Don’t worry about buy/rent ratio
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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October 27th, 2010 at 3:01 am
@space889:
Yes he is.
He's claiming that this house will have cost him $96K, and that's just plain wrong.
October 27th, 2010 at 2:37 am
@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 the housing market. If the decision they make is not the one you agree with, too bad becasue they aren't basing their decision based on your approval.
Lastly, how do you know swallowing the loss is the best course of action for everyone? You can predict the market for the next 20 years with pinpoint accuracy? You don't know where the RE market will be in 10 or 20 years, only probability of what it might do. Someone who bought a house at the top of the last boom in 81/82, held on with negative cashflow and sold again during 07 after 25 years might end up coming out way ahead than if they had sold for a big loss during the bust. So stop this holy than thou attitude of if you don't sell, you are a moron and you should be smart to swallow the loss now attitude. Just because RE will bust in the next 5 or 10 years doesn't mean everyone is better off to sell now instead of hold on for the long haul. Sure they will lose money on paper during the bust, but where's the guarantee they will make back their losses via other means like stock markets if they sold? Holding on could very well be the best long term decision for them.
October 27th, 2010 at 12:04 am
Anybody got a copy of Campbells speech for tonite?
October 26th, 2010 at 11:39 pm
@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.
October 26th, 2010 at 11:35 pm
@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 equity or fail to discount future cash flows.
…Rant over…It's off to work.
October 26th, 2010 at 11:27 pm
@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
October 26th, 2010 at 10:15 pm
@Hogtown Hozer:
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 got that part right. So who gets rich in the end, the smart money or the dumb money?
October 26th, 2010 at 10:07 pm
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.
October 26th, 2010 at 9:04 pm
@Anonymous:
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.
October 26th, 2010 at 8:23 pm
@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."
October 26th, 2010 at 3:58 pm
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.
October 26th, 2010 at 3:23 pm
@Elvince: It goes both ways though. Rent controlled apartments in NYC are renting for more than non rent controlled apartments now.
October 26th, 2010 at 3:23 pm
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 mortgages. But we live in a country of 36 million people. Just how much were the big six worth? How do you measure their solvency? How could banks originating mortgages to morons really be the envy of the world? (that was actually the official title of the loan origination program in Vancouver- Mortgages for Morons. Don’t believe me? Google it.)
So I did some digging.
Well, shockingly, they actually do have a formula for measuring the health of banks. They call it tangible common equity. From our friends at Wikipedia:
Tangible Common Equity (TCE) refers to the subset of shareholder’s equity that is not preferred equity and not intangible assets.
TCE is an uncommonly used measure of a company’s financial strength. It indicates how much ownership equity owners of common stock would receive in the event of a company’s liquidation.During the financial and economic crisis of 2008-2009, it gained public popularity as a measure of the viability of large commercial banks.
TCE, when used in a ratio with tangible common assets, is a measure of a bank's ability to absorb losses (e.g., homeowners defaulting on mortgages) before becoming insolvent. It is one of the factors considered by the office of the comptroller of the currency to determine if a bank has become insolvent.
It can be calculated from a company's financial statements.
From Eric Sprott, of Sprott Asset Management,by way of his newsletter:
"Looking at the Canadian system more closely, all five Canadian banks are leveraged at an average of 31:1, which is actually the lowest leverage ratio during the three years that we reviewed. This implies that if the Canadian banks’ tangible assets were to drop by 3%, their tangible common equity would effectively be wiped out… We are always cautious about investing in companies that have zero or negative common equity – we’ve seen what happens to public companies that trade at those levels, General Motors being a good example."
"Acknowledging the leverage levels above, you may wonder how the Canadian banks escaped the 2008 meltdown unscathed. The answer is that they received significant assistance from the Canadian government. First, they received $65 billion in liquidity injections from the Insured Mortgage Purchase Program (IMPP), whereby Canada Mortgage and Housing (CMHC) purchased insured mortgages from Canadian banks to provide additional liquidity on the asset side of their balance sheets. Next, the Bank of Canada provided them with an additional $45 billion in temporary liquidity facilities. Finally, a Canadian Bank (that shall remain nameless) also received assistance from the Canada Pension Plan (CPP) through the purchase of $4 billion in mortgages prior to the IMPP program, for a total government expenditure of $114 billion. For reference, the entire tangible common equity of the Canadian Banks in 2008 was $68 billion. Can you put two and two together? The Canadian government injected a sum through mortgage purchases worth more than the entire tangible common equity of the Canadian banking system! On top of that, the Bank of Canada provided more than 50% of the tangible common equity of the system in emergency liquidity facilities. Mark Carney, Governor of the Bank of Canada, acknowledged this, albeit in an indirect way: “Policy-makers had to do many unpalatable things to save the economy from the financial system – a financial system that begged for mercy.”
Was the Canadian Banking system bailed out by the government of Canada? Clearly it was. Were our banks insolvent? Clearly they were.
I suppose you are sitting here wondering why if we had the best banking system in the world, why did the banks need to be bailed out using Canada Pension Plan money? Well, I just ask the questions.
So the Canadian Banking System: over leveraged, under capitalized and recently insolvent.
October 26th, 2010 at 3:05 pm
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.
October 26th, 2010 at 2:24 pm
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.
October 26th, 2010 at 2:14 pm
@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.
October 26th, 2010 at 1:48 pm
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…
October 26th, 2010 at 1:28 pm
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.
October 26th, 2010 at 1:17 pm
@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?
October 26th, 2010 at 1:07 pm
@Debt Lover: No black swan events on the horizon
Loved this.
October 26th, 2010 at 1:04 pm
@realpaul
You've forgotten that they cater to the masses…the ones who can't pick out major nations on a map.
October 26th, 2010 at 1:02 pm
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
October 26th, 2010 at 12:57 pm
Almost time for patriotz to start the late shift
October 26th, 2010 at 12:45 pm
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
October 26th, 2010 at 12:45 pm
Saying that 'Canada' as a whole is overvalued by 25% is to include every shack and lean to, every where from Butt Fuck Labrador to Cocaine Heights West Vancouver…and convientantly 'divide and average' by the number of units in the sample. Is this issue moronic or what? How simple can you be to listen to this fucking halfwitted song and dance.
Sorry economist guy from someplace in Analville….but Vancouver is overpriced by factors of ten according to the same 'rent/income ratio used to state this stupid statistic.
Dear Economist: Prices in Spuzzum BC , Chug a Lug Saskatchewan and Rumpy Pumpy New Brunswick can not be compared to Vancouver or Toronto or to one another. Anyone falling for this crock has to be an idiot. This is real whore mathematics…..any wonder why it was printed?
Every location this douchebag mentioned was painted with the same 'moron paint' as was used for Canada.
Speaking of moral paint…the liberals in the media have just been thrown off the ivory tower with the election of Rob Ford as mayor of 'Toronto the Good'. They're already calling him bad names and seething under his benign gaze knowing that they're really fucked now.
What is it with the world swinging towards conservative values all of a sudden. Can it be the pendulum the indicates people around the world are finally fed up with the high tax and spend parasites that have infested governments and bureacracies?
One new HST lie and Gordon the Idiot King is running scared from a lynch mob…..Mayor Moonbeam has an uprising against this crazy multi million dollar bicycle lane rampage…US…UK all swinging to the right for fiscal responsibility. Great news…..every macro brings big change…..Ford smiles when he talks of throwing the unions out of city hall……the tide is turning…..as we knew it would.
"Come gather round people wherever you roam
And admit that the waters around you have grown"
A win for Ford could mean a big win for Harper…..the majority has spoken…no more parasites stealing the tax revenue….a change for Canada is in the works……The next generation will learn in school about the evil parasites and union people who tried to wreck our country and the world will be a better place.
Trudeau must be cross dressing in his grave.
October 26th, 2010 at 12:36 pm
"there is no rent control on what you can demand for a new property outside of Quebec."
You can ask whatever you want for a new property in quebec. Only existing properties are rent-controlled in quebec, and there's like a million ways around it.
The only place I know where rent is really controlled is New-York. Anywhere else it's mostly a show imho.
October 26th, 2010 at 12:33 pm
@Debt Lover: You are such a complete idiot. Does the term "emergency low rates" not imply something of a short term duration to you? How long do you think this country at every level from federal to individual can run on record debts and deficits? Now that these "emergency low rates" have sucked in thousands of idiots like you to un-wittingly fabricate an economic recovery, what does your pair of brain cells tell you will happen next?
October 26th, 2010 at 12:32 pm
See that back East there was quite a lot of turnover in civic elections.
I see Gordo scraped the bottom of the barrel letting that pompus ass John Les back in….but then he's got to try sell HST hahaha
October 26th, 2010 at 12:09 pm
@painted turtle: 23.9% ya right… maybe in Sudbury. What about good ole Hongcouver? What will Klump of shit's and Tsuir the hooer's response to this one be? "umm… they obviously are'nt taking into consideration the mountains… and umm.. well it's different here you know…"
October 26th, 2010 at 12:06 pm
@Debtlover
Daily sell list ratios are now over 100%, signaling that the much hoped for crash has never materialized, and may be put on the backburner for another decade.
Wow…this guy predicts decades at a time…must be quite a crystal ball.
October 26th, 2010 at 12:02 pm
Bank of Canada governor Mark Carney agreed Tuesday that an abrupt correction in Canada's housing market is possible.
Appearing before the Commons finance committee and responding to a question from Nova Scotia MP Scott Bryson, Carney said he was not predicting a significant drop in prices, but given how far prices have risen and the high level of Canadians' household debt, it could not be ruled out.
Read more: http://www.cbc.ca/money/story/2010/10/26/carney-f…
October 26th, 2010 at 11:53 am
http://www.ctvbc.ctv.ca/servlet/an/local/CTVNews/…
Canadian house prices are overvalued, but not as much as those in Australia, Hong Kong or France, according to a new worldwide survey.
The data published in The Economist magazine's annual survey shows Canadian homes cost on average 23.9 per cent more than they are worth.
That's somewhere around the middle of the pack. The scale ranged from Australia at the high end, where homes are 63.2 per cent overvalued, to Japan at the low end, where houses are 34.6 per cent undervalued.
Canada's house prices were up 4.5 per cent from one year earlier. And between 1997 and 2010, prices rose a whopping 70 per cent, the report said.
Compared to a year ago, when 15 of the 20 countries on the list were in negative territory, this year only four countries were undervalued.
"Singapore, Hong Kong and Australia boast the gaudiest year-on-year price increases, even if the rate of appreciation is down a bit from the summer," the report states. "House prices in China rose by 9.1 per cent in the year to September, compared with a 12.4 per cent rise in May."
The Economist's analysis of "fair value" of housing is based on comparing the ratio of current house prices to rents, with the long term average.
Simply put, the purchase price of a house is divided by the rent it could have earned per year, and the result is the price-to-rents ratio.
A high result could mean a house is overvalued, while a low number means it could be undervalued.
Here are the results of The Economist survey:
Overvalued countries:
* Singapore: 19.2 per cent
* Hong Kong: 58.1
* Australia: 63.2
* China: 18.1
* Sweden: 41.5
* Belgium: 21.6
* France: 42.5
* Canada: 23.9
* Netherlands: 23.6
* U.S.: 4.6
* Denmark: 19.4
* New Zealand: 20.2
* Britain: 32
* Italy: 10.5
* Spain: 47.6
* Ireland: 13.2
Undervalued countries:
* Germany: -12.9
* Switzerland: -6.4
* Unites States Using the Case-Shiller national index): -2.1
* Japan: -34.6
October 26th, 2010 at 11:52 am
@Hogtown Hozer:
"Maybe I’m a bit slow on the uptake on this one. So you’ve bought a place that you’re renting out (but it’s not an investment ??)"
That's correct, it was a primary residence. It's being rented out because I had to relocate due to a change in employment. This is not at all my situation, and I'm saying "I" even though it's all hypothetical. You need to read the other posts to get the gist.
" and after 20 years, you’ve only lost $96k so it’s a good investment? I guess this is the new economy."
Nope, I've "lost" $96K and have a property to show for it at the end, which is mortgage free.
If I were to sell instead of moving out, I'd take a $100K hit (for example) and have nothing to show for it later on.
I'm simply providing an example counter-argument for why those who bought primary residences won't sell even when the SHTF, which is what an earlier poster was suggesting might happen next spring.
October 26th, 2010 at 11:38 am
Contrary to popular bear opinions, the month of October is seeing a resurgence in RE activity in Vancouver.
Daily sell list ratios are now over 100%, signaling that the much hoped for crash has never materialized, and may be put on the backburner for another decade.
As everyone has said before, Vancouver really is different. No crash after the Olympics; no crash after the new April mortgage rules that were designed to pop the Vancouver and Toronto markets; no crash after the HST; no crash after the (ahem) “massive” increase in interest rates; no crash period.
Everyone likes to cite price to income ratios as being astronomical, but the stats don’t capture the fact that the majority of homes in Vancouver have mortgage helpers. Buyers don’t even consider purchasing without the mortgage helper – both here and in the burbs.
In fact, I challenge anyone to point out another jurisdication in Canada where mortgage helpers are the norm, and where there is huge pressure on local governments to legalize secondary suites.
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.
October 26th, 2010 at 11:21 am
Whitebear Says:
October 26th, 2010 at 6:49 pm
"Well. How’s the doom and gloom going?"
Fine. Why?
October 26th, 2010 at 11:15 am
@Anonymous:
…..@patriotz:
…….
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 (this is obviously a gross over-simplication and doesn’t account for inflation, vacancy, what I’d have paid on the mortgage up until this point, 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.
………..
Maybe I'm a bit slow on the uptake on this one. So you've bought a place that you're renting out (but it's not an investment ??) and after 20 years, you've only lost $96k so it's a good investment? I guess this is the new economy.
October 26th, 2010 at 10:49 am
Well. How's the doom and gloom going? Care to explain why Sales/List shoot above 100% for two days aleady within the last 7 days.
Also, care to explain to me why this house just got sold at this price.
http://www.realtor.ca/propertyDetails.aspx?proper…
October 26th, 2010 at 10:42 am
100 Boombust
Then, they went to interview that Pitchman Tsur What’s-his-face, and he earnestly agreed…
===========================
That's not Tsur..it was either Bob Dylan or Eric Bogosian trying to avoid Hollywood starwhackers
October 26th, 2010 at 10:39 am
"Larry Yatkowsky Says:"
Where the hell have you been for the last 230 days of lists exceeding sales?
Nice time to show up Realtard.
October 26th, 2010 at 10:37 am
Oh thank God…
supraboy is OK
hey I know how Roman Candles work
but where do you stick Greek candles ?