The topic of real estate overvaluation has been a hot one over the past week - pretty much ever since the big banks tweaked their real estate forecasts.
CIBC is the most recent bank to sing a different tune when it comes to real estate appreciation across the country, arguing that approximately 17% of homes are overvalued, and Canadians can expect a 5-10% price drop in the coming year or two.
Real estate markets across the country have been hot for over a decade, so this concept of overvaluation makes sense. To see if your home is one that 17%, you may want to employ a tool from the stock market.
When analyzing stock, investors look at its price-to-earnings ratio, which is a comparison of a company's share price with its annual profit. The higher the ratio, the more expensive a stock is relative to its underlying value.
Houses are similar in this regard - but instead of earnings, you have to look at the going rental rate in the area. Take the rental rate, multiply it by 12 (to get the annual cost) and divide your home's going price by that number. If you get a number that's higher than 20, your house is overvalued.
As an example, we employed this method to apply to a one-bedroom condo across three cities. To find the going purchase price, we visited www.mls.ca. To find the going rental rate, we visited www.craigslist.org. Where possible, we tried to find units in the same building or at least the same street. Keep in mind that just because one of the examples is overvalued doesn't mean every home in that city is. Prices can be escalating in a certain area of a certain city, but as long as rents are keeping up with them, chances are they're not overvalued.
Example 1: Toronto
Purchase Price: $325,000
Rental Rate: $1500/mo (x 12 = 18,000/yr)
Ratio: 18.05
Example 2: Edmonton
Purchase Price: $204,500
Rental Rate: $800
Ratio: 21.3
Example 3: Vancouver
Purchase Price: $369,800
Rental Rate: $1175/mo
Ratio: 26.22
Interesting to Compare the numbers on a national basis Thank you Marcy
ReplyDeleteDavid Pylyp
Living in Toronto
We don't notice that we are paying too much in rent. Try to analyze your budget for rent and compare it with those who pay for their own house. Imagine, when you're renting a house, you're like paying an amortization for it. It is still wise that you pay for owning a house. Actually, it is not a problem if you want to buy your own house. As for me, I'll be moving soon to Edmonton. My option for now is to avail of a mortgage broker in Edmonton. Before I signed a contract with my mortgage broker, I asked questions about their loan services and read their company profile. Actually, I had a fairly difficult time choosing among the mortgage companies in Edmonton, but then, I found a good one. I want to recommend this blog post, so that people concerned with this topic will be informed.
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