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.
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.
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