Vancouver Real Estate Report- Real Estate Math

Blog by Arnold Shuchat | May 15th, 2015

The British Columbia Real Estate Association just came out with a report indicating that prices for the month of April across the province increased by 13% since the same time last year. Now, by any measure, especially in comparison to GIC rates at your local bank, that annual return is stunning.  However, it does not reflect the real increase in owner equity, or the rate of return to the average owner.  That is because the average homeowner has a mortgage.

As an example, supposing someone buys a property for all cash for $1 Mill.  According to the price increase numbers cited above, the property would have increased by $130,000 in the last year.  However, if one assumes that the buy put 20% down and carried an $800k mortgage, the increase is still $130k, but the return to the owner is $130/$200 or 65% in a year!

When looking at real estate rates of return, one has to consider the return on equity, not just the increase in the price of the total asset.  Of course with the use of debt at a similar ratio of 80%, any decline in total price amplifies the loss percentage on equity by a similar factor of 500%!