# Canadian Real Estate Market Valuation "Index?"



## Justin1980 (Feb 23, 2013)

Good morning friends. 

Let's see if im able to word my question properly...

A bit about my situation:
I just turned 34, and I bought my home 6 years ago in kanata (near Ottawa) for $230K.
I still owe around $158K
I've done a bit of renovating and had two real estate agents in and they've said they would list it around $308K. I feel that's a bit high and that it's worth closer to $295K - $300K.

My fiancee and I are looking to move from Kanata, to Victoria, BC. Since we don't know the area well, we'd like to rent for a year or so while we familiarize ourselves with the city to find a suitable neighborhood and home to purchase.

Im hardly a real estate expert, but from what I've read, the Canadian real estate market "appears" to be overvalued. What we'd like to do, is sell our home in kanata prior to moving, and invest that money while renting in Victoria (for not too too long), and hoping for a decent correction at which point we'd buy again.

Im sure there's a lot of people doing this, and have been waiting and wasting money on rent for a few years. Kind of like trying to time the stock market, not gonna happen.

But we're in a position where we have to rent for a year or two, so what im asking you all, is, is there a way, or an index of some sort that depicts the relative strength, or level of over/undervaluation that could be monitored to see when the market is generally undervalued?

The best i've found is here: http://crea.ca/statistics which basically allows one to compare avg new home purchase price against previous points in history.

Any other advice you might be able to share with me?

Thank you all kindly, in advance, 

~ Justin


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## Pluto (Sep 12, 2013)

Justin1980 said:


> Good morning friends.
> 
> Let's see if im able to word my question properly...
> 
> ...


Look for the local real estate board statistics. So Google Victoria real estate board, and look for their stats page.


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## andrewf (Mar 1, 2010)

Teranet House Price index.

http://www.housepriceindex.ca/


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## nobleea (Oct 11, 2013)

I think market corrections happen a bit slower than stock market corrections. So it could take a couple years for things to even out.
How would you invest it? Stocks aren't exactly cheap either.


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## sags (May 15, 2010)

From what I have been reading on Garth Turner's blog...........the prices in BC have been declining for some time.

I would suggest reading some of the articles on his blog, where he gives actual numbers for the area.

www.greaterfool.ca


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## Potato (Apr 3, 2009)

The best and simplest index is to simply look at the price-to-rent for the kind of home you want to live in, because that's what's going to matter for your situation. Compare apples-to-apples; if the price is more than about 200X the rent, then keep on renting; between about 175X and 200X and it's sketchy but you may not be burned too bad by buying; under 150X and maybe you should read up on buying more as an investment.


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## NotMe (Jan 10, 2011)

Potato said:


> The best and simplest index is to simply look at the price-to-rent for the kind of home you want to live in, because that's what's going to matter for your situation. Compare apples-to-apples; if the price is more than about 200X the rent, then keep on renting; between about 175X and 200X and it's sketchy but you may not be burned too bad by buying; under 150X and maybe you should read up on buying more as an investment.


So a house that rents for $2,500 should be for sale for $500,000.

I don't think you're going to find that in any part of Toronto you'd want to live in. Maybe that's your point, and I personally would recommend renting over owning at the prices wer'e at now, but I do wonder when/where that 200 rule came from.


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## marina628 (Dec 14, 2010)

I was browsing viewit.ca for some condos then going to mls ,it seems a $500,000 condo rents for about $1600 these days.


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## kcowan (Jul 1, 2010)

Extracted from the Teranet data is this









The index is based upon 2003 local prices and is based on actual sales data (a la Case-Schiller) rather than usually inflated RE numbers.


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## Potato (Apr 3, 2009)

NotMe said:


> So a house that rents for $2,500 should be for sale for $500,000.
> 
> I don't think you're going to find that in any part of Toronto you'd want to live in. Maybe that's your point, and I personally would recommend renting over owning at the prices wer'e at now, but I do wonder when/where that 200 rule came from.


Yep, that's the whole point!

I went through the whole derivation years ago, but basically look at the total cost of ownership, then look to rent when rent is less than that. So to do the quick 'n dirty derivation:
Interest/opportunity cost: 3.25% [this may be optimistic]
Property tax: 0.8%
Maintenance: 1%
Insurance: 0.25%
Transaction fees: ~8% spread over ~10 years so ~0.8%
Total: ~6.1%, therefore break-even is when annual rent is 0.061 of price, so monthly rent is 1/12 of that. Then invert to get price as a multiple of rent: ~197X. Round off to 200X for the sake of even numbers.


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## NotMe (Jan 10, 2011)

Potato said:


> Yep, that's the whole point!
> 
> I went through the whole derivation years ago, but basically look at the total cost of ownership, then look to rent when rent is less than that. So to do the quick 'n dirty derivation:
> Interest/opportunity cost: 3.25% [this may be optimistic]
> ...


Interesting analysis. I don't agree with the 1% of purcahse price for maintenance (I don't get how a 1200sq.ft house valued at $1M costs more to maintain than a 2500 sqft house in Oshawa valued at $300,000) but otherwise pretty good.

A quick check on mls for houses to rent (full houses, not basements or floors) looks like it costs around $3850/month. That x200 = $770K which is getting pretty close to the purchase price for a starter house in TO. Not that that isn't depressing.


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## Just a Guy (Mar 27, 2012)

I wouldn't touch a rental place that generated these returns...in an inflated market, you'll be killed if you bought a 770k place that only generated $3850/month. Now, had you bout the place 10 years ago for $385k, and you could rent it today for $3850/month (with it having appreciated to 770k) that may be different (but it wouldn't have rented for 3850 ten years ago), but if you do it today, you'll lose your shirt.

When the prices are this high, you'll want to buy a rental that can rent for 1% of the purchase price to protect you when the market corrects...the people who charge low rents vs. the price of homes have owned the property for many years and have significant equity in them. That's when they become cash machines pumping out steady returns, in the first 10-15 years they don't make huge profits...real estate is a long term game, not a get rich quick scheme.

That's why it takes hours to play monopoly, vs about a minute to play a hand of poker.


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## Woz (Sep 5, 2013)

That analysis also highlights the impact interest rates have on property value. If interest rates go up 1% then the break-even becomes 7.1% for a price to rent of 169. 169/197-1 = -14%, so prices would need to decrease 14% if interest rates were to go up 1%.


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## Just a Guy (Mar 27, 2012)

The problem is, that if interest rates go up, your purchased price doesn't come down when the mortgage comes up for renewal. You buy today for 770, in 5 years your principle is nearly the same, yet you'll need the principle to have decreased 14%...the game doesn't work like that.

You have to look ahead 5-10 years in real estate...if not longer. What looks good today can kill you at renewal time.


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