Two years ago, I was one of five Yellowknifers who went to China to teach English. The one-week kids’ camp was held at an English language school set up by CloudWorks co-founder Paige Saunders. As a reward for their hard work, kids earned ‘camp money’ which they could spend on snacks and toys each evening at the canteen.
If there is no real change in the balance of supply and demand, but more money is added to the system, prices have to go up.
Oddly, on the first day the canteen didn’t have a lot of business. The kids had decided to save their money, despite the money clearly being useless. (It was photocopied pictures of Canadian nickels and dimes).
The camp economy was in jeopardy. An emergency meeting was called by the central bankers (Paige and I) and Quantitative Easing, English camp-style, was born. Rather than nickels and dimes, teachers began handing out quarters and even loonies to the students.
Day two was complete chaos – the kids recognized that incomes were going up but the supply of candy was limited. Picture the floor of the New York Stock Exchange, but instead of guys in multi-coloured jackets, it’s 45 kids involved in bidding wars and yelling over one another. Our Quantitative Easing worked too well – we created an asset bubble in the candy market.
English and economics lessons in China | Davis Heslep
The experience at the school in China demonstrated an important economic rule; if there is no real change in the balance of supply and demand, but more money is added to the system, prices have to go up.
The Yellowknife real estate market has seen similar market conditions. As we found in Part 2, supply of new homes has essentially been balanced out by the shift in demographics. So how can prices continue to rise? Through increased incomes.
Between 2004 and 2013, every measure shows that Yellowknife income has risen. Average personal income has increased 33.8 percent (see the chart below), average family income increased 34 percent, and the proportion of families earning more than $75,000 per year increased from 66.9 percent to 76.4 percent.
Knowing that Yellowknife has a fairly steady balance between supply and demand but that its incomes are rising, we know prices will go up. The question becomes, do prices make sense given our new incomes? Are we in a real estate bubble, like the great candy bubble of 2014, or are prices within a sane range?
Luckily, there an easy rule of thumb we can follow to find out: Housing should sell for between 10 and 20 times its annual rental income, less utilities.
Housing Prices vs. Rental Values
If, for example, you rented out a house for $2,000 per month and the tenant paid for all utilities on the property, the annual rental income would be 12 x $2,000, or $24,000. The rule of thumb is that if a home price is more than 20 times the annual rental income, it’s time to sell. If it’s less than 10, it’s a good time to buy.
Yellowknife’s population hasn’t grown too much, but the change in demographics of home buyers and rising incomes have pushed real estate prices upwards despite a modest increase in new homes.
To be sure that you are comparing apples to apples, take the non-financing costs of owning into account. For example, a house might rent for $2,000 plus utilities whereas a condo might rent for the same $2,000, but the owner pays the condo fees. These would be deducted from the rental income.
So how does Yellowknife compare? Let’s look at two examples: a 2-bedroom condominium and a newly built home.
A 20-year-old two-bedroom condominium would rent out for around $1,950 per month with condo fees in the range of $650, for a monthly total of $1,300. Using the chart below, the upper limit would be $312,000 and the lower limit would be $156,000. Forrest Drive Manor, Matonabee Manor, CloudWorks One, CloudWorks Two, Ravenscourt and Northern Heights all fall within the $240,000 to $270,000 range, or about the 16 times the annual rental income.
What about a new townhouse unit in Niven – 2,500+ square feet., garage, recent construction? A home like that would cost around $625,000. Doing the math in the opposite direction, would the townhouse rent for somewhere between $2,600 and $5,200 plus utilities? It’d probably rent for closer to the bottom end of that range, but still within the ‘normal’ band.
Compare your own home on the chart; do the rental rates and home values fall within the normal range? Other than a few extreme cases, they likely do. So the link between house prices, incomes and rental rates hold true.
Using a quantitative approach to the real estate market, we can analyze the available data and see that normal market conditions are prevailing on the demand side. Yellowknife’s population hasn’t grown too much, but the change in demographics of home buyers and rising incomes have pushed real estate prices upwards despite a modest increase in new homes.