Searching for the best deals in real estate is no simple task. It takes weeks to pull together the requisite data and solicit all the realtor feedback needed to prepare the most comprehensive report we can devise to identify where the best real estate opportunities are in Canada. Our report looks for these deals in 35 Canadian cities and then for six cities—Vancouver, Calgary, Edmonton, Winnipeg, Toronto and Montreal—we drill down even further to suss out the neighbourhoods that offer the best bang for your buck. The rankings follow a similar formula, but there are some distinct differences, which we outline below.
Canada’s top 35 cities
Real estate bubbles are notoriously hard to predict. Prognosticators have rung alarms over home prices in Vancouver for years; while growth in most markets has slowed, we have yet to experience a crash. Our ranking may not tell you if a housing market crash is imminent, but it will help you determine which of Canada’s largest 35 cities offer the best return on your investment—and perhaps which markets are less likely to fall should the forewarned crash actually arrive.
To come up with our ranking we assign grades to each city in one of four categories: value, momentum, rental income potential and the local economy. Each category consists of several different variables.
To measure value we turn to the Canada Housing & Mortgage Corp. (CMHC), which supplies us with data on the average rental price and the average home price for each of the 35 cities we studied. We use these figures to calculate the rent-to-mortgage ratio, which compares the average rent to the average mortgage payment a typical homeowner would have to make in that city. This ratio shows us whether rental rates are keeping up with home prices If the ratio is above one it means it would cost more to rent than it own—a positive indicator for anyone looking to own an income property. Weighting: 10%
Next we look at how expensive homes are relative to incomes. To calculate this ratio we rely on data from Environics Analytics and the CMHC. This calculation simply takes the average home price and divides it by the average household income. While no household can put their full income against their mortgage, this calculation provides us with an effective way to determine how affordable a market is. The lower the number the more affordable the city. Weighting: 10%
The momentum category is composed of four separate variables: home sales to new listings as well as the price appreciation of an average home over the past one, five and 10 year periods.
The home sales-to-new listings ratio effectively tells us whether demand is keeping up with supply. A high figure denotes a sellers market due to limited supply and/or high demand whereas a low sales-to-new listing ratio denotes oversupply and/or low demand signaling a buyers’ market. Weighting: 15%
Momentum is broadly understood to mean something that picking up speed over time. In housing terms, we want to see communities where the housing price appreciation is accelerating. To track this we measure the one-, five- and 10-year price change in housing prices, giving more weight to the more recent price gains than the longer-term price change. Weighting: 1-year price appreciation: 10%, 5-year price appreciation: 10%, 10-year price appreciation: 5%
Rental income potential
We recognize not everyone is looking to this report to by their next home; some might use these figures to help decide where to buy an income property. Then there are still others who are looking to rent out a portion of their homes to subsidize their mortgage in an expensive city. Understanding the health of the rental market is key in that regard. To measure this aspect of the market we collect CMHC’s figures on the five-year change in rent prices and the current rental vacancy rates for each city. For this category we’re looking for cities with a high rent increases and low vacancy rates. Rising rental rates signal a market where demand is strong enough to absorb the increased prices, while low vacancy rates suggest there is enough pent up demand, which should make it easy to attract renters. Weightings: Rent increase over five-years 5%, rental vacancy: 5%
Buying into a city with a flagging economy is akin to buying a boat with a small hole in its hull: Eventually your investment is going to sink. Buying into a market with a healthy economy is essential, which is why a third of our score is devoted to the health of the local economy. We track a number of different statistics to complete this portion of our ranking: average GDP growth 2011 to 2015, projected GDP growth and unemployment data for each of the past two years and discretionary income.
Gross Domestic Product is a broad measure of economy activity in a given region. Using data from Statistics Canada we examine the average GDP growth between 2011 and 2015 for each province. Higher GDP growth signals a strong, robust economy. All cities within a province receive the same GDP score. The CMHC also offers a projected GDP growth for each of the top 35 cities in Canada, but since no prediction is 100% reliable we give this variable a slightly lower weighting. Weightings: GDP growth (2011 to 2015) 5%, projected GDP growth 2.5%
The unemployment rate is perhaps the easiest economic indicator to understand. It’s hard to imagine a community with a robust housing market if people can’t find work. As a result we give extra credence to the current unemployment rate, as reported by CMHC, in each of the 35 cities we track in our report. We also look at where unemployment was 12-months earlier to spot any change in the employment opportunities within a city. Weighting: current unemployment 15%; previous year’s unemployment 2.5%
Lastly, we factor in the discretionary income levels within each city. Discretionary income is simply the amount of a household’s income that’s leftover for saving or spending after taxes and things like housing have been paid for. The higher this figure, the more of a cushion exists to absorb higher home prices. Weighting: 5%
Canada’s top neighourhoods
Local real estate boards and media try to simplify real estate markets by pointing to the average home price for a given city, but depending on the area you’re looking in that figure can be meaningless. Prices vary widely across cities. Some areas are prohibitively expensive, while others are dirt-cheap. Finding the area that offers the best potential is where MoneySense comes in. To identify the best deals we zero in on three key areas: value, price momentum and realtor feedback, because we don’t see the point in buying into an area if no one really wants to live there.
Value – 30% of overall score
One effective way to ensure you don’t loose money on an investment is to not overpay for it in the first place. It sounds easier said than done, but truth be told you can find pockets of value—in desirable neighbourhoods—in every city. To identify value we compare the average home price at the neighbourhood level to the average price of the surrounding area, the metro area and the greater city area. Just remember one important caveaet: good value isn’t a synonom for cheap. We see value as being relative; homes in some areas we look at sell for more than $1 million, but they’re still good value when you consider homes in adjacent areas are selling for $1.5 million or more.
The average neighbhourhood price compares to the average home price for the surrounding area, or the average price of the neighbourhoods immediately around it, is a key measure in this regard. Neighbourhoods selling at a discount to other nearby neighbourhoods get the top marks. Weighting: 70% of value score
While comparing one neighbourhood to the ones around it is important, it doesn’t really tell you whether it’s well priced relative to the city. For that we compare the average neighbourhood price to the metro area it’s situated in (eg. Toronto, the Island of Montreal, Burnaby, B.C., etc.). Weighting: 20% of value score
Finally, we also look at how the average price of each neighbourhood compares to the broader city area (the Greater Toronto Area, the Greater Vancouver Area, etc.) to identify the neighbourhoods offering the best value. The neighbourhoods with the lowest price earn the top marks. Weighting: 10% of value score
Note: Neighbourhood level data for Edmonton and Winnipeg was unavailable. As a result for these cities we were only able to compare areas versus the metro district and versus the greater city area.
Value weightings for Edmonton/Winnipeg:
Area vs. metro district: 70%
Area vs. Greater City Area: 30%
Momentum – 30% of overall score
Finding a cheap home is one thing, finding one that has the potential to appreciate over time is another. We want to see neighbourhoods that are already showing some signs of price increases, since like the momentum strategy in stocks, we believe that the price is more likely to continue to move in the same direction (e.g. up) than it is to change directions. To track this measure we examine how much each neighbourhood has appreciated over the past one and five-year years. The higher the change, the better the grade. Weighting: 1-year 50% of momentum score, 5-years 50% of momentum score
Realtor grades – 40% of final score
When looking for the best deals in real estate the numbers don’t always tell the full story. Just because an area is cheap doesn’t make it a good value. Similarly, just because an area is enjoying price increases doesn’t mean it’s going to be the best property for you and your family. There are many intangibles to consider, such as access to parks, good schools and safety that simply can’t be quantified. For that reason we paired up with Re/Max to ask realtors from across the country to complete an online survey to grade each neighbourhood within the areas they work in. Almost 400 responded. (Note, in Montreal MoneySense worked with several different brokerages)
The survey submitted to realtors was based on the neighbourhoods with the highest combined value and momentum scores. Realtors graded each neighbourhood on a score of 1 to 10. To avoid erroneous responses, realtors were asked to only to grade neighbourhoods they are familiar with.