of note, the Calgary condo average is usually closer to their residential average (85%) then in Edmonton (as discussed in the prior paragraph). Why is that? I’m not sure, but perhaps condos are more prevalent in that city and thus make up a larger portion of the market.

Here we see the price-to-rent ratio for condo’s to two bedroom apartments in our respective cities (or, in case you didn’t like how I derived this as explained earlier, here is the graph using the residential average to two bedroom apartments, in any case, they yield very similar curves).

How this is calculated is to take the price, then divide it by the monthly rent multiplied by 12 (in other words the amount of rent paid in a year). Interestingly we can see that Calgary generally seems to track 2-3 points higher then Edmonton. So while Calgary prices and rents are both higher then those in Edmonton, their differences are not proportional.

Looking at the trend, through 2001 in both cities the ratios remained relatively consistent… but from ’01 through ’07 they steadily increased at a rate of around 2 points per year. A reflection of the big run up in prices, but interestingly this trend was very much evident long before prices really exploded in 2006.

We can also see the effects of the drop off in price, as the ratios for both cities fell off to the tune of about 4 points in 2008, reflecting the drop off in price while rents continued to go up as evident in the earlier graphs.

Both these upwards and downward movements display how rents are generally more ‘sticky’ then prices, in both directions. This should not be surprising though as sale prices concern only one-off transactions that take place that month, while rents are determined by ongoing agreements/relationships/leases that can be made months or even years earlier.

One of our regular commenters Chris, aka CM, mentioned a good article concerning the price to rent ratios witnessed in many bubble cities in the United States at their peaks. One passage reads.

Throughout the 1970s, ’80s and ’90s, the average rent ratio
nationwide hovered between 10 and 14. In the last few years, though,
it broke through that historical range and hit almost 19 by the time
the housing market peaked, in 2006.And while home prices — and rent ratios — have always been higher on
the coasts, they reached whole new levels recently. In the Washington
area, the ratio went above 20. In Boston, New York, Los Angeles and
south Florida, it topped 25. In Northern California, it approached 35,
higher than it had been in any city, at any point on record.

So it’s interesting to note some of those figures with our findings above. Firstly, that the nationwide ratio in the US was generally between 10-14. This would certainly describe Edmonton’s situation until the run up… and would largely also ring true for Calgary though they were closer to 15, so they were close.

In any case, Calgary would be at the high end, while Edmonton would be right in the mix. So it’s interesting to compare the peaks, Calgary at 25.4, and Edmonton at 22.9. These ratios are very close to those experienced in Boston, NY, LA and south Florida.

While all four of those US cities experienced bubbles, those experienced in LA and south Florida were far more extreme, and both have suffered very badly in the aftermath of the bubbles bursting. This could also indicate trouble for us, as the magnitude of the bubble experienced in Edmonton is much closer to those witnessed in LA and south Florida moreso then Boston and NY… the bubble in Calgary was somewhat in the middle ground, significantly lower then the former two, but much high then the latter.

Thus, our price to rent ratio is another indicator of just who severe a boom we experienced… the question is, how bad will the bust be?

Also just want to do a quick appendices on another measure I found. These are the rented accommodation indexes, and owned accommodation indexes for Edmonton and Calgary.

These are part of StatCan’s Consumer Price Index. Not entirely sure exactly what and how many factors are included in these measures, but all things being equal, I thought they were worth a quick look.

It’s interesting to see how they’ve evolved since 1971. For both cities the two figures have tracked very closely up until 2006 when the rapid run up of real estate prices caused a significant decoupling. Rented actually have largely continued their traditional course, but Owned underwent a massive spike, to a magnitude never witnessed before.

It’s also interesting to note that in both cities in the early 70′s that the Owned index was actually significantly lower then the Rented index.

Forecasts Rental Market Sales

Forecasts ’09 – Part 3 – CHMC

The CMHC pumped out their latest forecast this past week. Cutting through the b.s. and bravado, here’s the pertinent Edmonton prognostications, tabular form for your viewing pleasure.

        2008        2009    Projected     2010       Actual     Forecast    +/- %     Forecast------------------------------------------------------Price     $332,852    $315,000    -5.4%    $325,000------------------------------------------------------Sales       17,369      16,000    -7.9%      17,000------------------------------------------------------Vacancy       2.4%        3.5%    +0.9%------------------------------------------------------Avg Rent    $1,034      $1,070    +3.5%------------------------------------------------------

A little rosy in my not so humble opinion, as prices already are in that $315,000 territory, and February doesn’t appear to be shaping up to be delivering any increases. The numbers are conceivable I suppose, though I’d be completely stunned to see rents go up, especially when they’re even acknowledging the increased vacancy rate. We’ve already been seeing 10-20% cuts as well as ‘free months’ and other promotions from the big players in the rental game.

The Edmonton Journal pumped this so-called recovery, front page of the Friday ‘Business’ section no less. Though I suppose one shouldn’t be surprised considering the Homes and New Condos sections posing as legitimate, when they’re really just de-facto paid advertisements. Seems all to many of these so called experts are merely those with a vested interest in selling real estate. Sadly we’ve seen this increasingly across all fronts and media though, legitimate journalism has increasingly taken a back seat to the advertisers

Anyway, for some context here is a look at CMHC’s forecast issued this time last year, against how it actually played out.

        2007        2008        2008       Actual     Forecast     Actual   Difference------------------------------------------------------Price     $338,636    $355,000    $332,582    -6.7%------------------------------------------------------Sales       20,427      19,250      17,369   -10.8%------------------------------------------------------Vacancy       1.5%        2.0%        2.4%    -0.4%------------------------------------------------------Avg Rent      $958      $1,050      $1,034    -1.4%------------------------------------------------------

They did pretty well on the rental front, but were off in a big way on the resale market. Seems they’re suffering from the same fallacy as most others in the sector and believing that the run up was the result of an efficient market and not just a bubble caused by easy credit and over-consumption.

I guess we’ll find out in the next 24 months.

Rental Market

The Rental Market

I thought I’d take a quick look at another part of the housing market that I haven’t really discussed as of yet, and examine what’s happened to the rental market in Edmonton in the last few years.

Much like the rest of real estate in the city, the rental market saw rather explosive increases in unit costs. A run of the mill two-bedroom apartment that went for $600 a month in 2000, has shot up to over $1000 a month today. Most of that increase came in ’06 and ’07, when much like the resale market we experienced very high demand and low supply, resulting in a negligible vacancy rate… thus providing all the fuel needed to greatly increase prices.

As the above chart shows, through 2005 the average rent (including apartments and row houses) was quite stable while the vacancy rates were above 3%… but come 2006 when the economy really started to heat up suddenly the vacancy rate plummeted down to about 1% and that triggered a big increase in rents.

Even as vacancy rates started to creep back up, the average rent continued to increase in 2008. This probably due to long term tenants getting more gradual annual hikes, to get them in line with when new tenants were paying. The major hikes really started hitting in summer ’06 but it took a couple years for those to make their way to pre-existing tenants in full.

Also during this period we saw a number of building operators attempting to cash in on the hot real estate market and do condo conversions.

At the peak in 2003, there were 75,597 rental units available in the metro Edmonton area, and since then we have lost 7,690, over 10%. Most of these were just in the last two years, 6,639 to be exact. With a growing population, many of which were people coming here and working at lower end jobs, this obviously caused a big pinch.

Not to bore you with numbers, but just to give you an couple examples, the average monthly rent for all units has went from $678 in 2001, to $956 in 2008, up 59%. And since 1 & 2 bedroom apartments make up 3/4 of available units, I should mention those specifically. One bedrooms have went from $489 to $847 (up 73%) and two bedrooms from $601 to $1034 (up 72%)

So while the increases in the rental market were not quite of the magnitude of those experienced by the resale market, they were quite significant in their own right.

What the future holds for the rental market should also be pretty interesting. Vacancy rates appear to be on the way up, and we’re already hearing of complexes lowering rates, as well as offering all kinds of incentives… stuff we haven’t seen for some time. Add to that the influx of accidental landlords that have resulted from all the speculation in resale and presale markets, and we have a buyers market for renters as well.