Housing Starts
INDICATOR DEFINITIONS
Real Annualized Price Gain: The twelve-month increase in average home prices deflated by the consumer price index (CPI). Sources: Canadian Real Estate Association, Statistics Canada, TD Economics.
Price to Earnings (P/E) Ratio: This indicator measures the price of a benchmark property (townhouse) in relation to its expected future cash flow. For real estate, this is broadly thought to be the imputed rent yielded by the property. On this basis, imputed rents should theoretically reflect all fundamental factors affecting the property including expected economic conditions. An increase in the P/E ratio suggests that a property.s price may have risen faster than what the underlying earnings of that property could generate, potentially implying some overvaluation. A standard townhouse is chosen as a benchmark property since it conceivably represents a median housing choice in the housing market (i.e., this property contains attributes that are similar to both condos and single-family homes). It is also a property type that is consistently found in most urban markets thereby allowing for regional comparisons. Source: Royal Lepage, Statistics Canada, TD Economics.
OWN vs. RENT Indicator: The ratio between the estimated monthly ownership costs of a benchmark townhouse and its imputed monthly rent. Ownership costs only consist of principal and interest payments for the property based on the current 5 year average mortgage rate and a 25 per cent down payment amortized over 25 years. The further the indicator moves above 100, the cheaper it is to rent that property type, all else equal. Sources: Royal LePage, Statistics Canada, TD Economics
Irrational Exuberance Indicator: The ratio between the twelve month percentage increase in inflation-adjusted average home prices and underlying supply and demand conditions. The latter term is estimated as the ratio between sales to new listings in the representative market. The Irrational Exuberance Indicator effectively suggests to what degree home prices are growing in relation to market conditions. For example, an indicator greater than 10, suggests that prices are growing faster than what market conditions would warrant, implying increasing risk of speculative activity. Conversely, an indicator less than .10 would suggest greater negative sentiment than the market would imply. Source: Canadian Real Estate Association, TD Economics.
Affordability Indicator: The percentage of household income needed to service the ownership costs of a benchmark property (townhouse). Ownership costs only consist of monthly principal and interest payments based on the current 5 year average mortgage rate and a 25 per cent down payment for the property amortized over 25 years. Household income is based on median total income for all economic family types. The greater this indicator, the more income it takes to service the costs of ownership. Source: Royal LePage, Statistics Canada, TD Economics
Sellers’ market conditions across Canada continue to support strong growth in house prices An indicator of price pressure in the existing home market is the sales-to-new-listings ratio1. New listings are a gauge of supply of existing homes, while MLS® sales are a proxy for demand. The sales-to-new-listings ratio for Canada remained in sellers’ market territory in December, at about 63 per cent. On an annual basis, the sales-to-new-listings ratio for Canada was 64 per cent in 2005. As a result, the Canadawide average MLS® price increased by 10.2 per cent in 2005 compared to the previous year. Economic conditions In January, 26,000 jobs were created, an increase of 1.7 per cent compared to a year ago. Nevertheless, the unemployment rate inched higher by 0.1 of a percentage point to 6.6 per cent as more people entered the labour force to search for work. In January 2006, the seasonally adjusted em-ployment-to-population ratio remained un 1 Taking the Canadian market as a whole, a sales-to-new-listings ratio below 35 per cent has historically accompanied prices that are rising at a rate that is less than inflation, a situation known as a buyers’ market. A sales-to-new-listings ratio above 50 per cent is associated with a sellers’ market. In a sellers’ market, home prices generally rise more rapidly than overall inflation. When the sales-to-new-listings ratio is between these thresholds, the market is said to be balanced. changed from December 2005 at 62.7per cent, which is only marginally below the historic peak of 62.8 per cent. In other words, a near record share of Canadians are employed, which is supporting high levels of consumer confidence and strong demand for housing. The Bank of Canada raised its target for the overnight lending rate by a quarter of a percentage point to 3.5 per cent on January 24th following similar moves on December 6th, October 18th, and September 7th. With the economy operating close to full capacity, the gradual reduction in monetary stimulus will help to prevent rising inflationary pressures. Nevertheless, monetary conditions remain stimulative. In January, the price of goods and services included in the Consumer Price Index (CPI) basket increased 2.8 per cent compared to January 2005. The increase was mainly due to higher gasoline and natural gas prices, purchase and leasing of automotive vehicles, and homeowners’ replacement costs. These increases were restrained by lower prices for computer equipment and supplies, for insurance premiums for automotive vehicles and for traveller accommodation. ¢