Friday, June 12, 2009

Rental market update

Sorry I couldn't get to this sooner, but June has been a busy month for me. Kind of doubting I'll be able to get in as many posts as I would like this month, so instead of posting tripe, I'll try to focus on quality instead of quantity.

After reading that last line, the girlfriend just laughed so hard she snorted, and said "not in the bedroom," really snide like. What could she possibly have meant by that?!

Anyway, CMHC released their spring rental market updates for the provinces this week. They just started doing these spring releases last year, and it's not as detailed as their annual reports (comes out in December), but lots of interesting stuff in there anyway.

Lets start with the high profile stat and get it out of the way first, rent.

Average Rents
I actually did a post that covered long term rents just a couple weeks back, and planning on doing another one on rent-to-earnings in the near future, so we won't go into rent too much.

It's interesting the 2-bedroom rents have actually continued to go up since October, but the overall average has went down slightly. In Calgary (and Alberta as a whole) rents were down across the board when compared to October.

It also goes against my personal experience, as I've seen my rent significantly reduced. Last summer it was actually supposed to go up from $1060 to $1210, but they axed that after sending the notice... then a few months after that I got it reduced down to $900, which is actually less then it was when I first moved into the place (September '06).

Rents were really taking off at that point, as vacancy rates were virtually nil. At first I figured I could get a decent place for $750-800, but pretty quickly clued in that wasn't going to happen... ended up getting a 2-bdrm for $910, which actually seemed like a helluva deal three weeks later when I moved in and noticed new tenants were then getting charged $1210.

That advertised rate stayed there for two years, and my rent was getting incrementally increased annually. But as time went on, vacancies in the complex slowly increased, and finally last fall they dropped the advertised rate to $1100, then $1050, and last time I checked it was $999. Established occupants can easily get it below that, even without a lease, as is my case.

As we took a look at in May, price-to-rent ratios are still very high, so it would be very unsettling to real estate prices if rents stopped growing, or even reduced as has been seen in Calgary.

The real estate bulls out there have claimed that rents are just catching up to prices because rents are much stickier then prices, and thus prices really aren't out of line it's just lag... but rents reversing course would blow that contention out of the water.

Vacancy Rate
For the rest of this entry I'm going to focus more on another part of the rental market equation, supply and demand. Here we see vacancy rates and that they're spiked significantly since the fall. There may be some seasonality in the numbers though (last April also seemed to have an unusually high rate), so until we get more spring numbers I think it's too early to draw any definitive conclusions.

In any case, this will be a number we'll be keeping an close eye on. That it's quite high should be no surprise, as anyone even taking a quick look around can see there are tons of rentals on the market, and an ever increasing number of "accidental landlords" joining the ranks (not sure how/if CMHC accounts for them in these surveys).

Total Units
I also wanted to take a look at more of the hard numbers, so here are the total available apartment rentals. It's interesting to note that this number actually contracted over 10% from 2003 through 2008 (presumably condo conversions)... all during a time when the population was growing significantly.

This would indicate a big pinch of supply, and that would ring true though the end of 2006, as vacancy rates were at their lowest... though oddly it wasn't until 2007 that supply started to really contract, all the while vacancy rates were creeping up. This continued through 2008 too, supply kept shrinking, yet vacancy rates kept rising.

Occupied Units
We can see why in the occupied stats, obvious these numbers had to be dropping. The number of renters peaked in 2006, and has fallen off significantly since then. This is an interesting observation, as over this time the economy was booming and population growing.

One would assume the rate of renters in a population would stay fairly level, thus when the population grows the number of renters should also grow proportionately... but we saw the reverse.

Thus, I hypothesis that we witnessed an unusually high number of renters became buyers since 2006. Which in many ways would make sense... we experienced record sales tallies, and to do that you need record numbers of first-time-buyers.

This may actually also be something of a troubling realization though, as this would seem to indicate that a significant portion of future first-time-buyers were actually induced to convert earlier then normal, and thus it's leaving something of a void going forward.

That has been something of a popular theory amongst the bearish, and would seem to be backed up in these findings. Of the renting population there will always be a certain portion that cannot buy for whatever reason, those who could but won't and then there are those that will eventually buy as they come of age... but when a large number of the latter are induced early it might be great in the short term, but long term it can cause real trouble.

So, while a drop of 7,000 or so over two and a half years may not seem like much in a city the size of Edmonton... but in an average year there is only 16,000 to 20,000 sales in the city, and its those entry level buyers that grease the wheels so to speak.

If they aren't there, those currently holding entry-lever properties can't sell and move up-to mid-classed homes... and those people holders can't sell and move into high-end homes... etc, etc.

One first-time-buyer can spur two, three, even four subsequent sales up the property ladder. Without them, things seize up in a hurry... so any kind of future shortage would have significant consequences.