The home ownership premium in Canada’s largest cities is unprecedented, dangerous to new buyers, and unlikely to persist – and if analogies to the U.S. situation at its peak back in 2005 are at all valid – this is bad news. [Let me explain.] Words: 430

So says Ben Rabidoux (www.theeconomicanalyst.com) in edited excerpts from his original article* which Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has further edited below for length and clarity – see Editor’s Note below. (This paragraph must be included in any article re-posting to avoid copyright infringement.)

Rabidoux goes on to say, in part:

The chart below] shows the price/rent ratio of the largest cities in Canada. Note that Vancouver is roughly 60, Toronto and Montreal are roughly 35, while Calgary is in the low 30s.

Below is a chart from the NY Times showing price/rent ratios in U.S. at their peak.

[A comparison of the chart and table above] implies that valuations in Vancouver are off the charts compared to any US city at [their] peak, Toronto and Montreal valuations are as stretched as Palm Beach and San Diego were at peak, while Calgary valuations are comparable to Las Vegas.

While this sort of ‘analysis’ is admittedly shallow and does not look at other macroeconomic variables, it’s nevertheless troubling considering the findings of a prescient research note from the Fed Reserve Bank of San Francisco which sounded an early warning bell in the US by looking at this very metric:

“The majority of the movement of the price-rent ratio comes from future returns, not rental growth rates. This will not comfort everyone, as it implies that price-rent ratios change because prices are expected to change in the future, and seemingly out of proportion to changes in rental values.

We found that most of the variance in the price-rent ratio is due to changes in future returns and not to changes in rents. This is relevant because it suggests the likely future path of the ratio. If the ratio is to return to its average level, it will probably do so through slower house price appreciation.”

I personally am a huge believer that rents underpin residential house values…[and,] because of this, I am greatly troubled by the unprecedented gap between house prices and rents, which the IMF recently calculated is the most stretched in the developed world:

Conclusion

Virtually every metric that academics use to gauge house price vulnerability points to cause for concern. [As mentioned in the opening paragraph,] the ownership premium in Canada’s largest cities is unprecedented and unlikely to persist – and this is bad news.

* http://theeconomicanalyst.com/content/house-price-rent-ratios-canadian-cities-alarming-levels

Editor’s Note: The above article has been has edited ([ ]), abridged (…) and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

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