YoY (Year-over-Year)
Definition: Year-over-year (YoY) is a term used in finance and economics to describe the comparison of a metric for one period to the same period the previous year. The YoY comparison is a useful measure as it removes seasonality, capturing the annual change and allowing for a more apples-to-apples assessment of growth or contraction trends. By evaluating the YoY change, analysts, investors, and decision-makers can understand the trajectory of economic or business metrics and whether they are improving, stagnant, or deteriorating.
Use of YoY in Economic and Business Trends:
- Gross Domestic Product (GDP): Perhaps one of the most commonly referenced economic metrics, GDP represents the total value of goods and services produced by a country over a specified time frame. Analysts often use the YoY change in GDP to assess the health and growth trajectory of an economy. For instance, if the U.S. GDP for 2022 was $22 trillion and grew to $23 trillion in 2023, the YoY growth rate would be approximately 4.55%.
- Earnings Reports: Publicly traded companies are required to disclose their financial performance on a regular basis, usually quarterly and annually. Analysts and investors often examine the YoY growth in revenues, profits, and other key metrics to assess a company’s performance. For instance, if Company A reported a profit of $10 million in Q1 2022 and $12 million in Q1 2023, they would have seen a YoY growth of 20% in their profit for Q1.
- Consumer Price Index (CPI): The CPI measures the average change in prices paid by urban consumers for goods and services over time, effectively tracking inflation. If the CPI is reported to have increased by 2% YoY, this suggests that, on average, goods and services have become 2% more expensive compared to the previous year.
- Retail Sales: Retail sales data can provide insights into consumer spending habits. If the retail sales in December 2023 were 5% higher than in December 2022, this indicates a YoY growth in consumer spending, suggesting consumers may be feeling more confident in their financial situations.
Year-over-Year (YoY) in Real Estate Asset Values:
In the realm of real estate, YoY comparisons are paramount for investors and stakeholders to assess the health and potential profitability of the market. Asset values in real estate can be influenced by a myriad of factors, including interest rates, economic conditions, demand and supply dynamics, and regulatory changes, among others. Thus, YoY comparisons help in distinguishing between short-term fluctuations and more sustainable, long-term trends.
For instance, consider an investor looking at the residential property market in a growing urban city. If the median home price in this city was $300,000 in 2022 and has risen to $330,000 in 2023, this would represent a 10% YoY growth. This kind of YoY assessment can be pivotal in investment decision-making. If the 10% growth is consistent with previous years, it might suggest a steady and robust demand, encouraging the investor to consider entering or further investing in the market. However, if the YoY growth rate has decelerated from previous years (e.g., from 20% YoY growth in prior years to the current 10%), this might suggest a cooling market and can serve as a cautionary sign for investors.
Moreover, when evaluating potential real estate investments, understanding YoY growth rates in tandem with other factors like rental yields, neighborhood development, and infrastructure changes can provide a more holistic view of the investment’s potential.
YoY assessments may pertain to various figures pertaining to a given real estate asset or real estate market. For example:
Asset-specific
- YoY rental income growth
- YoY NOI growth
- YoY cash flow
- YoY debt servicing cost
Market-specific
- YoY revpaf (revenue per available foot) growth
- YoY avg. rent growth
- YoY growth in construction starts
- YoY delivery of new units
Base Effects and YOY Calculations
The base effect is the impact that the choice of a reference point has on the comparison between two data points over time. In any YoY calculation, this would of course be the data point in the prior year. This is particularly relevant when analyzing financial metrics such as inflation rates, economic growth, and, crucially for investors, investment returns. The base effect can either distort or clarify our understanding of year-over-year performance, depending on its consideration.
Base effects are something to be aware of now more than ever amid fluid market conditions. For example, various rates of inflation may look less significant when the comparison point was already elevated.
The Impact on Investment Analysis
In evaluating commercial real estate investments, the base effect can significantly alter the perceived performance of an asset. For example, if a property experienced an unusually high occupancy rate due to a one-time event in the previous year, comparing this year’s occupancy rate to last year’s without considering the base effect could lead to misleading conclusions about the property’s performance and potential.
Similarly, in analyzing market trends, the base effect can cause fluctuations in economic indicators to appear more volatile or stable than they truly are. This is particularly relevant in periods following economic downturns or booms, where the base period’s performance was atypical.