the case for URBANIZATION
I was recently talking to some people in the real estate business that were telling me that condos have appreciated by amounts far outpacing the marketplace and that this type of growth was unsustainable. About two weeks prior to this, I was in Toronto, speaking at the Canadian Real Estate Forum on investing in real estate and all the experts on our panel were saying urbanization is the dominant trend in real estate and will push prices higher at a faster rate in the future.
I listened to all the comments and decided the best way to solve this mystery is to understand what has actually happened in the condo market in Ottawa and to outline what we know will happen in the Ottawa market in the future. The results might shock some people, as what you perceive is not always the reality of a situation.
The Ottawa housing market has increased in value by 7% per year since 2002. This 9 year period is slightly higher than the 50 year annual average increase of 6.33%. In the condo market, in 2002, a new condo was priced on average at $250/per square foot, meaning a 1,000 sqft condo was $250,000, whereas today new condos are priced at $460/sqft meaning a 1,000 sqft unit is $460,000. That means the 9 year annual increase in condo price is 9.3%.
That means that condos have really only outpaced the complete housing market by 2.3% annually. This is not a very significant outpacing, in dollar terms, it means an extra $5750 per year. That does not seem that significant, but considering the fact that most condos take 3 years to build, that is now a $17,250 increase, a much more significant figure.
If you were buying a condo today, based upon the pattern over the past 9 years, the condo you buy today at $460,000 would be worth $588,340 upon completion in 3 years. That appreciate is quite impressive. Remember though, that in the 1950s a can of Coke was five cents, now you are hard pressed to find a can of coke below $1.13. Maybe you should just stockpile some cans of Coke for the next 60 years.
The other item that people fail to remember is the ratio of income to housing price is similar to the ratio in the 1980s. In 1985 a person starting in the government made about $17,500 per year, whereas now, a starting salary is around $50,000. In housing prices, in 1985, the average price of a home in Ottawa was $107,306 and now it is $327,225. Incomes have grown by 2.85 times whereas houses have grown by 3.04 times. Those two numbers are remarkably similar.
The second part of the equation is predicting the future. Ottawa is a town of approximately 1,000,000 people. Approximately 30% of those people are Baby Boomers. That means there are roughly 300,000 baby boomers in Ottawa. Studies out of the US show that 7 out of 10 retirees will move into the city and 3 out of 10 retirees will move out of the city to country properties. Lets make a new assumption that 50% of those people want to stay in their current home.
This data does make sense, because as the kids leave home, there is no need for a pool, land, a four bedroom house, close to schools and soccer fields. Gladly most give up the commute and welcome the coffee shops, restaurants and bike paths. It is a major life change they are undergoing.
The first baby boomers are hitting 65 years old this year. That means for the next 20 years, 15,000 baby boomers in Ottawa will retire annually, so lets assume that 7,500 people per year will be moving out of their homes. This translates to likely 5,250 baby boomers will move into the city and 2,250 will move into the surrounding rural areas. A rough estimate of mine would be that since 50% of Canadian marriages end up in divorce, lets say that 25% of these properties are single owners and 75% are couples, so that means there should be a need for 3,125 core properties. This means that there should be dramatic demand for core properties.
Now the second side of this is that Toronto hit 1,000,000 in the early 70s. Now, 40 years, the population of Toronto is over 5 million people. There is a strange development that once cities hit 1,000,000 people they tend to grow quicker and reach the second million people faster than the first million, and on and on and on. It is highly likely that Ottawa will experience vast growth over the next 20 years. There will be jobs, which is a huge attraction for people moving to a city.
Putting this all together means we should see population growth in the core areas of Ottawa, due to the baby boomer effect. This should continue to push the condo market higher. Making the urbanization trend continue to make sense.
I listened to all the comments and decided the best way to solve this mystery is to understand what has actually happened in the condo market in Ottawa and to outline what we know will happen in the Ottawa market in the future. The results might shock some people, as what you perceive is not always the reality of a situation.
The Ottawa housing market has increased in value by 7% per year since 2002. This 9 year period is slightly higher than the 50 year annual average increase of 6.33%. In the condo market, in 2002, a new condo was priced on average at $250/per square foot, meaning a 1,000 sqft condo was $250,000, whereas today new condos are priced at $460/sqft meaning a 1,000 sqft unit is $460,000. That means the 9 year annual increase in condo price is 9.3%.
That means that condos have really only outpaced the complete housing market by 2.3% annually. This is not a very significant outpacing, in dollar terms, it means an extra $5750 per year. That does not seem that significant, but considering the fact that most condos take 3 years to build, that is now a $17,250 increase, a much more significant figure.
If you were buying a condo today, based upon the pattern over the past 9 years, the condo you buy today at $460,000 would be worth $588,340 upon completion in 3 years. That appreciate is quite impressive. Remember though, that in the 1950s a can of Coke was five cents, now you are hard pressed to find a can of coke below $1.13. Maybe you should just stockpile some cans of Coke for the next 60 years.
The other item that people fail to remember is the ratio of income to housing price is similar to the ratio in the 1980s. In 1985 a person starting in the government made about $17,500 per year, whereas now, a starting salary is around $50,000. In housing prices, in 1985, the average price of a home in Ottawa was $107,306 and now it is $327,225. Incomes have grown by 2.85 times whereas houses have grown by 3.04 times. Those two numbers are remarkably similar.
The second part of the equation is predicting the future. Ottawa is a town of approximately 1,000,000 people. Approximately 30% of those people are Baby Boomers. That means there are roughly 300,000 baby boomers in Ottawa. Studies out of the US show that 7 out of 10 retirees will move into the city and 3 out of 10 retirees will move out of the city to country properties. Lets make a new assumption that 50% of those people want to stay in their current home.
This data does make sense, because as the kids leave home, there is no need for a pool, land, a four bedroom house, close to schools and soccer fields. Gladly most give up the commute and welcome the coffee shops, restaurants and bike paths. It is a major life change they are undergoing.
The first baby boomers are hitting 65 years old this year. That means for the next 20 years, 15,000 baby boomers in Ottawa will retire annually, so lets assume that 7,500 people per year will be moving out of their homes. This translates to likely 5,250 baby boomers will move into the city and 2,250 will move into the surrounding rural areas. A rough estimate of mine would be that since 50% of Canadian marriages end up in divorce, lets say that 25% of these properties are single owners and 75% are couples, so that means there should be a need for 3,125 core properties. This means that there should be dramatic demand for core properties.
Now the second side of this is that Toronto hit 1,000,000 in the early 70s. Now, 40 years, the population of Toronto is over 5 million people. There is a strange development that once cities hit 1,000,000 people they tend to grow quicker and reach the second million people faster than the first million, and on and on and on. It is highly likely that Ottawa will experience vast growth over the next 20 years. There will be jobs, which is a huge attraction for people moving to a city.
Putting this all together means we should see population growth in the core areas of Ottawa, due to the baby boomer effect. This should continue to push the condo market higher. Making the urbanization trend continue to make sense.
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