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:
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.
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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The following charts indicate relative performance of US home prices in Phoenix, Los Angeles, San Francisco, Chicago, Las Vegas, New York and Miami to Canadian home prices in Vancouver, Calgary, Toronto, and Montreal. US home prices are reflected in Canadian dollars for comparison purposes. Words: 240
Canada, France and Switzerland stood alone among nine markets measured in recording annual price gains, based on second-quarter data, with inflation-adjusted price increases of 5%, 5% and 4%, respectively, compared to declines of 6% in the U.S., the U.K. and Australia, 10% in Spain and 14% in Ireland. In fact, Canada’s home prices have escalated 44% since 2005 – with a high of 68% in Vancouver – and they are up 7.7% in the past 12 months! Words: 1244
The explosion of Australia’s mortgage debt is viewed by many economists and commentators as the key factor behind Australia’s unaffordable housing [and the primary] reason why Australia’s housing bubble is larger than that experienced in the United States in the mid-2000s. [Another factor is] the strangulation of fringe urban land supply via increasingly restrictive planning processes. [Let me substantiate that contention by comparing the two countries housing situation via a number of descriptive graphs. Words: 817
The rat-through-the-snake process of working down existing and prospective distressed properties is likely far from over, and how that process plays out will no doubt have an impact on how much housing prices will ultimately adjust. [Let’s take a look at some differing points of view in that regard.] Words: 497
There has been a deluge of articles recently about the upticks in the housing data…[yet, while] I do not dispute the improvement in the data regarding home starts, permits, pending sales, etc.,… [see graph below] these data points are still mired at very depressed levels so the assumption is that if home building is stabilizing then it is only a function of time until home prices began to rise as well. Right? Not so fast.. [Let me explain.] Words: 1100
According to both the Case Shiller and RadarLogic indices housing prices have been essentially flat for the past 2 years after having fallen by a third from their 2006/7 highs. [That being said, surely we can now rule out another collapse, can’t we? Words: 764
Yes, you read that right; get ready for the next housing boom. You’re probably thinking, “How could that be with all the mortgage delinquencies and foreclosures going on, and the record levels of housing inventory? Well, it’s not going to happen soon – [probably] not for several more years – but it’s coming. [Let me explain to you why it is inevitable.] Words: 589