Calgary House Prices VS Rents

A Canadian real estate report released this week from Euro Pacific Canada, the Toronto-based branch of the global brokerage headed by Peter Schiff,  took a  look at housing prices in relation to rental costs.

The report stated:

It could be expected that when house prices rise significantly beyond the cost of renting an equivalent dwelling, people would choose to rent rather than own – but that is not always the case.

The drop in demand would put a downward price pressure on real estate, maintaining an equilibrium between growth in rents and growth in house prices. Home prices are typically tethered to growth in rents when analyzing trends across most of Canada and over long time periods.

When examining the growth in house prices and rents in cities across Canada this is no longer clearly seen. Using a rental index created from CMHC rental data it is possible to see how closely rents and prices track each other in most cities. However since the early 2000`s this relation has disappeared. This can be seen clearly in the regions of Vancouver, Calgary, Toronto and Montreal when comparing the CMHC rental index to CREA house prices.

Change in nominal home prices vs. the change in nominal rents since 1983 (Source: Euro Pacific Canada, Click to enlarge image)

Dan Simon, an investment consultant for Euro Pacific Canada, says, “I definitely feel that there will be a correction in the Canadian housing market.” Simon predicts that average prices could drop by between 20-30% — pointing to the disconnect between house prices and rents in major Canadian cities as a prime indicator of this coming crash.

But not all economists agree with him. From the HuffingtonPost:

Aron Gampel, deputy chief economist for Scotiabank says regulators are taking strides to avoid a significant correction in housing prices, which could not occur without a significant “trigger,” such as a rapid rise in interest rates, an unlikely scenario.

“The U.S. correction, and ones we’ve seen in other countries occurred during a recession. It was triggered by a financial crisis when the market was already in correction mode,” he said.

“We still have fairly vibrant housing markets here, because the economy is still moving ahead, and we’re still adding jobs, we’re still generating income gains. So I don’t see signs here to expect a significant correction of that magnitude.”

Gampel predicts that prices will come off by about 10 per cent over the next few years, driven by the erosion in affordability in markets like Vancouver and Toronto.

To read the summary or to download the entire report, click here

Change in nominal home prices vs. the change in nominal rents since 1983 (Source: Euro Pacific Canada, Click to enlarge image)

8 responses to “Calgary House Prices VS Rents

  1. From RBC’s Housing Trends & Affordability August 2012 report:

    Calgary – Enjoying the best of all worlds
    The Calgary-area market enjoyed the best of all worlds recently: stronger home resales and home building, moderately rising prices, and attractive and improving affordability. Such a combination is a rare feat, but it follows years of sluggish performance in the aftermath of the area’s mid-2000s boom.

    In the second quarter of 2012, a sharp drop in the costs of utilities provided unusual help to affordability in the area. Utilities and property taxes—two small components of homeownership costs—typically do not sway affordability, but the sudden reversal of earlier electricity rate increases led to a substantial 17% quarterly decline in utilities, which was more than enough to move the affordability needle.

    In the second quarter, the RBC measures edged lower for condominium apartments and two-storey homes by 0.6 percentage points and 0.4 percentage points, respectively, while the measure for detached bungalows was unchanged. Such general amelioration kept housing affordability in check at some of the better levels among Canada’s largest cities

  2. Further to the above report, the infographic below shows that – by comparison – Calgary is sitting pretty.

    Source: Macleans

  3. never read a bad blog here anymore…or any realtors site….wonder why that is?? lol

  4. Hi Cory, can you explain what you mean by you “never read a bad blog here anymore”?

  5. I think he’s saying “The bears have gone into hibernation.”.

  6. Very interesting infograph. Alberta’s Q2 afortability at 32% is the only province below it’s ‘Historical Average since 1985’

  7. Mike,
    Keep up the good ‘impartial’ opinions and facts.
    Although i may not 100% agree with you all the time (but most of the time i do), i appreciate your feedback whether you see the calgary/Ab housing market improving or weakening.
    I prefer to read about open mindedness Vs a stubborn hardline on opinion.
    Still sitting on the next egg of investments though…1-2 more years can’t hurt to see how this all plays out.

  8. Thanks Koz, I appreciate your comments! While it’s certainly difficult to be unbiased with regards to real estate, I will continue to provide many differing viewpoints and analysis so that you and others can make informed decisions.

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