We haven’t mentioned the actual word ‘fundamentals’ here for a while, probably because they seem so, well, passé for Vancouver. But the concept remains alive and well, if a little dormant, in the minds of the few remaining prospective buyers who see the market as bizarrely overvalued. Sometimes such folks are asked: “When would you buy?”
On a recent thread, ‘matt’ pointed us all to a 2008 NYTimes article on this very subject, a useful reminder in these frothy times. It’s worth the re-read, if just to keep oneself in touch with the reality of the extra-Vancouver universe: ‘As Home Prices Drop Low Enough, a Committed Renter Decides to Buy’, by David Leonhardt, NYTimes, 28 May 2008. A few excerpts: -
“One of the big lies of the real estate business is the idea that renting a home is tantamount to throwing money away. It’s a useful fiction for real estate agents, because they make vastly bigger commissions on house sales than rentals. But the comparison isn’t nearly so straightforward for the rest of us. Renting involves one obvious, recurring cost that can never be recouped: the monthly rent check. Buying, on the other hand, involves multiple expenses, some of which aren’t so obvious. On top of closing costs, there are repairs, property taxes, mortgage principal and mortgage interest. When you own, you also lose the ability to invest your down payment elsewhere, like the stock market.”
“Over the last several years, I’ve come to like a simple, back-of-the-envelope way to compare the costs of renting and owning. You find two similar houses, one for sale and the other for rent, and divide the sale price by the annual rent. You can call the result the rent ratio.
It’s the real estate market’s version of a price-earnings ratio — a measure of how expensive an asset is, relative to the underlying economic fundamentals. Like a P/E ratio, the rent ratio provides something of a reality check.
Throughout the 1970s, ’80s and ’90s, the average rent ratio in the US hovered between 10 and 14. [In the mid 2000's] it broke through that historical range and hit almost 19 by the time the housing market peaked [in the US], in 2006.
And while home prices — and rent ratios — have always been higher on the coasts, they reached whole new levels recently. In the Washington area, the ratio went above 20. In Boston, New York, Los Angeles and south Florida, it topped 25. In Northern California, it approached 35, higher than it had been in any city, at any point on record.
In concrete terms, a rent ratio above 20 means that the monthly costs of ownership well exceed the cost of renting.”
“The question facing my wife and me was whether we were entering the market before the correction had gone far enough. I really didn’t know what the answer would be. So as we looked at houses, I started calculating rent ratios. In the neighbourhoods where we were looking, two-bedroom condominiums were selling for $400,000 and being rented for about $2,100 a month, which makes for a rent ratio of 16. Four-bedroom houses were selling for $700,000 and being rented for almost $4,000, which makes for a rent ratio of 15. No matter the price range, pretty much every apples-to-apples comparison produced a similar ratio. Historically, this is still a bit high.”
Using similar calculations, ‘rent ratios’ [sales_price/annual_rent] for SFHs in Vancouver are currently commonly in the 40-42 range. -vreaa