Using the Organisation for Economic Co-operation and Development (OECD) House Price-To-Rent Index and a linear regression model yields the possibility of a 28-per-cent decrease in Canadian home prices by 2020, according to Better Dwelling co-founder and analytics/data guru Stephen Punwasi.
“The House Price-To-Rent Index is a measure that compares the cost of ownership to the price of renting,” Punwasi said. “Rent is a pretty good indicator of value, especially in large cities. If you’re thinking but ‘I’m not going to rent the property out!,’ think of yourself as your own tenant.”
“When the index shows a breakaway from the norm, home prices will come down or rents will come up. Rents are limited to income growth of the population however, so it’s hard to raise rent quickly. It happens, but it’s less likely unless the rest of the economy is in hyperdrive and pay is quickly rising.”
Punwasi clarified that this does not necessarily mean that there will be a 28% decline in sticker value.
“Inflation will likely decrease the value of money, and reduce the drop by 2% per year if the Bank of Canada can consistently hit their target going forward. It is a pretty big drop, but not a lot of people could have predicted the big climb either.”
And a price crash is not the only possibility in the horizon, of course.
“[Rents] can soar. If rents increase by 39% by 2020, we once again have a balanced market. This is less likely due to the fact that rent increases are tied to income increases, but it could happen. More likely a combination of the two will occur to help balance things out.”
Better Dwelling’s fuller explanation of the model can be viewed here
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Taking the long view in the ever-shifting sands of the Canadian real estate segment might appear counterintuitive, but a markets observer argued that a bit more information about how the future might shape up is never a bad thing.