Saskatoon housing affordability deteriorated again in 2008: Demographia
Some call it a report on the obvious, while others see it as big news.
No matter how you view the Frontier Centre for Public Policy’s International Housing Affordability Survey, you’d be hard pressed to make a convincing argument that housing affordability hasn’t suffered a serious blow in Saskatoon over the past couple of years. In fact, you’d have to be a fool to even try. When the average selling price of a home nearly doubles in two years time you’re going to see some pretty serious deterioration in affordability. Most of us didn’t need an “international study” to tell us that the cost of home ownership has skyrocketed here but some might be a bit surprised to learn that no other city in Canada has seen affordability deteriorate to the same extent as Saskatoon. According to the study, Saskatoon is now among the ranks of the “seriously unaffordable.”
I suppose the greatest value of this kind of study, if you feel you can trust the methodology and actual statistics, is that it provides a bit of a benchmark as to how we’re doing locally compared to other markets around the world. The Demographia study looks at 265 housing markets and determines housing affordability for each assigning a “median multiplier” as its affordability measure. The “median multiplier” shows you how many years of median household income it takes to buy a home priced at the median in each market. We’re not quite sure which median income measure was used, or how a “house” is actually defined, but let’s assume that these measures are consistent from one survey to the next and see how things have changed in relation to some other Canadian markets. Here’s a quick look at the changes over the last three survey periods.
Recent price declines would suggest that Saskatoon might have already bottomed out as far as affordability is concerned, at least for now. I haven’t been able to make sense of the “median price” that the Demographia study has used for Saskatoon, but I can say with certainty that the median price of a Saskatoon house has been $21,250 lower over the past 90 days compared to the third quarter of 2008, the period that is measured for the study. It’s down $38,000 from its peak in Q2 when the median price of a Saskatoon house hit $315,000. Things are starting to look up for affordability. With any luck, we’ll be back in the “moderately unaffordable” category soon, and even that has a nice ring to it right now.
See the latest Demographia Affordability Study here
A copy of the 2008 study is here (data from Q3/07)
A copy of the 2007 study is here (data from Q3/06)
See the Star Phoenix story on this study here
And another Star Phoenix story here
I’m always happy to answer your Saskatoon real estate questions. All of my contact info is here. Please feel free to call or email.
Norm Fisher
Royal LePage Saskatoon Real Estate
19 comments so far. We'd love to hear your thoughts.
April 20th, 2009 at 11:48 AM
Norm,
Just wanted to say we saw that report and it was nice to see Edmonton down lower in the affordability side of things. btw, we love reading your blog. Keep up the awesome work. We know how much effort you put into it.
Sheldon Johnston
April 20th, 2009 at 11:49 AM
Thanks for the Frontier Centre report – when someone tries to encapsulate the whole world in a report it would be not be accurate for any one individual location. I would trust the collected local knowledge contained on a board such as this over the world report when trying to make an actual purchase decision. But it is good for comparison purposes.
On another topic, I hope you don’t mind if I try to pick the minds of the contributors here regarding house/rent ratios. I have read that a house/price ratio should be calculated as the value of a house divided by the yearly rent. So where does Saskatoon stack up in terms of house/rent ratio? If the average nice 3br 1100 sqft house in Saskatoon is worth about $290,000 these days, then it should rent for about $1200 per month if you use a house/rent ratio of 20 as a guideline. My gut tells me that I could not find such a house in Saskatoon for that rent – probably more like $1500 per month which is a ratio of 16. Did I do the calculation correctly? And what does this information tell us? If I want to rent out a reasonably nice 3br house in Saskatoon (I don’t by the way), what is a reasonable rent to ask that is rationally related to the value of the house?
Thanks for your responses…
Daniel
April 20th, 2009 at 11:49 AM
Daniel, I’ve always used a similar rule (5% of the value of the home, which is the same as the ratio of 20). And yes, you’re correct that it *should* rent for around $1,200. However, while we don’t have an acute rental shortage, the vacancy rate still isn’t anywhere near as good as it used to be, IMHO. In answer to your question, though, I would think a (newer) 3-bedroom house in a nice area with landscaping, fenced yard and basement development would fetch $1,500-$1,650 plus utilities (sometimes a bit more with allowing small pets).
I would check out saskatoon.kijiji.ca under “House Rentals” and that will might give you a good range of properties and what they’re renting for.
April 20th, 2009 at 11:54 AM
Sheldon,
Thanks for stopping. I also enjoy keeping in touch with you and Sara through your excellent Edmonton Real Estate Blog. Hope you’re both having a good time in Banff.
Daniel,
This report is probably more or less accurate for Saskatoon. I mean, the multiplier could be played with I’m sure, but the price of a house did nearly double over two years. It should be no surprise that the “years of income” required to buy a home nearly doubled as well.
Daniel and Jason,
An annual rent of 5% of value is going to be running in a major negative cash position for a long, long time. Take out some tax and maintenance cost, and the odd vacancy and your money is far better off in an ING saving account.
April 20th, 2009 at 11:55 AM
Historically, the price-rent ratio has hovered around 15. I have lots of data from the US, but I have not found much information about the Canadian picture. This is from 2007 and will come as no surprise to anyone here:
http://tinyurl.com/be99vq
“Saskatoon, Saskatchwan has seen soaring house prices and price-to-rent ratios in the last year. “The sudden and steep acceleration in price-to-rent ratios coincides with the sharpest deterioration in affordability on record,” says the Goldbloom. “More expensive conditions already appear to be pricing people out of the market. Fifty per cent price gains are starting to weigh on demand and softer demand should feed through to cooler price gains ahead.”
April 20th, 2009 at 11:56 AM
Interesting study! Looking at these numbers (but without reading the report), Saskatoon’s market really was undervalued two years ago. Perhaps we’ve overcorrected now, but with prices starting to soften a bit, we’ll probably settle in at a reasonable median price compared to median income. With incomes continuing to rise in Saskatchewan, plus all the infrastructure dollars flowing to pay for upcoming construction jobs, I suspect there will be some support for current prices.
April 20th, 2009 at 11:56 AM
Crikey,
Thanks for the link.
I have seen “price to rent ratios” expressed in different ways including this one on Garth Turner’s site which suggests that historically, 100 times monthly rent = value. His graph suggests that “values” are currently running about 185 times monthly rent in Canada.
http://www.greaterfool.ca/2008/11/16/global-price-to-rent-ratio/
In the RBC report you’ve posted, the price to rent ratio is measured on the left hand side of the graph in measures from .5 to 3. Do you get what’s going on there? Perhaps it’s to early for me on a Sunday am but it’s just not clicking. Help a guy out here.
April 20th, 2009 at 11:57 AM
Like every other number in economics, this price to rent ratio does not mean much by itself. There are so many other factors which affect the price of housing.
Just off the top of my head I would say that interest rates have a very large effect on this ratio. Mortgage rates at 4.5% versus say 10+% in the early 80′s makes a huge difference on affordability and hence the price side of the equation.
I would also think that employment levels and vacancy rates will impact the rent side of the equation. Depending on which way these values go, your ‘rent’ side of the equation can go up or down.
So my point is, you can’t make much sense out of these numbers without predicting which way interest rates and employment levels are going to go.
April 20th, 2009 at 11:57 AM
One thing not to forget about in all of this is how the homes are acutally valuated, or that is grossly overvaluated. RBC uses a mulitplier of 2.85 times household income to suggest a longterm home valuation, therefore if the average household income in Saskatchewan was around $60000 a year (maybe someone has some fresh stats) then the average house should be going for $171000. Bringing this back to the string only supports the facts that housing and rental rates are far above where they should be in terms of afforadability.
April 20th, 2009 at 11:58 AM
“In the RBC report you’ve posted, the price to rent ratio is measured on the left hand side of the graph in measures from .5 to 3. Do you get what’s going on there?”
Numbers-guy to the rescue!
The graph is a ratio of house price-to-rental cost, with both prices and rents indexed to 1988 values. That last part is the key: basically, the author of the study is saying “We’re comparing how things were to 1998″ with the inherent implication that the ratio was ‘correct’ in 1998.
So, for the sake of argument and simplicity, let’s pick some numbers. If it cost $120k in 1988 to buy a house, and that same house would have rented for $800, then the ratio of these two numbers would be 150. That’s the baseline, and the number against which all else will be compared. Now fast forward 10 years: the price of the house has gone up to $250k, but the rent in that same house has only gone up to $1300, then the ratio of these two numbers is approximately 192.
You can see that this number is higher than the 1988 number, but when you divide one by the other you find that it is 1.28 times higher… and *THAT* is the number that is being plotted on the graph.
The good thing about a graph like this is that it gives a nice, simple, pictorial representation of which way things are trending, and that it works in markets that are both up and down. (If the house price stayed flat at $120k, but rent fell to $700, then the comparitive ratio is 1.14) The down side is that in order to achieve this simplicity of form, you give up almost all the actual *data*. What were house prices or rents in 1988, or 1998, or 2008? Unknown. It’s not even possible to know what the comparison between house prices and rents was in any of those years (which is the information Daniel was looking for)… only the fact that it was higher compared to the 1988 number, which is useless for anything other than the purposes of this RBC report.
(That’s probably what RBC wants; they don’t want people to have their actual data, because then they would no longer be the gatekeepers of it. Once it’s out there, people can start making their own charts and comparisons, and if RBC decides in the next report that they want to make a graph like this indexed to 2000 instead of 1988, it’s very difficult to gainsay them or provide counter-facts.)
As always, I hope that helps clear things up.
April 20th, 2009 at 11:58 AM
Bookrat,
Thank you. That was helpful indeed. I didn’t catch the fact that the graphs were displaying percentage change over previous years.
April 20th, 2009 at 11:58 AM
Thank you, Bookrat! I would’ve liked to see the data indexed back farther than 1998, as it was just a few years later that the credit bubble began in earnest (particularly in the US).
Matt,
You’re right, the this ratio will be affected by all of the things that you mentioned, to a greater or lesser degree. The historical ratio is the key value of this data. Rents, just like incomes, are generally tied very closely to supply and demand fundamentals; one rarely sees an unsustainable “rent bubble”. Therefore a rapid change in this ratio can signal the onset of an over (or under) valuation in the price of housing.
April 20th, 2009 at 11:59 AM
Oops. It was indexed back farther than 1998. 1988, to be precise.
Man, I think I might be needing bifocals. This aging thing is harsh.
April 20th, 2009 at 11:59 AM
Crikey: not compeltely your fault. I stated 1988 in one place in my first sentence, and 1998 in two others. The graph itself is quite clearly marked 1988, but I screwed up my explanation.
Norm: It’s not over previous yearS (plural) — it’s all compared to the index year of 1988. Indexed graphs have one advantage, in that a change from 1.0 to 1.5 and then back to 1.0 indicates a return to the same relative baseline conditions. A YOY graph, on the other hand, has a problem in that percentages don’t work nicely in the inverse: a 20% YOY rise followed by a 20% YOY drop does NOT take you to the same place. (e.g. 100 + 20% = 120 : 120 – 20% = 96)
Anyway, glad it helped.
April 20th, 2009 at 12:00 PM
“Some call it a report on the obvious, while others see it as big news.”
; ) I had a pretty big laugh with that sentence.
WHO could perceive this report as being big news? The overly wealthy? People living in a fallout shelter for the last two years? Oblivious conservative radio talk-show hosts?
You sure have to question the intelligence / awareness level of anyone who thought this was “big news.”
(Sorry to report on the “obvious,” heh!)
April 20th, 2009 at 12:00 PM
May be a report on the obvious, but with media reports and the old “at least we’re not as expensive as Toronto/Alberta” sometimes we need an objective outside source to wake us up to the obvious.
For the record, @ 4.8 years income, Toronto is barely more expensive than Saskatoon @ 4.6 years income to buy the median house. Edmonton @ 4.2 years income is actually a bit cheaper than Saskatoon!
Seriously unaffordable, must be getting tougher and tougher to convince people to move to, or stay and buy in Saskatoon.
April 20th, 2009 at 1:00 PM
Bookrat,
Yes, I got that. Sorry for the confusion.
Nick,
There you go again. Most people who can read already know that 4.8 is greater than 4.6, and 4.6 is greater than 4.2 but thanks for making sure.
April 20th, 2009 at 1:01 PM
Well Norm you’d think so, but amazing how many people in Saskatoon are still telling me how much more expensive and more dangerous it is to live in Edmonton than Saskatoon – when we both know Saskatoon is more affordable than Edmonton, and Saskatoon has substantially more violent (and total) crime than either Edmonton or Toronto.
Without some one pointing out:
4.6 years of income for house in Saskatoon
4.2 years of income for house in Edmonton
3.5 Regina
3.4 Ottawa
3.0 Winnipeg
I’d have to endure more of this “well at least it’s cheaper than Edmonton to live” all I have to say is Prove It, anyone, one objective way in which it would be cheaper for me to move to Saskatoon than Edmonton given more expensive housing, same groceries, and more expensive gas in Saskatoon
I put my money where my mouth was and moved to Regina,
I suggest others do the same
Maybe Winnipeg, with 2 rivers and a big university, is really just a bigger, lower crime/cheaper housing version of Saskatoon
April 20th, 2009 at 1:01 PM
Perhaps more telling:
Saskatoon 4.6 years of median income to buy a house
Canadian Median 3.5 years of median income
So, for all those who say “jobs are better here” well apparently not good enough, as the number of years a Saskatoonian takes @ their median income (which is actually quite low) to buy a house is 1.1 years above Canadian Median!