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Toronto home: the pricier, the more affordable
Stephen
Chung Managing Director
Zeppelin
Real Estate Analysis Limited
August 2014 Lower priced condos are heftier to afford? ˇ@ To its ˇĄcounterpartˇ¦ potential buyers and homeowners, that is. Your humble author has come across some basic data on Toronto home prices, household incomes, neighborhood features such as local employment, number of businesses, social assistance recipients, and the like, separately for each of the 140 neighborhoods which make up Toronto. The data comes from the ˇ§Toronto Wellbeing Mapˇ¨ [note: the URL is long and cumbersome so it is not stated here. However, just google Toronto Wellbeing Map and very likely you would see a link to the website]. Some number crunching ensured and here are some of the results: 1) The more well off a neighborhood is, the pricier its home price tends to be = well, this is no surprise and itˇ¦s a bit like saying ˇ§my mother is a womanˇ¨. And the correlation is high, very high. In all markets which your humble author has analyzed to date, the income factor ˇV be this expressed by household income, GDP per capita, or the like ˇV always dominates the forensic residential real estate price scene. 2) The neighborhood population has little bearing on home prices = in fact if there is any, it is a negative correlation, albeit a very slight one, i.e. the more people there are in a neighborhood, the less pricey its homes are. Well, again, this isnˇ¦t much of a surprise. Bridle Path is sparsely populated after all. 3) Things like local employment level and the number of business establishments in a neighborhood have insignificant influence on home prices = one reason might be that many of the employed and business owners do not reside in the same neighborhood in which they work or do business. Hence, their residential neighborhoods get a boost from whatever they earn in terms of household income but not their work or business neighborhoods. 4) Aspects like the presence of social housing units, major crime incidents, and social assistance recipients have varying degrees of negative correlation to home prices = i.e. the more there are, the lower the home prices tend to be, but to varying degree; the first aspect just a little, the second item some but not too significant, and the third aspect rather significantly. Now, and this is important, whatever degree of correlation there is, it does NOT follow automatically that there is any causal (i.e. cause and effect) relationship between any of the foregoing aspects and home prices. To find out if there is causality, other studies will be required. Furthermore, the data only show the aspects, be this home price level, income level etc, of the neighborhoods in the same year. That is, the data set is not a longitudinal series. It is no surprise to see that neighborhoods with relatively more social assistance recipients would have lower home prices. Recipients are generally poorer and thus the typical household income would be smaller which in turn correlates to lower home prices. However, the data does not tell a) how the home prices in the neighborhoods have been performing i.e. up or down ˇV it could very well be a relatively poorer neighborhood has been seeing higher home prices while a richer one has been experiencing price drops; b) if there is a cause and effect relationship between aspects in (4) above and home prices. While incomes do jive with home prices and it is not unreasonable to suspect causality between them [see (1) above], this alone does not mean social assistance recipients also cause home prices to be lower, rather, the lower incomes might be the reason behind both the lower home prices observed AND the presence of social assistance recipients. Deeper analyzes are needed to verify the various interpretations. Now to the less unsurprising results: 5) The home price to income ratios for all 140 neighborhoods do not correspond to the respective home prices in them = the home price to income ratio gives a sense of roughly how many years of income is required to buy the typical home in the neighborhood, and as such, how difficult, hard, hefty, heavy etc [take your pick of adjective] it is to buy and own a home. While richer neighborhoods do come with higher home prices, our analysis indicates there is practically no correlation between these ratios and home prices in the 140 neighborhoods. That is to say, higher home prices do not necessarily mean a heavier burden to the likely homebuyers, NOR for that matter do lower home prices necessarily imply a lighter burden to their likely homebuyers. 6) In fact, the richer the neighborhoods are, the lower the home price to income ratios tend to be = and the negative correlation is significant. That means the homebuyers for the richer neighborhoods tend to find the homes to be MORE affordable and feel, perhaps, LESS of a burden, given their income. We have listed the home price to income ratios for all 140 neighborhoods below. Very roughly, the average home price to income ratio for all the Toronto neighborhoods is 5.65. Many prime neighborhoods are less than this average with most being below 5, several are less than 4, and one being under 3. Which is the lucky oneˇKcan you guess?
Disclosure: yours truly invests in Toronto real estate. Notes: The article and/or content contained herein are for general reference only and are not meant to substitute proper professional advice and/or due diligence. The author(s) and Zeppelin, including its staff, associates, consultants, executives and the like do not accept any responsibility or liability for losses, damages, claims and the like arising out of the use or reference to the content contained herein. |
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