Monday, November 19, 2007

Price to Rent Ratio Stinks in Vancouver


Well another loverly day in the blissful paradise that is Vancouver. Warm, balmy tempuratures in the low single digits, liquid sunshine of different varieties and over 8 hours of wonderfully cloud-filtered daylight. The weather must be one of the reasons for the real estate prices being higher here than anywhere else in North America. Really, California or Florida, give me a break . . . all they have is sun, sun, sun and hot, hot, hot. Who wants that!?!?! (um - don't answer that - me - thats who!)

Let's look at the Price / Rent ratio in our splendid and worthwhile village, er, I mean Metropolis of Vancouver. The average price / rent ratio over the data period has been 19.9 and currently sits at an all time high of over 27 as of June 2007.


Now let's look at Price / Rent ratio in other loverly places where sadly for them it doesn't rain as much. How would you get mould to grow if it doesn't rain? How would building envelope specialists be employed in these sunny climes? Notice anything about most of the more pricey real estate markets in the US? (hint - the earth orbits it and clouds block our view of it in Vancouver 300 days a year)



Vancouver clearly has nothing to worry about with its cost of living because quite obviously this is such a desireable place to live and nothing like Honolulu or San Diego or Miami. Smart people (or amazingly rich and stupid people) will pay anything to experience the bone-chilling warmth of Vancouver in November (and December and January and February) with short and wet days and dreary and soaking nights.

Price / Rent ratio be damned. What is the point of all these silly numbers anyway? Afterall how can you measure the cost of our amazing climate and mouldy buildings? Priceless I say.

Gosh - I am so sick of this self-absorbed city.

31 comments:

Strataman said...

I do not see a problem we're lower then Honolulu so we are okay. My daughter was living in Hawaii and she moved back to Vancouver this year, so I go to Kits to visit her instead of going to those dopey beaches, which doesn't bother me however it might bother her.... I cut her outa my will !
:-)

freako said...

I would have thought that we would rank near the top in the U.S. I guess our affordability is worse than our price/rent multiple. By implication, our rent to income ratio must be high too.

Strataman said...

"By implication, our rent to income ratio must be high too." Probably it would be interesting although I sometimes wonder how that figure could be accuarate..construction jobs which comprise a large part of Vancouver employment pay well, yet have absolutely no bearing on long term income. They would follow the housing bubble, so to get a true take on income I would suggest that a large percentage of those incomes should be disregarded.

Jade East said...

Here is a link to a RBC study on Price to rent ratio in Canada. Looks like were a " bit off " compared to T.O.

http://www.rbc.com/economics/market/pdf/citytrend.pdf

jesse said...

US gets mortgage tax writeoff. Seems weird that the multiples are so high compared to Vancouver. Seems like something structural that would lead to higher avg ratio.

freako said...

US gets mortgage tax writeoff. Seems weird that the multiples are so high compared to Vancouver.

Well it seems that compared to the U.S. bubble markets we have:

1. Obscene prices
2. High rents.
3. Mediocre incomes.

Reasons:
High rent to income can only mean that people are willing to pay a premium to live here.

Implictations:
The price to rent multiple won't get much help from the denominator as rents have little room to rise. They already take up a significant portion of incomes.

mohican said...

freako - I think you draw the right conclusions from the data. Rent has no room to rise at this point ss rent / income ratio is higher than most other markets.

Clarke said...

Neat graphs. I had been doing price to earnings ratios in my complex, and all were around 27 or so....

I seem to recall from my finance courses that a normal P/E ratio is between 10 and 17, and anything in the 20s suggests recent growth in price or speculation. Based upon your numbers, what would a normal ratio be for real estate?

freako said...

Based upon your numbers, what would a normal ratio be for real estate?

I don't think there is such a thing. It depends on interest rates, expected population growth, expected economic growth, average density and availability of buildable land.

jesse said...

"High rent to income can only mean that people are willing to pay a premium to live here."

So Vancouver is different? :)

I understand the price-income ratios being higher in Vancouver but I don't understand the difference in the price-rent ratios.

Drachen said...

It's interesting to look at those RBC graphs and compare them to Mohican's graphs. Since Mohican's graphs only go to '92 it doesn't really tell the whole story. As I've always suspected the bubble actually began inflating slowly back in the late '80s when it looks like price/rent was around 10-12.

Personally I think that slow escalation of prices has been a big part of what's driving the "prices never go down" myth. Once that myth is well and truly busted I think it only makes sense for prices to revert to inflation adjusted mid '80s levels or 10-12 price/rent. This seems to also align very closely with the expected median income/median house price multiples we should expect.

In other words, I'm calling a 60-65% drop before things level off. Every set of numbers I can find seems to back that up.

freako said...

I don't understand the difference in the price-rent ratios.

Pretty simple really. If people are drawn to a city for non-economic reasons you have a scenario where incomes are low relative to rents and prices.

jesse said...

That explains price-income and rent-income ratios but not price-rent ratio. Maybe I'm missing the obvious.

freako said...

That explains price-income and rent-income ratios but not price-rent ratio.

What is it about the price-rent ratios you don't understand?

mohican said...

The percentage of average income that is used for shelter costs (rent and/or own) in the vancouver area is higher than the Canadian average. I don't have the exact numbers in front of me but it doesn't surprise me that Vancouver is expensive - shocking!

What this means is that the price rent ratio is lower than we might expect based on our extremely poor affordability and high property prices. We rank at the top of the list in unaffordability and average cost for homes but we do not rank at the very top of the list (just close) for price-rent ratio because our rents are higher.

patriotz said...

Freako, you're off base. You're entirely correct that a desirable city has a high rent/income ratio. Vancouver has always had this, like SF, etc. Living in the city is perceived to have a higher utility so people are willing to pay more of their incomes for shelter.

But that has nothing to do with price/rent. A high price/rent is a subpar yield on investment. In other words a bubble, and Vancouver is among the bubbliest. People are simply paying way more to buy properties than the value of shelter, i.e. the yield, justifies. Period.

BTW Mohican, you are comparing Vancouver price/rent with US price/rent, but of course as we are now seeing almost the entire US is in a bubble. If you compare with other Canadian price/rents you will see how out of line Vancouver is to cities where prices make sense, like Montreal and Ottawa (although the latter is still somewhat overpriced IMHO).

patriotz said...

Once that myth is well and truly busted I think it only makes sense for prices to revert to inflation adjusted mid '80s levels or 10-12 price/rent

Back in those days you could buy a house for 125K, rent out the main for 750 and the suite for 500 (give or take). That's a monthly price/rent of 100 or 8 (!) annually.

Do keep in mind interest rates are lower now, so yes I think 10-12 is in the ballpark once the reality check arrives.

jesse said...

"A high price/rent is a subpar yield on investment. In other words a bubble, and Vancouver is among the bubbliest."

Yes, that's what I was trying to get at. But why does Vancouver (the "bubbliest city around") currently have a price/rent ratio lower than half the listed US cities in the post?

patriotz said...

Well, Vancouver's price/rent, 27 is the same as current US disaster areas like Cal Inland Empire, Las Vegas and Miami. Note also that prices in the US have been falling all year, while Vancouver has still been going up, which means that using June numbers makes Vancouver look less overpriced.

The highest p/r, 50.9 for the SF East Bay, is suspect IMHO. Keep in mind that the East Bay contains most of the area's "ghettos" which probably had grossly overpriced sales due to mortgage fraud. It makes no sense at all for this area to have a higher p/r than San Francisco itself which is much more desirable.

Remember also, that due to mortgage interest deductibility the p/r effectively nets out to a lower value for owner-occupiers in the US.

freako said...

But that has nothing to do with price/rent. A high price/rent is a subpar yield on investment.

I think we view the cause and effect slightly differently.

If people are attracted to a city for non-economic reasons, we will see:

1. Low incomes
2. High rents
3. High prices

From the above we get:

1. High price/income (affordability).
2. High rent/income.

You are right, if we inverse the price/rent we get yield. A high price/rent is low yield.

I am not sure if you are getting my point. I am not trying to explain the high/price rent. I am just pointing out that based once we take high rent/income into consideration, the situation is actually worse than the price/rent indicates. In summary:

1. Obscene prices.
2. High rents
3. Mediocre incomes
4. Pathetic affordability
5. Rents physically constrained by incomes.

freako said...

But why does Vancouver (the "bubbliest city around") currently have a price/rent ratio lower than half the listed US cities in the post?

That was why I was trying to explain. Because our rents are high compared to income.

freako said...

NAR numbers and the accompanying spin are out.

Sample:In the third quarter, 93 out of 150 metropolitan statistical areas show increases in median existing single-family home prices from a year earlier

jesse said...

"...once we take high rent/income into consideration, the situation is actually worse than the price/rent indicates"

So you are saying renters cannot afford the ownership premium and this reduces the P/R ratio.

I don't discount this argument but I still think there are structural differences between the U.S. and Canadian markets that could partly account for the discrepancy.

freako said...

So you are saying renters cannot afford the ownership premium and this reduces the P/R ratio.

I am not sure exactly what you mean, but I don't think that is what I had in mind.

I don't think there is a cause and effect between rents and prices. Rather I think both are high as a result of the city being attractive for non-economic reasons. Lot's of people with mediocre incomes results a higer percentage of income spent on housing than either a fast growing economic driven city, or a stable non-growing city. This manifests itself as high rent/income and high price /income. As a result, price/rent isn't as bad as affordability.

On the other hand, you'd think that high yield would lead to more construction which will knock rents back down. This is where we consider the fact that there is divergence between condo price/rents and SFH price/rents. They are different beasts. More on that later.

Adrian said...

Is there a source for median incomes by neighborhood or postal code? If that could be coupled with sales data and rental data and put on a map which changes color gradients over time... that should turn out be quite enlightening.

patriotz said...

On the other hand, you'd think that high yield would lead to more construction which will knock rents back down.

I think you mean high price, not high yield. High yield means low price. Supply is driven by price of course.

There is no purpose-built rental construction being built in Vancouver at all, because the yield is so low. Rather all new construction is being sold to owners who are buying for expected capital gains, not yield. I.E. it's a bubble. Indeed you get rental stock turned into condos for this very reason.

But this has no effect on the actual supply of rental accommodation - just a shift in the ownership of it from true investors to speculators.

So you are saying renters cannot afford the ownership premium and this reduces the P/R ratio.

It has nothing to do with an "ownership premium", which is just happy talk for a subpar rental yield.

Freako is just saying that since rents in Vancouver are less affordable in terms of incomes than most other places, so will prices be less affordable for a given price/rent.

there are structural differences between the U.S. and Canadian markets that could partly account for the discrepancy.

Such a generalization makes no sense. Vancouver is as out of whack with Montreal and Windsor as San Francisco is with St. Louis and Houston.

freako said...

Freako is just saying that since rents in Vancouver are less affordable in terms of incomes than most other places, so will prices be less affordable for a given price/rent.

That is exactly what I am saying. The important thing to note is that it will act as a physical barrier to rising rents. Thus the only way out of this mess is falling prices or rising incomes.

the pope said...

Interesting post Mohican - do you happen to have the data for those US cities from their peak (around 2005) Didn't rents go up in cities like Miami just before the bust or is that an urban myth?

freako said...

nDidn't rents go up in cities like Miami just before the bust or is that an urban

The reasoning that rents go up because more people are priced out is humorous.

Warren said...

The reasoning that rents go up because more people are priced out is humorous.

True, but don't statistics indicate that vacancy rates are at all time lows and rents are high just prior to a bubble pop? I think this was true in Miami, and now they are flooded with both listings and rental availability (probably the same units). The only reason I can see is speculators holding on to empty condos in hopes they will sell in 6 months at $X profit.

Trevor said...

I would love to see an update of this data now that the US bubble has burst?