Yes, Vancouver Homes Are Expensive, But As Investments They Are Potentially Extravagant

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Vancouver real estate values have been the talk of my home town for many years now.  We’ve landed podium finishes atop “most unaffordable city” and “most expensive city” lists time and time again.

So, if you are lucky enough to own some of this stuff, or you want to get in on the action I suggest thinking about the years of income necessary to justify current prices.  What these buildings and earth are worth compared to other investments?

As a buyer, how long would it take me to earn back my purchase with current rental income?

The calculation I’m proposing simply divides price by annual earnings.  It’s a P/E ratio used in business (stock) valuation (or the inverse of a “cap rate” used by real estate investors).  It tells an interesting story.  Here’s an example:


Example Vancouver Home

Price of a rental property


Rental Income

Property Tax

Maintenance, repairs, management

Home insurance

Vacancy


Earnings

Number of years (P/E Ratio)

$ 1,500,000


$ 72,000

Less $ 9,000

Less $ 9,000
 

Less $ 1,000

Less $ 3,000


$ 50,000

30

Including transfer taxes and other purchasing costs

$6,000/month from multiple suites

Vancouver property taxes at 0.6%

 

Assumes non-payment 1 month every 2 years.

 

= Price $1,500,000 / Earnings $50,000

This means a buyer (or owner) of this property would have to wait 30 years at current rental rates before they covered their purchase price.  I find performing this calculation on most Vancouver “investment” property tends to render figures between 20 and 40.  Please do your own calculations.


To put this in context (at the time of this writing) the number of years (P/E ratios) for the following public companies looked as follows:

Company

Example Vancouver Home

CN Rail 

Telus

Apple

Sunlife

Walmart

Royal Bank

P/E Ratio

30

19

18

13

13

13

12

The main reason for higher P/E ratios is the expectation of future earnings growth.  With an accelerating rate of earnings growth investors won’t actually have to wait decades upon decades to have their original investment covered.  This might make sense in ambitious new industries (Facebook Inc. rightly or wrongly now trades at a P/E of 108).

However rental homes might have more in common with private businesses (where exchanges are infrequent, and sellers have an informational advantage over buyers).  They commonly sell at P/E’s between 3 and 5.

So, at a P/E of 30 exactly what kind of growth rate are we expecting out of Vancouver homes?  More specifically what aspirations do we have for the dirt or airspace they occupy (since the physical buildings if maintained perfectly will simply maintain their value)?

Are those aspirations really superior to the majority of business investments?

Photo by Josiah Coates on Unsplash

Written by Ian Collings