Updated: Sep 14, 2020
It seems like these days in Vancouver, everything is overpriced. whether they are houses or Condominiums being overpriced is always making headlines in the news. In Vancouver, housing prices have been stable for about a year, but condominium prices have been increasing steadily and has been making headlines. Of course, everything is always expensive, but can we quantify things being expensive by studying the numbers?
Let's look at the numbers in the eyes of an investor. An investor wants to some sort of return at the end of every month. This is called the capitalization rate, which is also called the cap rate. Every city has a different average cap rate. For example Las Vegas has a cap rate of about 5%, and St. Louis Missouri has cap rates of about 7%. As long as you're buying a property which falls within the averages of any particular city's cap rate, you will be fine. In Vancouver, the cap rate is about 2 to 3%. About 10 years ago, the cap rate was about 3 to 4%. In the last decade, property prices have increased, so that is why cap rates have decreased. Rents have also increased substantially as well, so that is why cap rates haven't plummeted as much as you would have thought.
So in today's condominium market, you can buy place in the Burnaby area for about $1,000 per square foot. This $1,000 per sqft applies to pre-sales. However, if rent out when it finishes completion, rental price won't even cover all your expenses. This being the case, your cap rate will be negative. I've never seen wise investor investing in a property with a negative cap rate. Buying into a property with a negative cap rate are only for those who hope that the property will appreciate in value. However, this is not a disciplined approach. Of course, any investor will wish that his or her investment will increase in value. However in in the event that the property does not go up in value, the investor will at least a positive cap rate to fall back on.
If course, if you're buying a condominium to live in its a totally different story. You cannot put a price tag on your enjoyment or its location because its the fits the lifestyle that you want and its value is different for every person. My analysis above was strictly from the standpoint of disciplined investor.