Canada

Canadian Real Estate Prices Will Drop, Or Rents Will Soar Show OECD Numbers

Canadian Real Estate Prices Will Drop, Or Rents Will Soar Show OECD Numbers

Canadian real estate prices are about to drop, or rental unit prices are about to soar. Numbers from the Organisation for Economic Co-operation and Development (OECD) show the home price-to-rent ratio is making a parabolic rise. Real estate prices have not been this detached from rental prices in the 47 years of data we could obtain.

House Price-To-Rent Ratio Explained

The home price-to-rent ratio is one of the most basic economic principals used for real estate valuation. It’s the ratio of the cost of carrying a home for a year, compared to the cost of a year worth of rent. Basically, it helps people understand if you should rent or buy.

That’s pretty straigtfoward, what isn’t is how to read the numbers. What you’re looking for is any deviation from the baseline. If it starts to drop rapidly, renting is becoming a waste of money. In this event, home prices will either rapidly rise, or rents will drop.

Conversely, if the index rises too quickly, renting becomes better deal. When this happens, rents will either follow with a steep climb or homeprices will drop. In order for rents to rise however, there needs to be a rapid increase in wages to support it. If you’re using the index to help figure out which way prices are going, you should watch if wage growth even supports the possibility.  There’s a reason Realtors that deal with investment properties track unemployment.

Canada’s OECD House Price-To-Rent Ratio

OECD index numbers show Canada’s house price-to-rent ratio started accellerating really fast. At the end of the second quarter of 2017, the index read 141.3 – a 3.59% increase from the quarter before. When compared to the same quarter last year, this is a massive 23.2% increase. To put this in perspective, from the first quarter of 2007 to the second quarter of 2016, the index only rose 23.5%. This means the increase in ratio over the past year, was the equivalent of the 9 years before that.

Source: OECD.

Will home prices come down, or rents soar? There’s some indication that rents have started climbing in places in like Toronto. It’s unclear if incomes are rising fast enough to support such massive rent increases. But that’s just Toronto? The rest of the country also saw home prices rocket, and rents didn’t quite jump the same amount.

Where do you think prices are going? Leave your comments below.

Like this post? Like us on Facebook for the next one in your feed.

Discuss On Facebook

14 Comments

  • Reply
    Dirty City 3 months ago

    I hate Toronto.

  • Reply
    Two Words: 3 months ago

    Rent Control

  • Reply
    R. Losier 3 months ago

    Neither, … more rentals will be build.

  • Reply
    Justin Thyme 3 months ago

    Rent has to cover the cost of the mortgage on the rental property.

    I suspect there will be a time lag between the soaring cost of property, and the soaring increase in rent to cover the mortgage carrying costs of that property.

    Only rents on recently-purchased rental property will be squeezed by high mortgage payments on the rental property. Property that has been bought years ago and rented out will not face the same pressures.

  • Reply
    Anne Hamilton 3 months ago

    You should plot average/median house-hold income against this ratio to further underscore this wackiness.

    Net worth could also be a proxy.

    Are there stats per city or province?

  • Reply
    Jonathan 3 months ago

    This is so wrong when our domestic population is not growing and the cost of construction are not rising. The government in Ontario, BC and Canada, all Liberal Parties, need to get out. This is a huge wealth transfer from the young to older gens. We all know that the younger gens have been screwed in every direction, with low wages, high unemployment and by the way, no plan for pensions for them, let alone defined benefits like we’re paying out to government workers using debt. Don’t worry kids, that’s on your shoulders too!

    What a country. It wasn’t always like this. We use to be proud of lowering expenses and increasing incomes. Now it’s all about making the rich rich and the poor poor. I’d say it was the Americanization of Canada, but that’s incorrect. Down there it is the free market that rules. Here it is the Liberal Party(s) that are purposefully and ignorantly doing this. If we let the free market take care of this, they’d build too many homes and the price would fall to replacement cost – at least once and awhile.

  • Reply
    Jake Carter 3 months ago

    Yikes, looks like the late 80s’ all over again.

  • Reply
    Dan 3 months ago

    The thing is that these stats need to be area specific. For example Toronto condo rents are soaring, there is not enough supply and people pay more and more (and somehow can afford this crazy rent). At the same time houses in suburbs are rented cheaper than small apartments in downtown, but those houses cost twice more.

    If you try to plot price-to-rent graph for Toronto condo’s, graph will not be so steep…

    Condo is usually entry level purchase for first-time home buyers and given today’s rent prices it still makes sense to buy condo rather than rent it(if you have downpayment). When it comes to houses, people who buy them sell their previous house (at huge profit). So when someone buy 1.3M detach, big chunk of it might come from sale of previous house. And it’s not accounted in graph above.
    So it’s much more complicated than plotting price-to-rent graph. It needs to be done separately for different segments of the market and for different areas.

  • Reply
    Dan 3 months ago

    In addition to last comment, it would be nice if you could publish price-to-rent graph but limited only to condos (let’s say in Toronto) which is entry level purchase for first time home buyers. As long as it makes sense to buy for first-time home buyers, it will feed upper level of housing “pyramid”

  • Reply
    Al Daimee 3 months ago

    The rental market, in downtown Toronto specifically, is increasing now partly due to the incoming rent control. Landlords are concerned that their spread between rent and carrying costs are going to widen negatively and so the base rent will increase quickly over the next few years as rentals turnover. This will be further exacerbated should minimum wage be increased over the next 2 years, making condo fees shoot up as the majority of the maintenance costs are labour driven. The only way the Ontario government’s Fair Housing Plan makes sense is if you plan on being a long-term tenant in the same property.

    To the remark about construction costs not increasing, this is not true. There are unions behind all construction trades and they have wage increases annually, plus government costs for development are also increasing every year, as are materials. The main cost variable that can be controlled is the profit margin of each development and that is often tied to the demand driven by the developers’ ability to hype their projects.

    I have recently done rent vs. buy scenarios for some renters and depending on the available cash for a downpayment, it may make sense for you to own given the low rate of return of safe investments (not playing specific stocks = risk) and high rental cost vs. the tax-free equity of real estate growing even at a normal historical pace of 3-4%. The key here is the leverage that a 20% down payment gives you on a massive investment amount. This factors in all acquisition and selling costs, including land transfer taxes and legal fees.

    If rents continue to increase, which has already begun based on what I have been seeing as a professional Realtor, then the buy scenario can become more attractive in today’s market environment where buyers have the ability to negotiate price and interest rates are still insanely low.

  • Reply
    brent 3 months ago

    Are these rental numbers based on all rents, or just recent rental amounts in leases? What is the source of the data? A lot of tenants in Toronto have experienced slow rent increases because they are protected by rent control. Until recently, this excluded all the newer condos that are rented out.

    Rental rates can only go as high as the market can bear. They go up with income. But if you are just reporting rental rates for recently signed leases, this may be upwardly biased because the recent market for rentals is tight and so many renters stay put to keep their rent below market-rate.

  • Reply
    RL 3 months ago

    Toronto vacant homes tax could be hard to enforce, city officials say
    The Globe and Mail
    Published Monday, Jun. 19, 2017 9:04PM EDT
    Last updated Tuesday, Jun. 20, 2017 7:18AM EDT

    Mayor John Tory says he recognizes that imposing a tax on vacant homes in Toronto – as Vancouver has done – could turn out to be more trouble than it’s worth. But he still wants city bureaucrats to study the idea and come up with a proposal for a tax that could encourage speculators to free up empty units.

    On Monday, Mr. Tory’s executive committee approved a plan to see city finance officials launch public consultations and draft Toronto’s own version of the tax. Starting next year, Vancouver property owners will have to cough up a surcharge worth 1 per cent of their home’s assessed value – $10,000 on a $1-million dwelling – if they leave it empty for more than six months.

Leave a Reply

Your email address will not be published. Required fields are marked *