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Don’t worry about buy/rent ratio

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Desjardins Securities is warning that the Canadian housing market looks vulnerable because the buy/rent ratio is getting out of whack:

Canadian house prices rebounded from the recession, hitting a fresh record in May and bringing the buy/rent ratio to about 1.85x. That means that mortgages are increasingly difficult to afford compared to rent, as house prices increase and rents remain stable.

In other words, excluding major factors such as taxes and maintenance, homeowners pay about twice what renters pay.

“This is precipitously close to the 2.3x level reached in December 2007 and the 2.5x level reached in 1988, which preceded house price corrections of 13 per cent and 10 per cent, respectively,” Ed Sollbach and Deep Jaitly of Desjardins wrote in a research note today.

They added ominously that when the buy/rent ratio hit an “unsustainable” 3.6x in Toronto in 1989, it was followed by a 29-per-cent decline in house prices.

Some people pay attention to the buy/rent ratio because rent is the income that an investor seeks from an investment property while they hold it.

But not everyone is worried. Did you know that the Canadian Real Estate Association has their very own economist on staff? He’s got a theory about why the buy/rent ratio is no cause for concern:

“Maybe that’s just telling us that rents are just too low,” said Gregory Klump, the chief economist at the Canadian Real Estate Association in a recent interview. “I’m not a fan of the price-to-rent ratio because it’s so skewed by the fact that rents are subject to rent control.”

I guessing Mr. Klump is so busy intensely studying the numbers for real estate that he didn’t realize there is no rent control on what you can demand for a new property outside of Quebec. You can ask whatever the market will bear, the only limit is what people are willing and able to pay, but maybe that’s what he means by ‘rent control’.

Or maybe he’s just saying that there’s never a bad time to buy the product that his organization is in the business of selling.

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patriotz

@space889:

He’s not even talking about if holding on a property with negative cash flow is good investment or not.

Yes he is.

If I had a place that was costing me, say, $2000 a month and rented it out for $1600/month, over 20 years that property will have cost me 20*12*400 = $96K

He's claiming that this house will have cost him $96K, and that's just plain wrong.

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space889

@patriotz: uhm…that wasn't his point at all! Geez…if you are going to lay the smackdown on someone about how they aren't rational and can't think straight financially, at least actually read the guy's post and understand what point he's trying to get across. He's not even talking about if holding on a property with negative cash flow is good investment or not. He's merely trying to illustrate what the average person will likely think and how they will go about analyse the sell versus hold decision, and what effect that will have on the supply of housing for sale. It doesn't matter if you think the analysis is wrong and stupid because you aren't making the decision for these people. Other people will do what they believe it's in their best interest and right for them, with result consequences on… Read more »

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N O - LYMPICS

Anybody got a copy of Campbells speech for tonite?

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"A-sharp"

@vancouverseniorsecondarymarket: "Question: If the argument against an implicit guarantee (the implied though not directly expressed notion that the U.S. Government would bail out Citibank if they got into trouble again; as an example) is that it raises the risk of moral hazard, doesn’t an explicit guarantee (the Government of Canada guaranteeing our Canadian Sub Prime mortgages), also explicitly guarantee moral hazard?

___________________________________________________________

Bingo!

But don't worry, Everyone loves moral hazard at first, and we are still in the "at first" part of this.

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"A-sharp"

@patriotz: Eye roll…I don't understand why it is so hard for people to understand that future cash flows need to be discounted. This financial illiteracy is a problem that extends into two other fallacies – ignoring the cost of equity – mixing the investing and financing decision. I suppose you can argue until you are blue in the face but people believe what they want to (have the capacity to) believe. …Meanwhile, a patient is telling a doctor that he thinks smoking is fine. …a client is telling accountant that he heard it is fine to expense his golf club dues…and his buddy's been doing it for years. I guess the problem is that there is no immediate stimulus that a financial decision is wrong. You can easily rationalize the $400 negative cash flow if you ignore the cost of… Read more »

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"A-sharp"

@patriotz:

Eye roll…I don't understand why it is so hard for people to understand that future cash flows need to be discounted.

KUTGW

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patriotz

@Hogtown Hozer:

If I had a place that was costing me, say, $2000 a month and rented it out for $1600/month, over 20 years that property will have cost me 20*12*400 = $96K

That's the fallacy I'm talking about. Assuming your mortgage rate is 4%, in the first year it's $2400, second year it's ($2400*1.04)+$2400, third year it's (($2400*1.04)+$2400)*1.04+$2400, etc.

……You sound much more like an investor than somebody who wants to own, and I’d stick my neck out and guess that 95% of the players in this market don’t think like you.

You got that part right. So who gets rich in the end, the smart money or the dumb money?

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Keeping An Eye on Th

http://www.npr.org/blogs/money/2010/10/22/1307569…

"It was a bit like announcing there was no God — like the idea that housing was like God," he says. "Buying is always better. Listen to your mom, listen to your minister, listen to the government, listen to politicians. Everyone says it's better."

Just plug in CMHC in place of Freddie and Fannie and the story is the same one.

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patriotz

@Anonymous:

I think you make the (false) assumption that everybody acts rationally and that the markets should behave that way, too.

Not at all, because if everybody acted rationally we wouldn't have a bubble in the first place, would we?

What I know (not just assume) is that the market must act rationally in the long run, because people who don't act rationally will go broke in the long run.

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jesse

@stagnate: "that can all be attributed to land compression and somewhat stimulative credit conditions."

Land compression? Condos don't compress. I'd also add "speculative behaviour" to your list. Tulip bulbs and hockey cards went crazy too, without access to credit and not much in the way of "land compression."

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fixie guy

125 abolish cmhc Says: "Exactly you fricking maroon. They also had home prices cut in half nationally and they are still dropping."

And that's with four times Canada's population on an island smaller than California of which only a fraction is livable, and they're still a manufacturing powerhouse. But we have Rennie.

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Anonymous

@Elvince: It goes both ways though. Rent controlled apartments in NYC are renting for more than non rent controlled apartments now.

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vancouverseniorsecon

Question: If the argument against an implicit guarantee (the implied though not directly expressed notion that the U.S. Government would bail out Citibank if they got into trouble again; as an example) is that it raises the risk of moral hazard, doesn’t an explicit guarantee (the Government of Canada guaranteeing our Canadian Sub Prime mortgages), also explicitly guarantee moral hazard? Just a thought. (we will soon find out though!) A lively discussion about the relative conservatism of the Canadian Banking System (I feel like that should be trademarked) brought up a question I have been asking myself for a long time. We know that the estimated amount of sub prime mortgages in Canada is in the neighborhood of about 50 billion dollars, 5 billion of which is estimated to the be the super risky no equity (zero down), 40 year… Read more »

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Dan in Calgary

Debt Lover said with great confidence that there are "no black swan events on the horizon".

I envisage a language-processing computer going into meltdown trying to make sense of Debt Lover's statement; I picture one of those sci-fi scenes where the computer starts to shake and rattle, sparks are flying, giant vacuum tubes begin to crack, and everyone abandons ship.

Debt Lover, you're just too funny.

Next you'll be telling us you have a real solution for the square root of a negative number.

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stagnate

ulsterman says: This is from the building manager who is a friend. So rents are up about 65% ‘ish and prices up what? 200%? Houston, we have a problem…

region wide i would calculate rents up approx. 50% (median), prices (median) about 100%. that can all be attributed to land compression and somewhat stimulative credit conditions. if you look at all the data objectively it was all quite predictable. some say i'm a genius but really it's as simple as math and research.

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abolish cmhc

@Anonymous: "duhhh… Japan had emergency low rates too you know…duhhh.." Exactly you fricking maroon. They also had home prices cut in half nationally and they are still dropping. Your point was? I swear to God the highest concentration of the dumbest people on the planet live in Vancouver.

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ulsterman

Some actual rents from S Granville (14th) for comparisons:

Studio suite:

1999 – $580

2010 – $1000

1 bd – $680

Now $1150

This is from the building manager who is a friend. So rents are up about 65% 'ish and prices up what? 200%? Houston, we have a problem…

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Patiently Waiting

After my conversation with my parents banker the other day, I guess I shouldn't be surprised that the craziness continues. You don't need a steady income if you had one a year or two ago. Just bring in those old tax assessments. The lender won't just be accepting of your application…no, they will be downright anxious to throw a mountain of debt on your weakened shoulders.

When I said I might want to wait to see where prices go, the banker reminded that the homoaners will "just pull their houses off the market" if buyers don't appear. Why? Banks will now let the homoaners pile on even more debt in exchange for even less freedom. Up to 125% of their property value: http://www.canadianmortgagetrends.com/canadian_mo…

Mommy I want off this ride. I feel sick.

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Anonymous

@abolish cmhc:

"You are such a complete idiot. Does the term “emergency low rates” not imply something of a short term duration to you? "

Perhaps look at how long Japan's emergency low rates have lasted before calling people idiots?

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/dev/null

@Debt Lover: No black swan events on the horizon

Loved this.

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Anonymous

@realpaul

You've forgotten that they cater to the masses…the ones who can't pick out major nations on a map.

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Anonymous

On News:

COV new hi-tech parking meters

Solar powered, indicators to the Bylaw officer, another cash grab

Mass protest:

Everbody buy a beater, put on 2 days insurance, scratch out VIN number , and park it in the bike lanes….if 25 people do this..chaos

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A. Einstein

Almost time for patriotz to start the late shift

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A. Einstein

107 Debt Lover

Face it, after two years of emergency interest rates, they are not going anywhere quick. Stock markets are moving, with all the cheap cash floating around. No black swan events on the horizon my house poor bears.

========================

And here I thought Andy Kaufmann was dead

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