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First-time home buyers, real estate investors, or current homeowners may be concerned about the current real estate market conditions. Prices in the market, as we know, fluctuate and can increase or decrease. However, this is a very simplistic assumption, and for further nuance, an in-depth understanding of how much house prices can rise or fall in different provinces in Canada is needed.
To that end, this report utilizes data from the last 3+ decades to analyze how much can the price of new houses rise or fall in different provinces in Canada, per month & annually.
The report utilizes sample standard deviation (volatility-- this measures the spread of the data observed, the distance between the observed values and the mean), variance (this is the variability from the mean of observed values), mean confidence interval (MCI) (this is an estimate of the possible range of values, as per a specific confidence level), value at risk (VaR) (this is a statistical figure that quantifies possible future losses, as per a confidence level – 98% confidence level used here), and sample mean (average) calculations for definitively answering these questions.
Simplified explanations regarding the calculations are also provided.
The risks and fluctuations discussed here pertain to long-term data analyzed; for a specific analysis of how house values may drop in a recession or an economic crisis, see our report on the reaction of prices to economic decline.
Summary results of calculations for monthly fluctuations:
Table 1. Numerical analysis of New house prices in Canada
Prices in Ontario, on average, have increased at a rate of 0.280% pm, with a volatility of ±0.63% & a variance of 0.006%; as per the yearly growth rate (geometric mean), new home prices have an annual growth rate of 3.38%. As per the 95% MCI, prices are highly likely to appreciate in the range of 0.209% to 0.351% pm ($209 to $351, per $100,000 property value). There remains a 5% probability of fluctuations being higher than the aforementioned figures.
The best monthly appreciation observed in the data is 4.719%, while the worst monthly depreciation stands at -3.093%. In terms of how much a buyer or investor can lose, as per the 98% VaR, a home should not lose more than -1.014% or -$1,014.58 pm, & -3.5% or -$3,514.60 p.a., per $100,000 property value; there remains a 2% probability of losses exceeding these values.
Overall, in Ontario, we can thus state with confidence that buyers should be aware that house values can drop about -1% per month and, cumulatively, by -3.5% p.a. On the other hand, price appreciation should be about 3.4% annually long-term, but, in the absolute worst case, can drop by as much as, or more than, 3.1% in a month (less than 5% probability).
The monthly average increase observed in Quebec stands at 0.287%, a rate comparable with other provinces. The volatility stands at ±0.479% & the variance is 0.002%. The yearly growth rate, as per the data, stands at 3.5%. An investor or (tentative)buyer should know that as per the 95% MCI, prices should increase in the range of 0.233% to 0.341% pm ($233 to $341, per $100,000 of value). There is a 5% probability of an increase or decrease beyond this range.
The highest monthly appreciation for this province stands at 5.6% pm, while the worst depreciation/decline per month stands at -2.09%. As per the VaR calculations, prices shouldn't drop below 0.7% pm or 2.415 p.a. (-$697.28 pm, -$2,415.43 p.a., per $100K); a 2% probability remains of prices falling below these figures.
Overall, in Quebec, we can confidently state that prices of new houses can fall about -0.7% pm, and -2.415% p.a. Appreciations per month should be in the range of 0.233% to 0.341%; nonetheless, in the worst case, prices have been observed to fall by -1.105% pm. These are data-derived values, and the probability of future values being outside the range stated above is less than 5%.
The mean monthly appreciation in B.C. stands at 0.143%, the volatility is ±0.747% & the variance is 0.004%. The annual growth rate is observed to be 1.7%. Monthly price appreciation should remain in the range of 0.059% to 0.227% ($59 to $227 per 100K of property value) with a 95% confidence level attached with this range.
The best monthly value increase for B.C. stands at 4.811% & the worst monthly decline/depreciation stands at -3%, i.e., a drop of -$3000 per $100K in property value. VaR calculations have also been conducted: as per the calculations, prices shouldn't fall below-1.4% pm & -4.817% p.a. This means that per $100K of property value, a decline shouldn't exceed -$1,390.71 pm & -$4,817.57 p.a. There remains a 2% likelihood of a decline/losses being greater than the aforementioned figures.
Thus, (tentative)owners & investors should understand that as per the data, new house values in B.C. can decline by -1.4% pm & -4.8% annually. Prices usually rise monthly in the range of 0.059% to 0.227%.
The worst monthly decline has been -3%, and the best monthly appreciation has been 4.81%. Long-term, the yearly growth rate (geometric mean) is observed to be 1.7%. There is a strong probability or over 95% attached with these values; thus, future values of the parameters examined here are very likely to remain in the range discussed here.
Prairie provinces (Alberta, Saskatchewan, & Manitoba)
The average monthly appreciation in this region stands at 0.31%, and the volatility is ±0.74%, variance stands at 0.005%. Monthly value appreciation is this region should remain in the range of 0.23% to 0.4% ($230 to $400, per $100K of property value) (95% MCI). The yearly rate of price growth stands at 4.42%, which is impressive compared to other regions.
The best monthly appreciation in this region stands at about 5.5%; the worst monthly price decline figure stands at -2.09%. VaR calculations reveal that prices shouldn't decline more than -1.21% per month, or -4.2% annually. These figures translate to a risk of about $-1,210 pm & $-4,183 p.a., per $100K value of property; the likelihood of losses or decline being higher than these values is 2%.
Therefore, those interested in new houses in Alberta, Saskatchewan, or Manitoba, should know that, according to the data analyzed, new house values in this region should rise at a monthly rate in the range of 0.23% to 0.4%; values can decline by 1.2% pm and 4.2% annually. In the worst month in the time series analyzed, prices fell by -2.1%; for the best recorded month, this figure stands at about 5.5%.
As per the long-term growth rate, yearly appreciation should be about 4.42%. Data strongly support these values, and while it is, of course, possible that future values may be outside the range of these figures, the probability of that happening is low.
Atlantic provinces (New Brunswick · Newfoundland and Labrador · Nova Scotia · Prince Edward Island)
This region's mean monthly price increase stands at 0.187%; the volatility figure is ±0.4%, variance is 0.002%. The annual growth rate is observed to be 2.25%. As per the mean confidence interval calculations, future monthly appreciation as per the time series analyzed should be in the range of 0.143% to 0.231% ($143 to $231 pm, per $100K of property value).
In terms of risk, as per the calculations of VaR, values of new houses in this region shouldn't fall more than -0.613% pm, and -2.12% p.a. (translating to $-612.4 pm and $-2121.3 p.a., per $100K house value) probability of decline being higher than these values is 2%. The worst monthly return observed is a -2.4% decline; on the other hand, the best monthly appreciation is observed to be 2.2%.
All in all, (tentative)buyers or investors, etc., should know that monthly price appreciation is likely to be in the range of 0.143% to 0.231%; however, in the worst-performing month, a -2.4% decline was observed; in the best month observed, the monthly appreciation was 2.2%.
Realistically, nonetheless, as per 98% confidence level VaR calculations, decline in values is unlikely (2% probability) to be higher than -0.612% pm & -2.12% p.a. (per $100K property value, this translates to $-612.4 pm and $-2121.3 p.a.). Investors/buyers should expect prices to increase at a long-term rate of 2.25% p.a. As these are data-derived values, future values are likely to remain in the range discussed here; nonetheless, the likelihood of future values being higher or lower than this range is under 5%.
Putting it all together—which Canadian province is best for residential property investment?
Investors and buyers should note that the province/region with the most volatile price movements is B.C., followed by Prairie provinces, while the lowest volatility is observed in Atlantic provinces, followed by Quebec.
The region/province with the highest monthly appreciation on average is Prairie provinces, followed by Quebec, which beats Ontario by a slim margin. Prairie provinces also have the highest upper range of returns, i.e., logically, values, in the best case, are likely to increase at a higher rate in this region, simplistically; it is followed by Ontario.
The lowest range of returns is expected in B.C., followed by the Atlantic region; this simplistically means that the lower end of the expected returns range is observed in these areas. As per calculations of VaR, B.C. investing/buying a new house/condo is the riskiest investment, followed by the Prairies.
Nonetheless, an additional specific parameter, the coefficient of variation, is calculated below to measure which region has the best monthly appreciation of houses with the lowest volatility or risk of returns:
As per the data, (1) Quebec has the best mean price appreciation with the lowest volatility; this is followed by (2) Ontario and (3) the Prairies region. The region with the lowest mean appreciation and highest volatility of prices is (1) B.C., followed by (2) the Atlantic region.
These data-derived insights, on the face of it, don't appear to conform with investor interest, especially interest from international investors. In recent years we have seen high interest from international investors in B.C. and Ontario; while investment in new houses in Ontario may be warranted, as per this analysis, the risk/return analysis reveals that B.C. shouldn't be the top choice of investors due to high volatility and mediocre appreciation.
While anecdotes persuade some people, it is imperative that intelligent investors make decisions based on data rather than anecdotes, especially those provided by realtors.
"If you ask a barber whether you should have a haircut, they would, of course, say yes!"
Investors should also explore value opportunities in Quebec & the Prairies, as these regions, in conjunction with Ontario, stand out as the best options.
Furthermore, long-term investors should also take into consideration the impact of long-term trends regarding the type of properties that are likely to be appreciated at a higher rate or yield a superior return; see our report on a long-term issue that investors must take into consideration when making this decision).
For a further consultation of this topic, feel free to contact us
Source of data: Statistics Canada. Table 18-10-0205-01 New housing price index, monthly