High buy/rent ratio may lead to housing price correction

High buy/rent ratio may lead to housing price correction

The current high buy/rent ratio may indicate a vulnerable housing market said Desjardins Securities, but others aren’t placing too much weight on the measurement.
 
Canadian house prices rebounded from the recession, hitting a new record in May and bringing the buy/rent ratio to about 1.85x. This means mortgages are increasingly difficult to afford compared to rent, as house prices increase and rents remain stable.
 
So, 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.
 
They added 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.
 
However, at that time unemployment was also rising and a spike in interest rates to 14 per cent forced many homeowners to sell.
 
The problem with the rent/own ratio is that half of the provinces employ rent control, so prices can’t rise with the broader housing market. For example, house prices in some Toronto neighbourhoods have gained 30 per cent in the last year but Ontario limits rent increases to 2.1 per cent.
 
“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 with The Globe and Mail. “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.”
2 Comments
  • Barb 2010-10-20 5:44:46 AM
    Canadians still have the dream to own their own house and we have to remember that this dream is still alive, affordability isn't always a factor when buying a home, however you will see rents increase as more young grads come out of college and into the rental market, with high student loans they will be renters for awhile driving up the rents in non controlled areas. it will probbaly level itself out.
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  • Valerie 2010-10-22 1:06:41 AM
    Isn't that the whole point? We will always have rentals and home ownership... If home ownership costs far outweigh the cost of rentals, everyone will rent forcing a market correction on homes??? I actually think that this is a good thing. There are other factors that can force a market correction admittedly. I remember the 1989 crash and have to ask this question: Did anyone think that home prices would keep going at the rate they were going? Obviously not, however greed made a lot of people ignore the warnings. Many lost their shirts and many made a lot of money...My mom was a real estate agent at the time and she kept her ears to the ground, and recommended to clients to stay put for a year or two to ride out the wave. For those who listened... many had gratitude for her recommendation. For those who didn't although impacted by their loss still had gratitude saying that they should have listened...
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