USA – Rent vs Buy

– from ‘Chart of the day: Let’s go and buy a house’, Felix Salmon, Reuters, 8 May 2012

Ratios in above two graphics reflect how many years of rent it would take to purchase a property in each of these cities. [As an exercise, do the same math for your Vancouver home. Many properties here are in the 40+ range for this ratio.]
[from trulia, based on Q1 2011 data]

Buying is already looking more attractive than renting in many parts of the US, even though housing prices likely still have another 20% to fall before a bottom. Broad and deep speculative manias in RE only end when buying looks a lot more attractive than renting; owning a home has lost all appeal for many.
– vreaa

17 responses to “USA – Rent vs Buy

  1. New York is an interesting case, apparently a lot of money is finding its way into apartments there and not all rents can be easily raised.

    Notable too, San Francisco, LA, and Seattle. Not all parts of the US were crushed and, though off their peaks, have wisps of commonality with some Canadian cities.

  2. Do you simply divide the purchase price by your annual rent? A 25 year mortgage at the 25 year average of 8% compared to rent increasing at a rate of 3.5% per year would produce different results. (With my figures, I could rent for 37 years for the same amount of money a 25 year mortgage would cost. So the benefits of purchasing would only be realized after 37 years; more if you include condo fees, maintenance, etc.). If you or anyone knows of a better formula to compare renting vs. buying over the long term, I would be interested in seeing it.

    • Yes, you just divide. It does not take into account interest rates might be higher or lower. The 15x multiplier is just an old investor, back of the envelope, quick assessment mechanism. I’m not an RE investor, but the usual comments by landlords is that 15x is break even so they actually wouldn’t buy, 12x is preferred if you are hoping to actually make money on a property.

      This ratio matters a lot for owner occupiers when you have a crash. This is the floor on the market. Real investors will sit on the sidelines until prices reach that multiplier. Interest rates don’t seem to matter.

      • Thanks for that. But according to the 15X multiplier (I assume that means 15 times the annual rent), an apartment/condo that rents for $1000/mo (cheap in Vancouver), would have to cost below $180,000 for an investor to buy it? It would cost at least double that, and will never drop to that figure. For someone who just wants a decent place to live, with solid walls between suites, etc. (which unfortunately are more likely to be found in owned condos than rental apartments), I guess you would just have to calculate whether or not you will break even before you die to see if it’s worth mortgaging vs. renting. I have seen various online calculators, but if anyone knows of any good ones, or formulas for non-investors, I’d like to see them.

      • Jean, you are asking to apply fungible outcomes to a “non-investor” purchase. I don’t think you should garner much hope from a calculator.

        And yes that is exactly what the calculations are stating: a $1K/mo rent for an apartment will be about $125K. This may not occur any time soon but there are other places to put money that will do better if you pay $250K or whatever for such a place. What will not show up in any calculator are the “unforeseen” costs, which is why larger investors demand a gross rental yield closer to 10% even though the buy-vs-rent for them is a big giant buy signal. Most of them know better.

      • Jean- >

        Here’s an oft cited rent vs buy calculator at the New York Times:

        For the example you give, $360K unit renting for $1000p.m., the calculator tells us “Buying is never better than renting after 30 years”.
        (And remember, that makes the Canadian math even worse as we don’t have 30 yr-fixed mortgages and we don’t have tax-deductible interest payments).
        That’s how far out of whack our market is: people don’t think our prices will ever drop to levels that still make them unattractive.

        When you say “It would cost at least double that, and will never drop to that figure”, on what are you basing your conclusion?

      • Thanks for the link, vreaa, and for your blog in general which provides a great reality check.
        My ‘conclusions’ are based only on my impressions, not data, so please correct me if I’m wrong. Google searches always take me to realtor’s websites, and I find it hard to find facts online. But I think the average price for a one bedroom condo in Vancouver would be around $360,000 and very little could be found for half that. I guess prices did drop almost 50% briefly in the 1980s, so I may be mistaken there, though the predictions I’ve heard are much less than that. But it seems the long-term trend is for the rich to get richer and everyone else poorer and crises of overproduction and bubbles in real estate will continue. I would be happy to remain a renter forever if I could find a decent quality place to rent.

  3. In my opinion, in a calm and level market owning does cost less than renting, because. Buy-to-let has its place(albeit a small one, not as the life goal for crazed 24 year-olds) in a normal market, and it doesn’t make any sense to buy when, even with a cash purchase, the renting yield is under 5%.

  4. Just curious. When you predict a 20% additional decline, is that from peak or from current value?

    • (Good point; to clarify):
      For the US, from current values.

      • In real terms that is a bold call, though I think the chart above indicates that in certain markets prices have further to fall. These markets make up a relatively small part of the country’s housing stock which, interestingly, is the same situation the City of Vancouver and its near-burbs find themselves in relation to the rest of Canada.

        If Vancouver is truly entering another housing recession, the pleas for the federal government to intervene and prop things up will be deafening. Behind closed doors, my bet is that Flaherty and Carney will be rather austere with respect to giving a f*ck.

      • mhanson/biderman have good data if you want to dig … there’s still a lot of shadow inventory to clear … doesn’t mean prices will bomb but there will be steady supply long-term into limited demand … things are getting so bad, the mexican migrant flow may be reversing


    When I bought my house in Toronto 13 years go, my mortgage was $750 with a conventional mortgage. The house had a basement apartment which I rented out for $750 inclusive of utilities. I chose to make double payments but I could have lived in my house for the property taxes and utility payments. (about $400) per month. The rent for the place I moved out of was $750 plus utilities. So it was cheaper for me to buy rather than rent.

    • “The house had a basement apartment which I rented out for $750 inclusive of utilities”

      argument from the renter side is that you didn’t live in a house, you lived in a suite.

  6. Whooboy. My house is currently at 44.

    • Paul Streppel

      I visited Courtenay not to long ago, and surveyed the rents in this market. Rents are coming down, and I see landlords very proactive in getting dissimilar people to co-habitate to fill the bedrooms. Since visiting Courtenay, oil’s lost $10/bbl very quickly, which might put added pressure on the Comox valley as this area is a fast love place for the Alberta crowd who find it very convenient to fly in direct from airports in AB.

  7. Pingback: Vancouver real estate The 20 cheapest homes on the market West … | Vancouver Realty News

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s