HOME PRICES
WHAT YOU NEED TO KNOW ABOUT THE RELATIONSHIP BETWEEN PRICES & APPRECIATION • Similar to “conventional” factors that affect the value of a home, existing price differentials also impact home values over time. • In the Vancouver Region, the lower a sub-market’s benchmark price compared to the regional average, the greater the price appreciation over time (and vice versa). • A greater relative appreciation in prices may be found in more affordable parts of the region, and among more affordable home types.
the rennie brief
JUNE 2022
In the Vancouver Region, relative home values—that is, how close to, or far from, the regional average that prices are—appear to be one predictor of potential value appreciation over time.
HOME VALUES & PRICE APPRECIATION Myriad factors influence the value of a home, from the size of the lot on which it’s situated, the square footage of finished area, its age and condition, and its location (...location, location) to broader macro and market features (like interest rates). These factors can, of course, also impact how the value of a home changes over time. Naturally, having a firm understanding of how these elements interact with each other to determine the price of a home—or the potential for its value to change over time—is really the holy grail of real estate analysis. And while we won’t be unveiling such a treasure here (unfortunately), our analysis of home values in various sub-markets within the Vancouver Region does reveal a somewhat robust negative relationship between a home’s current value and its potential for appreciation over time. Put slightly differently, the lower an area’s benchmark price is in relation to the region as a whole, the greater is the home price appreciation in that area, all else being equal. The opposite applies to areas that have relatively high values (that is, they appreciate less quickly). A CLOSER LOOK AT WHAT WE DID & WHAT WE FOUND As a starting point, we gathered monthly benchmark price data for a 10-year period beginning in April 2012 and running through April 2022 for 17 sub-markets in the Vancouver Region. Then, using these data, we calculated the average monthly difference between the benchmark price of each sub-market and that of the Vancouver Region over these 10 years. We then compared these differences to each sub-market’s overall benchmark price change over the same 10-year period. As noted above, the correlations that the analysis yielded were negative across all the region’s sub-markets (and, perhaps not surprisingly, across home types, too). And while correlation isn’t causation, the findings indicate that relatively lower values could be a pre-condition for relatively faster price appreciation. Noting that a more negative correlation signifies a stronger relationship between the price difference and the total price change, we found that for detached homes the coefficient was -0.7; for condos it was -0.4, and for townhomes, -0.3. (Notably, the pandemic marginally strengthened the correlation, though the
relationship between value differentials and value changes over time existed prior to the pandemic.) Using the detached market as the focus here (showing price differences and changes for detached homes in 17 Vancouver Region sub-markets), it is Langley—appearing on the far right- hand side of the chart below—that has had both the greatest negative price differential over the past 10 years (at an average of $254,000 below the Vancouver Region’s benchmark price) and the greatest price change over the same period, at 49%. Conversely, Vancouver’s Westside has had the largest positive price differential (at an average of $1.79 million above the regional benchmark value) and also the least benchmark price appreciation among all sub- markets, at 17%.
benchmark price difference* & total price change
60%
$2,000,000
45%
$1,500,000
30%
$1,000,000
15%
Correlation Coefficient: -0.7
$500,000
0%
$0
Total Price Change (%) Benchmark Price Difference ($)
-15%
-$500,000
-30%
-$1,000,000
*AVERAGE MONTHLY DIFFERENCE BETWEEN SUB-MARKET & VANCOUVER
THE “SO WHAT?” This analysis represents neither the pre-eminent research into the drivers of home price changes over time, nor should it be singularly used to make home purchase and/or sale decisions. Having said that, it does provide some empirical support to the notion that a greater potential upside in home values, at least as measured in rate-of-change terms, may lurk in more affordable parts of the region. Whether you’re a buyer, seller, investor, or realtor, it’s food for thought.
For further information please contact Ryan Berlin (rberlin@rennie.com) or Sneha Danda (sdanda@rennie.com). The information set out herein (the “Information”) is intended for informational purposes only. RAR & RMS has not verified the information and does not represent, warrant or guarantee the accuracy, correctness and completeness of the information. RAR & RMS does not assume any responsibility or liability of any kind in connection with the information and the recipient’s reliance upon the information. The recipient of the information should take steps as the recipient may deem necessary to verify the information prior to placing any reliance upon the information. The information may change any time without notice or obligation to the recipient from RAR & RMS.
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