The Veritas-Urbanation Showdown

December 3rd, 2013 by Potato

Fact: an “investor” buying a condo in Toronto today quite likely faces negative cashflow and poor projected investment returns based on current rents. The three reasons for buying in such a situation are that rents will increase — and increase fast enough to matter/before interest rates rise; that there will be price appreciation; or that the investor is making a mistake. Well there certainly was price appreciation in the past, and appreciation can beget appreciation until a bubble pops. Current and future buyers may not be counting on appreciation as much though, as expectations temper and we see flat or negative price growth (year-over-year price changes were negative for 416 condos in 5 of the last 12 months, and under 2% in all but 4).

That leaves rent increases. Urbanation puts out a quarterly report claiming staggering amounts of rent increases (figures that look even higher as they report price per square foot in a market with ever-smaller units). I mean, they don’t come close to keeping up with the kind of price appreciation seen over the past decade, but staggering compared to our expectation of rent increases from CPI inflation and the Ontario rent control increases. This news often gets picked up by the Star (with breathless headlines) and these high inflation figures get stuck in the minds of some. Personally, I’ve doubted these figures, as they don’t jive with my anecdotal experience or other data sources on rent inflation.

A new report from Veritas has ignited a bit of a spat, as they report a small amount of rent deflation. They also explicitly track and project the negative cash flow for an investor buying a condo in Toronto today. Urbanation took to their blog to try to debunk the new report and reinforce why we should listen to them instead.

What I found particularly shocking in Urbanation’s post is that they themselves don’t have a good handle on what proportion of the market their data is sampling. As far as I can tell, nobody does. They claim to capture 2/3 of the [condo] rental market. I back-of-the-envelope it and get more like a quarter of it (and a non-randomly selected quarter at that). And I think that says just how bad the data is: the biggest, splashiest report on the matter uses a non-random subset of data with several potential selection and reporting biases, and no one can even say what proportion of the population their sample represents or how representative it is. Smaller spot-check “mystery shopping” samples are potentially not as accurate, but nevertheless the fact that they disagree should call into question how much weight we give either figure. Nobody can even say whether the average rental tenancy lasts 3 years, 5, 7, or something in-between. Urbanation just takes an unsupported stab at 5 years below (20% turnover), and assumes that’s the same for owner-occupied and rental units:

Who’s [sic] research should be taken with a “grain of salt”?
We recognize that transactions through the MLS system don’t represent all activity in the condo rental market, but we do believe it represents the strong majority. […] The ‘true’ annual turnover rate of all condos is likely closer to 20%

[Emphasis mine]

Yes, whatever slice Urbanation gets from MLS will be bigger than the slice Veritas sampled on Craigslist and their mystery shopping adventure, but that’s not the point*. The take-home message is that they are both imperfect samples saying very different things about the market. We need to view the whole thing as a lot fuzzier than we have been: both reports likely have large margins error, and it looks like all we can say about rents on condos is that they’re basically flat, plus or minus 5%. Heck, the Ontario rent control rate may be the best estimate of rent inflation out there.

* – Even though bigger is usually better in sampling and stats, a bigger biased sample is still a biased sample.

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