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.