For over a decade, the articles, commentary and analysis focusing on the Toronto and Vancouver housing markets have addressed high levels of mortgage debt, speculative investors, foreign buyers and the inevitable unfolding of the markets when interest rates inevitably rise. It has been hypothesized that the unraveling of these major housing markets will inflict pain on the entire Canadian economy.
Should we keep waiting another 10 years for this scenario to play out, or should we come up with new explanations for what is happening in the Toronto and Vancouver housing markets?
Perhaps the biggest problem is a comparison problem. When you go out shopping for anything, you compare the price of the item you want to the price you paid before, or you compare the price to a similar item whose price you know.
You check out a couple of different stores in the mall, perhaps you go online or head south of the border to an outlet store -- you'll get a pretty good idea if something is a deal or if it's overpriced.
The same applies to house prices. If you paid $400,000 for a condo downtown, does it makes sense to pay $500,000 for a bigger unit up the street, or $700,000 for a house in the suburbs? You might even contemplate moving out of the metro area altogether to a smaller city or town a couple of hours away, because you know the prices are 40 per cent lower.
This method of comparison was valid when Toronto and Vancouver were second-tier global cities. But that has changed. These markets have ascended to the ranks of world-class cities. One way to identify a global city is to review their price-to-rent and price-to-income ratios. The higher these ratios are, the greater the likelihood that the area is attracting foreign dollars and disrupting the relationship between these variables.
Rents are typically constrained by the incomes of local renters, while prices are not, as foreign capital snatches up homes to keep as vacation properties or to rent to relatives at a discounted price. In addition, desirable places like Toronto and Vancouver build brand new luxury properties, areas gentrify quickly and existing properties are renovated and resold at much higher prices.
Some owners of rental older properties do few improvements and see less rapid rental growth, but they envision simply selling their property for the next big condo project. Income numbers skew low as local residents sell to affluent local buyers with business (and not personal) income or foreign buyers that don't report their salaries in Canada.
All of these extreme factors become greater and more influential in global markets, rental rates and incomes appear lower than they should be, and prices skew higher.
I looked at data from Numbeo -- a website that collects cost-of-living data from cities across the planet -- to observe 10 major markets: Hong Kong, London, Moscow, New York, Paris, San Francisco, Sydney, Toronto, Tokyo and Vancouver. According to this analysis, Canada's two top markets just cracked the top 10 for price-to-rent, ranking eighth and ninth when measuring ownership apartment prices to one- and three-bedroom city centre rents.
It makes much more sense to compare Toronto and Vancouver to these global markets, rather than to Saskatoon, Sherbrooke, or Halifax -- or even the average Canadian price overall.
In fact, when you use Numbeo to compare the prices of downtown ownership apartments, the $692 per-square-foot (PSF) Toronto price and $770 PSF Vancouver price look like bargains in comparison to these prices: $2,419 PSF in New York, $3,167 PSF in London and $3,297 PSF in Hong Kong.
When you factor in the decline of the Canadian dollar, it suddenly appears as if Toronto and Vancouver have just gone on sale -- watch out for global bargain hunters.
So, maybe high price-to-rent and price-to-income ratios don't signal overvaluation, an overabundance of property speculation, or impending doom. Perhaps they actually signal the ascension of Toronto and Vancouver into the highest of global ranks.
This revelation won't make you feel any better if you're in an affordability crunch, but may give prospective homebuyers on the fence some comfort that these markets are viewed by international investors as global destinations with long-term value, so their home price won't crash.
With each successive ranking from a major publication that puts Toronto and Vancouver as top cities to live in the world, foreign investors compare the value of real estate in Canada's major markets to theirs, and see great value.
They see undervalued -- not overvalued -- markets, and conclude that Toronto and Vancouver housing prices are not high.
Do you agree?
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