‘The Province’ Publishes BC’s Shocking Price:Rent Fundamentals – “If the number is higher than 15, it’s generally not a good time to buy. Our numbers are through the roof, from 29 in Prince George to 73 in West Vancouver.”


A map of the price-to-rent ratio of cities throughout Greater Vancouver.

“Take the house price and divide it by what it costs to rent for a year to get the price-to-rent ratio: Price divided by (Monthly rent x 12) = X.
(Estimates for additional costs of homeownership, such as taxes, maintenance and insurance are factored into the equation.)
If the number is higher than 15, it’s generally not a good time to buy.
If the ratio is less than 15, buying is a better deal than renting, if you plan on living there for at least five years to offset moving and closing costs.
By the time the number hits 20, renting is apparently the way to go, except if buyers expect to stay put for at least 15 years, according to a formula used by trulia.com to rank major urban U.S. centres every year.
B.C.’s numbers, as shown in the graphic, are through the roof, from 29 (Prince George) to 73 (West Vancouver).”
“Local real estate experts say the number is simplistic and doesn’t factor in other market drivers.”

– from ‘Where it’s cheaper to buy (or, more likely, rent) in B.C.’, Susan Lazaruik, The Province, 12 May 2012

Ergo, it is not a good time to buy, anywhere in BC, especially in the LML.
The only other “market driver” of importance is the insanity that accompanies a speculative mania.
Almost all purchases are speculative, and have been so for years.
It is good to see The Province printing something like this.
Will their readers realize what it means?
– vreaa

45 responses to “‘The Province’ Publishes BC’s Shocking Price:Rent Fundamentals – “If the number is higher than 15, it’s generally not a good time to buy. Our numbers are through the roof, from 29 in Prince George to 73 in West Vancouver.”

  1. I think the table values are erroreous. I think the rent cost is underestimated per the average home price (or average home price is overstated for the rent cost)

    I can give an example that a condo unit in Burnaby East goes for $1600/mth and the similar unit (different floor) is being listed for ~$480000. So the P/R would be 480000/1600/12 = 25, far from 45 given in the table.

    That said, I do agree that the Vancouver RE market is way overpriced, and according to the article a P/R of 25 is still above the 15 “fair value”.

    • It’s a good start, throw out some data and have it debated. Using averages isn’t as correct as median or benchmark, but nothing is better than a survey of landlords and comparing to sales.

      “[Muir] said the formula doesn’t take in the factors that drive the housing markets, including the emotional drive to own.

      Ha, you’d think an economist would be familiar with “consumer surplus”. A big part of the reason Vancouver is in such a mess is because investors are confusing fundamental returns with who is buying at the margins. A concentration on investor returns, and explaining why they will inevitably set marginal prices, is imperative to understanding what’s going on.

      I wrote about this a couple of years ago: http://housing-analysis.blogspot.ca/2009/01/ownership-premium.html

      and I believe it’s still relevant. Look at US markets for who’s (finally) buying.

    • If those are standard rental cost estimates they usually include tenanted suites… rental ask prices aren’t the same as currently tenanted price. Also, there are different ratios in the tiers that make one property hard to extrapolate from. ($1600 for a two bedroom rental in Burnaby suggests new, great location, great amenities, utils included, or allowing pets/smoking. Otherwise high.)

      About a third of 2 bedrooms in Burnaby on CL are offered at $1100 or below, so I think the rental price given sounds right for average rents. Long term tenants often pay quite a bit less than market, because a good tenant often provides other value.

      However, they are comparing that to the benchmark. I’ve never quite figured that benchmark out. Houses, with land cost, strike me as often carrying a higher possible-density premium.

    • That’s my immediate response as well. Having lived in East Vancouver for a long time, I can’t remember the last time I saw a whole house rent for $1500. The house I live in now, the upstairs would rent for at least $1800 and the basement suite does rent for $1000 and we have a studio that can be rented for office space at about $500 per month. And we’re not living in fancy digs (the whole thing is only 2300 square feet including the studio)…. The next-door house to us which is a crumbly falling-apart thing with no garage rents for $1800 per month.

  2. Lots of bearish stuff is to be had on the wire recently to be fair, but local articles from local reporters I have found lacking. This is a relatively rare foray into using some hard data and throwing it in front of some local boffins.

    I’d love to see a go-to Vancouver-based bearish analyst on the Rolodex when asking for “expert” opinions. I don’t know of any but I’m sure they’re out there. Good step, Susan Lazaruk of the Province, my suggestion is to expand who you use to debate these issues and I’ll consider a subscription!

  3. What could they possibly have been thinking when they split cities into areas for purposes of home prices when average rents are only available at city level? It definitely doesn’t follow from this data that Van E is in a less of a bubble than Van W or that North Surrey is a better deal than North Delta – meaningless.

    • Aldus Huxtable

      I for some reason feel that the event of this is more meaningful than the accuracy of the numbers.

  4. These rents are mostly for condos/apartments. Fortunately apartment prices are available too (http://www.laurenandpaul.ca/MarketTrends.ubr).

    It’s still not clean data but the idea is there.
    Ratios: http://ow.ly/d/CEC

  5. I think 25 is the market number for apartment-style at this time. This is what landlords call 4% cap rate. It actually is not a 4% cap rate (taxes, strata fees, insurance, vacancy, maintenence), but that’s what they mean when they say it.

  6. LandlordRescue.ca

    If it weren’t for speculation no one would be buying these apartments. Those are really awful prices for landlords.

  7. Isn’t the mls benchmark too high to use in this data, as they have included single family homes, but on the rental side it looks like they are only including 2 bdrms? I agree with the argument, but rents are very high on single family homes on the North Shore for example, which only makes it harder for the renter wannabe a home owner in this current market.

  8. exec_speak … all green, great job, keep it up … next

  9. Renters Revenge

    This is why I am happy to rent. Ha ha ha ha ha (all the way to the bank)!

  10. Do you reduce the house price by the down payment in this calculation? I would assume a larger down payment changes things a fair bit. But then do you add back the opportunity cost of that money not used elsewhere? And how could future price increases/decreases impact these ratios? I just don’t know what value these tables have except psychological.

    • measure of gross yield .. i.e. purchase price is risk to access rental income stream … benchmark to ‘riskless’ (pfffft!) treasury yields, etc. … basically, ratios this high is saying there’s no good investable reason for buy unless somehow able to exit higher … what risk would you take to achieve that?

    • Including financing would normally be a secondary calculation once a business case makes sense. Well in most businesses anyways. Right now in Canadian real estate there is inordinate amount of attention paid to the means of financing and not so much the business case. That should trigger a non-inhibitable alarm.

  11. If Vancouver were valued based on local dynamics only, then the numbers look ridiculous.

    But it is not. Surprisingly, more money is rushing into Canada as we have now become a ‘safe haven’.

    “Canada’s dollar rose against most of its major counterparts on speculation North American economic growth will outpace other regions’ as the failure of Greece to form a government spurs risk aversion. The Canadian currency is up 0.7 percent in the past week, rising with haven currencies the yen and U.S. dollar, amid concern Greece may be the first member state to exit the euro.”

    • “If Vancouver were valued based on local dynamics only, then the numbers look ridiculous.”

      The vast majority of buyers are local.

      • Yes, the majority of buyers are local.

        But the Pareto Law is alive and well. 20% of buyers impact the market more than the remaining 80%.

      • Uh so 80% of buyers will overpay because the other 20% are outbidding them. I don’t think that’s the proper application of Pareto…

      • i always apply some pareto

      • 80% of the time Pareto is applied incorrectly; but in the case of the other 20%… watch out!

      • “The vast majority of buyers are local”.

        the majority of detached sales are to Chinese buyers…local “dynamics” are not relevant to this property class.

      • “the majority of detached sales are to Chinese buyers”

        That is actually a relatively small segment compared to the overall region’s activity. I’m thinking Vancouver is little more than a capital expropriation machine. In some ways it’s tragic.

      • “That is actually a relatively small segment compared to the overall region’s activity”.

        yet an entire blog and community is established to discuss the segment every day, all day. Isn’t this pareto principal? The 20% segment is attracting 80% of the discussion

      • 4SlicesofCheese

        Not really F1, the blog focuses on a wide variety of RE issues.

        “The 20% segment is attracting 80% of the discussion”
        Stop making up numbers.

      • “The 20% segment is attracting 80% of the discussion”

        You got it. A wonderfully astute comment. Not quite a found poem but eminently worthy of introspection by readers.

      • As TimeGoesBy VREAA’sCollective Zen is self evidently permeating Mr. McLaren…. Osmosis? Percutaneous Absorption?… WigglyCharts???

      • Rick and Ilsa never got over losing that WestSide BiddingWar… On the UpSide – Rick&Louis eventually settled into a Swell YaleTown Condo… And Ilsa&Victor were quite chuffed with their Vashon Island HideAway….

  12. The price to rent a 2 bedroom townhome in Vancouver could be much more than 1498, but a 2 bedroom apartment could be lower. It does not include the dreaded ‘basement’ suite in their calculations. Speaking of which does city hall have info on how many suites are in the city?

  13. There is a typo in the table in the cost of the North Delta dwelling, I wish it was true but…:(

  14. CanuckDownUnder

    Based on reported gross rental yields in Australia, right now in the capital cities you would currently be looking at a ratio of 23-24 for houses and 20-21 for units.

    I’d say these are fairly accurate, our current apartment would have a ratio of around 22-23. Even from this “low” number it would still take a 33% haircut to get down to a ratio of 15.

  15. Not as related, but out of curiosity I was looking at Vancouver Craigslist and I have to hit the 900’s (as of 10 minutes to May 15th) before I hit the end of “for sale” listings. Only 3 assignments today and a few other things like lawn mowing services.

    http://vancouver.en.craigslist.ca/rea/index900.html

    It’s probably not normal, but to be fair, today is the only time I checked. Anyone know?

  16. The above chart demonstrates to me how banks take theirs immediately and leave consumers to assume debt and scramble to break-even. If you’re paying $25000/yr to make back $17000 (gross) in rent the difference better be there come sale day. The bank already took the profit out of it, starting with your downpayment. Govt taxed the return. The chart looks like a shopping list of losers for investors seeking a tax write-off.

    Met with my buddy realtor for coffee yesterday, looking at some land up country that’s virtually unaffected by local volatility. Then I asked him about LML. He said two words, “Don’t buy.” His biggest source of income right now is lending emergency cash at 16%.

  17. i rent a 1.7 million dollar house ( what it would be listed at ) and pay 2700 a month…….51 x is the ratio. this is very typical of the west side anyways. these homes are only being bought in hopes of selling higher in a year or two….speculators.

  18. reality check

    The error with this table is that all the rents are for condos or even basement suites not full houses and yet houses are included in the average property price.

  19. Devil’s advocate: what if the stratospherically high price-to-rent ratios in Canada in general, and the LML in particular are the result of an inherent and permanent ownership preference by Canadians? What if, despite the financial downside, Canadians are simply willing to shell out much more money if it means they can claim they own rather than rent? Maybe this won’t ever change…

    • There is still 30% of the market that rents (closer to 40% in Vancouver), and that means 30% of the market is owned by investors. These investors are accepting lower returns by purchasing at current valuations. They think this doesn’t matter because they will recoup the shortfall via capital appreciation.

      As an investor, if you get into a bidding war with a young pregnant couple who just have to buy, chances are you’re playing against a stacked deck. For a group of owners that make up 30% of the market, bets are they will eventually set the marginal price.

      This is what ECON 101 says. Investors either forgot what a consumer surplus is, or think it’s irrelevant. I’ll take the under.

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