Price to rent bubble in the Province

Looky here, the Province newspaper has discovered the price to rent ratio!

Take the house price and divide it by what it costs to rent for a year to get the price-to-rent ratio: Price divided by (Monthly rent x 12) = X.

(Estimates for additional costs of homeownership, such as taxes, maintenance and insurance are factored into the equation.)

If the number is higher than 15, it’s generally not a good time to buy.

If the ratio is less than 15, buying is a better deal than renting, if you plan on living there for at least five years to offset moving and closing costs.

By the time the number hits 20, renting is apparently the way to go, except if buyers expect to stay put for at least 15 years, according to a formula used by trulia.com to rank major urban U.S. centres every year.

B.C.’s numbers, as shown in the graphic, are through the roof, from 29 (Prince George) to 73 (West Vancouver).

Compare that to a few little housing markets like Manhattan (20) and San Francisco (17).  That ratio doesn’t mean house prices are <i>low</i> it just means that they’re more reasonably priced compared to rents.

Since you can’t take on a big loan to pay rent it tends to show how much a place is actully worth in terms of desirability and local economics.

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jesse
Member

I’m glad a local reporter is running some numbers, albeit slightly flawed ones, and throwing it in the faces of some local “experts”. A start, alas their “expert” network is full of the usual suspects.

Now… seriously, Province. If you want any hope of legitimacy on these sorts of articles, find bearish analysts and get their side. Otherwise you deserve every ounce of mockery meted on the blogosphere.

Sigh.

registered
Member
registered

“A price-to-rent ratio used in the U.S….”

Economic principles are the same across the globe, price-to-rent ratios are no more American than mortgage interest.

“UBC professor Tsur Somerville said the ratio of 15 can’t fit all to-rent-or-buy scenarios because of variables such as appreciation, interest rates and other variable costs.”

Not a great endorsement for BC’s academic institutions. Those metrics impact the cost of purchasing, which must be reflected in rent to make financial sense. Maybe they don’t in BC where amateur landlords eat the difference hoping what they lose monthly is made up over time. Between Tsur and Muir this article presents a depressing picture of local real estate ‘expertise’.

patriotz
Member
@fixie guy: Somerville is peddling BS which would get a 1st year finance student an F. Appreciation is not an economic return of an asset. It’s simply the part of its cost which the current owner is able (or isn’t able) to pass on to the next owner. It’s not earnings, which is what the asset passes on to its owner from the user of the asset, and which determines the fundamental value. When evaluating what you would pay for a asset, you can’t make an assumption that the next owner is going to be paying more than you would. That’s contradictory – you’re assuming that he would be willing to pay a price that you yourself would not. In other words, you’re assuming the existence of a greater fool. Any stock market analyst who assumed appreciation a priori when… Read more »
BoogyBear
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BoogyBear
Some of the variable costs are lower in BC, such as snow removal and monthly condominium assessments to some other areas like Ontario. And true the interest rate is a big factor in these numbers. And sure the Province is mixing rental units like apartments with home ownership. So the numbers are flawed. Much easier to look at monthly rental costs compared to monthly mortgage payments plus home ownership costs. During a market trough, it becomes more costly to rent a home than to buy a home, because of the difficulty in saving a down payment. The opposite of what it is today. Of course when that happens the price to rent ratio will also fall, as does the percentage of debt service and the length of time it takes to pay back the mortgage. It will cost you less… Read more »
Harry Wang
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Harry Wang

Canada’s banks, ranked the soundest on the planet by the World Economic Forum, aren’t immune to collapses triggered by falling housing prices, according to the government official implementing new mortgage rules.
Banks Not Immune to Housing-Related Failures: Corporate Canada

Previous failures of Canadian financial institutions were due to bad real estate lending and sharp falls in housing prices, and these can happen again, Vlasios Melessanakis, manager of policy development at the Office of the Superintendent of Financial Institutions, wrote in documents obtained by Bloomberg News under freedom-of-information law. The last failure in Canada was in 1996.

http://www.businessweek.com/news/2012-05-15/banks-not-immune-to-housing-related-failures-corporate-canada

yvr2zrh
Member
Some Mid-month market updates. Based on 10 days of activity to May 14, 2012. MTD Sales – 530 Detached, 800 Attached MTD Lists – 1,166 Detached, 1,907 Attached Projected Sales combined – 2,926 Projected Lists combined – 7,500 Sale to list 39% May should be the month this year with the highest number of sales, although it is a low amount and 15% below the 12 year average. Listings pace are also likely to top out this month and at 7500 would be 28% above 12 year average. Current Inventory – 17,138 Detached and Attached Projected Month-end inventory 18,500 Projected month-end MOI 6.25 (prior month 5.9 and 2 months ago 5.3) Key monthly achievements / Other Market indicators. 1.) Year over year avg prices are now down over 5% for detached and approximately 1-2% for attached. 2.) Van-West detached inventory… Read more »
Makaya
Member
Makaya
The HAM problem is not just felt in Vancouver… Ferrari crash fuels Singapore anti-foreign sentiment A wealthy Chinese expatriate who crashed his million-dollar Ferrari into a taxi killing himself and two others has sparked outrage in Singapore, where anti-immigrant sentiment is on the rise. Websites were swamped Monday with postings attacking Chinese and other foreigners in the city-state after it was reported that a 52-year-old local cabbie had died of his injuries following Saturday’s pre-dawn accident. The crash instantly killed the 31-year-old Ferrari driver, Ma Chi, while the taxi passenger, a 41-year-old Japanese woman, died in hospital two hours later, a police spokeswoman told AFP. Police gave no other details but local media said the Ferrari driver was a financial adviser from Sichuan who was applying for permanent residency and already living in a Singapore penthouse with his family. Disgruntled… Read more »
patriotz
Member
@Makaya: There are a couple of different issues in Singapore which the article touches on, The first is the huge number of migrant workers in the country. Many middle class Singaporeans are coming to the conclusion that this is part of an effort by the government to suppress their wages and there is growing discontent with the government over it. The other is immigration (I mean immigration as we know it in Canada) from the PRC. The reason for this is that ethnic Chinese have a lower birthrate than the Malays and Indians and the government wants to keep the Chinese in a majority. However as we see the locals have many of the same concerns with the PRC immigrants as Canadians do. But PRC immigration is not going to stop as long as the demographic issue remains. The other… Read more »
Makaya
Member
Makaya
@patriotz: I know very well the issues of Singapore (I hear about it daily…), and they are broader than what you describe. “The reason for this is that ethnic Chinese have a lower birthrate than the Malays and Indians and the government wants to keep the Chinese in a majority. However as we see the locals have many of the same concerns with the PRC immigrants as Canadians do. But PRC immigration is not going to stop as long as the demographic issue remains.” Singapore is a democracy only on the surface. Look beyond the facade and all the dirty business he’s involved in becomes obvious. The government’s popularity is at an all time low, and getting worse. The massive immigration from Singapore has only one goal: buying votes to keep the current governing party (PAP) in charge. This policy… Read more »
N
Guest
N

Average selling price in Vancouver down 9.8 per cent compared with a year ago at $735,315

Read more: http://www.vancouversun.com/Vancouver+home+sales+down+April+while+rest+Canada+soars/6624414/story.html#ixzz1uxS8ldZb

Not much of a name...
Member
Not much of a name...

@N: That’s large. Especially when you couple that with much lower sales so that represents a much lower dollar value in RE sales. And we all know what that means….lower commissions.

Anonymous
Guest
Anonymous

@N: ….Average selling price in Vancouver down 9.8 per cent compared with a year ago at $735,315….

So, before deducting rent, I’ve just avoided a 70k loss by renting the last year! Or alternatively, I can rent for 5 years for free compared to the loss a buddy who purchased last year has experienced.

Bring it on baby! Yea!

I love the smell of rent savings in the morning.

Madashell
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Madashell
N
Guest
N

@Not much of a name…:

To be fair, average prices are not great market indicators. What is significant is that those words are showing up in headline font at the top of a newspaper article in Vancouver.

Not much of a name...
Member
Not much of a name...

@N: I understand that, but it’s just a different way to look at the numbers.

When looking at total dollar volume of sales, average is very important. Multiply the average sales price by the number of sales and there you have total dollar volume sales. This is a stat that the BCREA likes to use.

On a YOY comparison, total dollar volume of sales is down by over 20% in Vancouver. This has to hurt RE agents in the pocket book. Period.

Media Whore
Guest
Media Whore

To be fair, average prices are not great market indicators. What is significant is that those words are showing up in headline font at the top of a newspaper article in Vancouver

___________

It is showing up online, but not in the print. Lets see if that same stunning title of selling prices down 9.5% is still there by the end of the day…..

My bet is that it will be replaced…

Manna from heaven
Guest
Manna from heaven
Tales from the office: real-estate anecdotes. One colleague is taking out a $1.4 million bridge loan to cover the purchase of a new home while he waits for his other house to sell. “You didn’t make the sale of your house a condition?” I asked. “No”, he said. He’s already taken 25k off and realizes the market is weak and will probably aggressively reduce it to get it off his hands. Another colleague, the gal who makes 75k a year who was approved for a 600k mortgage, is now eating over $600 a month because the city wants to inspect the house she bought to rent out. The house has three suites, one upstairs, two downstairs. Apparently the bylaws don’t allow for two basement suites so she has converted one into a storage room until city inspects the house. She… Read more »
Harry Wang
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Harry Wang

@Manna from heaven: Are you co-workers HAM???

cause, you know, only us porker munchers do stupid things with money 🙂

Anonymous
Guest
Anonymous

@Manna from heaven: Fine examples of prudent lending by the banks.

jesse
Member

@Manna from heaven: I must live in a bubble. I hear very little of these stories first-hand 🙂

Makaya
Member
Makaya

Some news from CBC…

Canadian home prices flatten in April

(…)
As has been the case for several months, activity in two of Canada’s largest housing markets, Toronto and Vancouver, is disproportionately skewing the national averages.
(…)
“Sales data confirm that high-end activity in Vancouver is well off the peak levels reached at this time last year, which is exerting a gravitational pull on the national average price.”

Prices in the Greater Vancouver area came in 9.8 per cent below the level of a year ago, a fourth contraction in home prices in five months and the largest drop the region has seen since the recession, TD Bank economist Diana Petramala noted.

Anonymous
Guest
Anonymous

real estate expert on BNN just called for a 4 year bull run in Calgary housing market that’s with new report of sales up 30% year over year. Is Calgary the next Vancouver?

jumpin in
Guest
jumpin in

“It bears repeating that the national average price was skewed higher last spring by record level high-end home sales in Vancouver’s priciest neighbourhoods, and that a replay of this phenomenon was not expected this year,” said Gregory Klump, CREA’s chief economist

So a few expansive sales in ONE city, and in only some neighborhoods of that city is enough to skew a NATIONAL average. I wish I could see the numbers…

registered
Member
registered

@23 jumpin in Says: “It bears repeating” implies real estate Klumps raised warnings about the temporary beneficial effect on the national average of Vancouver high end sales during last year’s tear. I wouldn’t bet a mortgage on it.

Anonymous
Guest
Anonymous

@fixie guy: It’d be funnier if he said “it bulls repeating”…

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