House Prices Are Rising…But What Does This Really Mean?

I’m often amazed at how the housing market is reported in the news media. Not for what is reported, but for what isn’t. Read any business news site or paper, and you wouldn’t know that one-third of Canadians do not own a home, and instead pay rent as a tenant. For investors and managers in the rental housing industry, there is a surprising lack of business news about the rental housing sector and its $20 billion GDP impact (in Ontario alone).

That being said, house prices are an extremely important economic indicator, and deserve far greater attention than the simple sports-score style reporting on the MLS price index.

We hold a lot of our wealth in real estate

As pointed out by Bank of Canada President Stephen Poloz in a recent speech, Canadians hold a lot of their wealth in real estate. Real estate assets counted for 40% of total wealth in 2012, compared to just 32% in 1999. The Bank of Canada confirms that housing is seen as a safe and attractive investment. And importantly, it is the price of purchasing a home that has one of the biggest impacts on the rental housing market.

Home-ownership housing and rental housing are not mutually exclusive – they are tightly tied together. All we need to know about the outlook for rental housing vacancy rates and rent growth we can learn by looking at house prices.

Wonder where rents and vacancies are headed?  Look to house prices…

One of the best indicators we have to judge the outlook for the housing market is courtesy of the Bank of Canada, who smartly took over 60 years of Statistics Canada data on the prices of owned-accommodation and rented accommodation, and compared the two.  The comparison shows a fascinating story that explains past cycles we have seen in house prices and rents in Canada.

As shown in the resulting chart, not only have house prices recently climbed (as widely reported in the business news), but house prices have climbed significantly compared to monthly rents for apartments. For the past ten years, the cost of owning a home (including mortgage, taxes and repairs) has been far greater than the long-term average ratio of rental costs (including monthly rent, taxes and insurance). More households are now turning to renting as house prices climb out of reach.

The key take-away here is that house prices are rising, but that alone does not tell us much. It is the comparison of the price of owning versus renting that tells us the most about the outlook for the housing market and long-term positive demand for rental apartments.

Written By: Mike Chopowick, Federation of Rental-housing Providers of Ontario (FRPO)

Interest(s): Property Date: November 24, 2014